National Financial Literacy Month: What Generation Y Needs to Know


JOE WILSON, WEALTH MANAGER AT TIAA-CREF
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Why does financial literacy matter?
Those of us in Generation Y are facing no shortage of financial challenges. People in their 20s and early 30s often have wages that are entry-level or close to it, and given the high unemployment rate, a lot of people are even out of the job market for the time being. Many in our age group are struggling with a substantial amount of student loan debt; in 2009, the US student loan default rate was 8.8%, up from 7.0% in 2008.

At our age and in a harsh economy like this, staying financially strong today while trying to plan for tomorrow can be a tall order. Adding to the challenge is the complex array of investment options competing for your attention and dollars. But even in dark financial times, there is a light at the end of the tunnel. There are a number of steps that you can take towards financial independence.

What can you do now?
Let's look at a few important steps you can take to improve your financial outlook. Some steps outlined below apply to everyone in Generation Y, while others are targeted toward age-based subgroups within the generation.

Late teens and early 20s
This may be the time of your life when your earnings are at their lowest, so managing expenses should be a top priority. Among the best ways to cut costs is to stay current on all the benefit programs offered by your employer and take advantage of those that can save you money. For example, many employers offer flexible spending accounts that allow employees to save on certain health care or dependent care expenses. Discounts on health club memberships and cell phone service are also common perks. The more money you can save on day-to-day expenses, the more you can put toward reducing debt or funding other financial goals.

Mid- to late-20s
A rainy-day fund offers important protection and peace of mind. Try to have enough savings set aside to cover three to six months of expenses in the event of an emergency—like high, out-of-pocket medical expenses or a temporary loss of income. Keep this cash reserve in an account that you'll be able to tap quickly and easily, such as a money market account at a bank or a money market fund.

Having appropriate types and levels of insurance is another essential way to protect yourself and your loved ones against financial risks. Assess your needs for health, life, disability, tenants or homeowners, auto and umbrella insurance.

It's never too early to start saving for retirement. If you start setting aside even a few dollars per paycheck now, not only will you get into a habit that will serve you well throughout your working years, but you'll give yourself more time to take advantage of compounding: Earnings create more earnings, leading to a snowball effect that fuels the growth of your savings.

Don't miss out on getting tax advantages on your retirement savings. If you contribute on a pre-tax basis to a workplace retirement savings plan, like a 401(k), 403(b) or 457 plan, your contributions will reduce your current-year taxable income and, in turn, your tax liability for the year. The growth on your savings will be tax-deferred until distributions are made from your account. Your plan may include an employer match on at least some of what you put into the plan, and not taking full advantage of this feature is like forfeiting free money from your employer.

Such plans are portable, which is important, since many people in their 20s change jobs and even careers several times. They are also flexible, allowing you to make changes to your investments at any time or even put your contributions on hold if you run into dire financial straits. Your plan may also allow you to borrow or take a hardship withdrawal from your account before you retire, but this is a step for extreme circumstances only—you will lose out on the benefits of compounding during the time the money is not in the plan, and may even get taxed twice since you will repay the loan with after-tax dollars that could then be taxed again when you eventually withdraw the money in retirement.

You can also save for retirement outside your workplace by opening an IRA. With a Traditional IRA, you could qualify for a current-year tax deduction on your contributions, plus your investment earnings will be tax-deferred until withdrawal. A Roth IRA does not offer a tax deduction on contributions, but if you meet certain requirements—basically, if you've held your account for at least five years and through age 59½—you'll be able to withdraw your earnings tax-free.
The benefits that you receive by saving for retirement are too good to put off to a later date.

Early 30s
Buying a car and a home are two of the biggest financial commitments we'll make in our lifetime and will probably require making payments lasting anywhere from a few years to three decades. Make sure you're willing and able to keep up the payments for the length of time you'll have to make them. Also, as tempting as an expensive vehicle or posh home may be, don't forget that overspending on one big-ticket item could put all your other financial goals in jeopardy.

If you have children whom you hope to put through college, now is a good time to start a college fund for them. Tax advantages on college savings are offered by Coverdell Education Savings Accounts and section 529 plans. You can set up a Coverdell account to pay qualified higher education expenses as well as qualified elementary and secondary school expenses. A 529 plan can be used to pay qualified higher education expenses.

All ages within Generation Y
Be sure to take advantage of tools for self-education. There are a multitude of valuable resources out there, and you're bound to find some that are suited to the way you want to learn. TIAA-CREF's website offers information and tools on a variety of topics related to financial planning and investing. With TIAA-CREF's free Savings Simplifier iPhone app, you can increase your personal finance IQ, track investments and get tips on saving for retirement and other goals. There are a multitude of websites that allow you to track all your financial accounts, use budgeting tools, and find out where to earn the best interest rates on your savings or pay the lowest rates on credit cards. There are also blogs, books and magazines to help you become more financially literate.

While self-education is critical, don’t be afraid to enlist the services of a professional financial advisor. You'll benefit from an advisor's education, background and knowledge, plus you'll be able to feel more confident about being on the right financial path.

The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Past performance does not guarantee future results.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.
 

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