The generation of people born between the early nineteen eighties through 2000 are commonly referred to as the Millennials or Generation Y. They follow Generation X, and grew up through two national events which had world-wide significance: The World Trade Center collapse (9/11) and the Wall Street financial crash followed by the Great Recession starting in late 2007 and ending in 2009.
Like other generations before them Millennials have unique characteristics commonly associated with them. Two characteristics that are sometimes associated with Millennials are an increased need for instant gratification fed by technology, and a greater desire to make social connections online. Unlike other generations before them, they also have unprecedented levels of student debt. So, how does this factor into their ability to create wealth?
Student Loan Debt
From 2004 to 2017, the average student debt increased from $18,650 to over $38,000. In 2017 it was reported that outstanding student loan debt had actually surpassed credit card debt and is now over one trillion dollars.
Some Millennials graduated and got their start in the pre-recession years – before 2007. Those may have been able to get a start in a career that wasn’t affected by the financial crisis. For those who graduated during and just after the recession – like for all US workers, their ability to land a job may have been dependent of their career choice.
If you are a Millennial, tracking your own net worth is one of two smart exercises worth doing annually, if not more often. Remember that it is determined by assets in one column and liabilities in the other. These liabilities include student loan, mortgages and credit card debt. If your income is not growing as quickly as you might like then it may be that securing a side job as well as examining student loan repayment strategies is a good plan.
Even if you haven’t yet filed your tax return, chances are you’re already thinking about how you’re going to spend it. With that in mind, here are three smart, responsible ways that Millennials can (and will) spend their tax refunds:
Show your student loans who’s boss
A smart strategy for getting ahead of your student loans is to make an extra payment. Student loans (like many other loans) incur no prepayment penalties so you can use part of your tax refund to make a student loan repayment in one lump sum.
Begin by contacting your student loan servicer and communicating that you want to make a one-time, lump-sum payment toward the principal of the loan (not to next month’s regular monthly payment). The idea here is to reduce the principal, therefore saving on interest costs.
Make hay with your credit card balance
If you’re a Millennial, you’re probably carrying some credit card debt. Using your tax refund to reduce your credit card balance or pay it off entirely is a great use of your refund and can save you a lot of money over time in interest payments. Just as you should do with student loan debt, ensure that payment is applied directly to your principal loan balance (not toward next month’s payment).
Adopt the Girl and Boy Scout Motto: “Be Prepared”
You may know nothing about starting fires with flint and surviving in the wilderness, but like Girl and Boy Scouts, you can be prepared to weather the worst when it comes to financial storms or other monetary crises.
Since you never know when an emergency will strike, it’s a smart idea to have a reserve of capital for unexpected medical expenses, loss of employment, vehicle repairs, or anything else life might throw your way. Aim for 6-9 months of cash to cover all your basic necessities and to buy you time to get back on your feet in the unfortunate case that they get knocked out from under you.
As they say, what’s good for the goose is good for the gander, which means that these three smart ways of using your tax refund have merit for Gen Xers, Millennials, and Baby Boomers alike. (And if you happen to be a Millennial without any student loan or credit card debt and an already hefty reserve of “rainy day” capital – congratulations – you’ve not only defied stereotypes but given the rest of us something to aspire to.)
Another annual exercise worth doing is to go through a checklist designed for recent college grads to make sure you haven’t missed any write offs on your taxes. Any tax savings at all, is like money in the bank for this cash strapped generation.