Gen Z may find it difficult to think about retirement planning, saving, and investing.
And, for good reason.
Stock markets, especially the S&P 500, have been in turmoil as young workers begin their careers. A recession is also on the horizon. It has also been difficult for wages to keep up with inflation.
What’s more, increasing credit card debt and interest rates are contributing to the problem. The cost of housing has also risen. And, the retirement savings gap has grown even larger.
Despite these challenges, a financial health check-up would be a good idea for Gen Z at the beginning of the new year. This means balancing your immediate money goals with saving for retirement, even if it’s decades away. More specifically, they need to follow these ten steps to establish a healthy financial future in 2023.
1. Increase your income.
As we look forward to the new year, Rocket Homes examined the goals of Gen Z for the year 2022. In 2022, 28.9% of respondents said they started or completed their goal of increasing income. In this group of survey takers, the median age was 22 years old. Most likely these people were just beginning their careers, moving from college to the working world, resulting in higher incomes.
Entrepreneurship can drive wealth, and many Gen Zers have already figured that out. Increasing social awareness, 9-to-5 fatigue, and unparalleled social media skills are driving Gen Zers to ditch corporate jobs for their own startups. In fact, more than 60% of Gen Zers have started their own business, or plan to do so.
According to the GoBankingRates, Gen Zers can get rich in 2023 through:
- UGC/Influencer Marketing
- Real estate investing
- Becoming an Amazon influencer
- Investing your tax refund in an IRA
Even if you’re working a minimum-wage job, you can supplement your income by:
- Monetizing your social media content
- Launching a YouTube channel
- Pet-sitting or dog walking
- House sitting
- Gig work, like freelancing or DoorDash
- Renting out extra space
- Selling your unused items
- Donating plasma
- Selling handmade goods online
2. Improve your financial health.
In 2023, more than 39.5 percent of Gen Zers aimed to increase their income, according to Rocket Homes.
However, in 2023, a new category came in second. In the new year, more Gen Zers are preparing to buy a house after focusing on their financial health the previous year. 27.3% plan to save for a home in the next year.
What exactly is financial health?
In simple terms, financial health means being able to meet your financial responsibilities. In addition, it describes your ability to cope with any unforeseen financial situations.
Assessing your finanical health.
Individuals have different ways of evaluating their financial health and determining what can be improved. Nevertheless, comparing your debts and assets is one of the most useful. Here are some suggestions for categorizing the information:
- Debt-to-income ratio. It is detrimental to your finances if you have too much debt. A debt-to-income ratio (DTI) compares a person’s monthly debt obligations with your income. DTI ratios below 43% are generally preferred by most lenders. In some cases, rates as low as 36% may even be preferred.
- Credit score. It is also important to maintain a good credit score in order to maintain financial health. The debt-to-credit ratio can be influenced by many factors including debt payments, credit utilization, repayment history, credit mix, and credit history. You are more likely to be approved for financing at lower interest rates and on better terms with a higher FICO® Score. The score ranges from 300 to 850.
- Emergency fund. A person’s financial health is determined by their ability to cover unexpected expenses, like job loss and car breakdowns. Most experts recommend saving between three and six months’ worth of living expenses in an emergency fund.
- Your retirement savings. The amount of savings you should have at each age is based on several theories, though some general guidelines should be followed. You can determine whether you are on top of your savings or if you need to catch up if you are behind.
Improving your financial health.
- Spend less than you earn. Suppose your family earns $7,000 per month and spends $7,300 per month. It’s obvious your family’s cash flow is negative. Basically, you spend more than you make. This means you’re going deeper into debt or consuming your savings.
- Always pay your bills on time. Keeping up with bill payments, no matter how high or low priority, determines an individual’s ability to manage their cash flow and day-to-day financial commitments.
- Have sufficient living expenses in liquid savings. The money in liquid savings can be accessed at any time. This means they are not locked away in accounts like CDs and IRAs. The money is more accessible, like in a savings account.
- Invest in enough long-term savings or assets. A short- and medium-term plan is beneficial in financial terms. Long-term savings are necessary for education, homeownership, and retirement.
- Maintain a reasonable debt load. When determining how much housing you can afford, a common rule of thumb is that you should spend no more than 30% of your gross monthly income before taxes and other deductions.
- Make sure you have a prime credit score. There are two types of loans: prime and subprime. Prime borrowers are more likely to get the best loan type, rate, and terms. According to the Consumer Financial Protection Bureau (CFPB), prime credit scores range from 660-719. Numbers vary by lender.
- Have appropriate insurance. Individuals define “appropriate insurance” differently. A person who isn’t a homeowner, for example, isn’t required to have this type of insurance. If you own a vehicle, however, you must carry auto insurance.
- Plan ahead financially. Having a financial future in mind is an indicator of financial stability. You won’t be able to look forward to the next ten years if you’re scrimping over your last $20.
3. Prepare a balance personal sheet.
In today’s world, we rarely look at all our income, investments, and expenses together. However, you need to understand where you stand before making any financial decisions.
What does that involve? Keeping a careful record of all your transactions. Specifically, you should pay attention to recurring subscriptions and interest rates on any loans.
4. Prioritize paying down.
Student loans, credit cards, and other types of personal debt can be a financial burden as well as a stress factor. Moreover, it influences your credit score, which makes it harder to apply for other credit cards and mortgages. When paying off debt, you should try to focus on the debt with the highest interest rates.
In an effort to combat inflation, the Federal Reserve increased interest rates on credit cards aggressively this year, pushing the average rate above 19%. In addition, short-term financing schemes such as buy now, pay later (BNPL), which is popular among Gen Z, can damage credit scores by rapidly accruing loans.
Considering that, there are several things to consider when choosing BNPL.
Use BNPL only to purchase essentials like a mattress for your apartment or a computer for school, according to NerdWallet. It’s rarely a good idea to take on debt for a non-essential purchase, even though the plan might seem simple and inexpensive.
In addition, you’ll want to find a BNPL plan with zero or minimal interest. As a result, you will be able to lower your monthly payments and make it easier to repay the loan.
If you’re struggling to make ends meet or starting an emergency fund, avoid buy now, pay later. With BNPL, you can easily overspend due to its convenience. It could result in high fees or being sent to collections, which can negatively impact your credit.
5. Make sure you don’t accidentally spend $5,000 on a $2 Frisbee.
“One of the best personal finance anecdotes I ever read was a warning about not being tempted by credit card offers,” writes Michael Grothaus in Fast Company. “I don’t remember if I read it in a personal finance book or some article on the early web, but it went something like this.”
During his walk across campus to meet some friends, a college student noticed a booth set up by a credit card company. In exchange for signing up for a guaranteed credit card, the student was told he would get a free Frisbee. It sounded like fun to play Frisbee with his friends that day, so he agreed to do so.
The Frisbee was used only once. However, he frequently used the high-interest card to purchase items he wanted but did not need. It took him years to pay more than $5,000 in interest and fees to the credit card company for a $2 piece of plastic he no longer had.
“The moral here is not to be lulled into taking a high-interest credit card offer because of any free gift attached (be it Frisbees or “points”),” explains Grothaus. “It will cost you way more in the long run than the short-term incentive offers.” Only use high-interest credit cards if you have no alternative.
6. Put money aside for emergencies.
In an economic downturn, such as a recession, it is recommended to set aside three to six months’ worth of expenses for emergencies.
Prior to paying off debt, make sure your financial health is in order. It might seem counterintuitive to save before paying off loans. Without it, you could spiral deeper into debt or sell investments that could help.
You can leverage any extra cash you have by shopping around with bank products such as high-yield savings accounts and money market funds that are yielding record-breaking returns at the moment. If you’re deciding where to keep your money, though, you’ll need to consider whether certain accounts have penalties or withdrawal limits.
7. Invest as early as possible.
For investing, some experts recommend setting aside 15%-25% of your after-tax income. However, every individual’s financial situation may be different. Even if you only invest a few dollars, the longer your money has to grow and work for you thanks to compound interest.
8. Diversify your portfolio.
As far as investing is concerned, for anyone seeking a retirement investment or a general investment, the most important decision is how to allocate their assets. To put it another way, it is a way to diversify your investment portfolio between:
- Bonds since they are more stable
- Equities since long-term returns are higher. However, they tend to be riskier.
- ETFs and mutual funds. With both, you can invest in a variety of assets simultaneously. For example, you may purchase an ETF that tracks the S&P 500 index to benefit from the ups and downs of the entire market.
- Real estate. Real estate is a good investment if you are looking for more tangible assets.
An investment portfolio with 60/40 stocks and bonds might be appropriate for investors with a moderate level of risk tolerance. The risk tolerance of each individual is determined by identifying their trigger points. This is how much financial loss they can take before they act.
Diverse investments should be made in a variety of companies from a variety of industries. Even if you’re an enthusiast of crypto and tech, they posted large losses in 2022. Therefore, you missed out on energy sector gains. In addition to meme stocks and options trading, riskier assets are not necessarily red flags. However, they shouldn’t account for more than 5% to 10% of a portfolio.
9. Buying a home.
Taking a look back at the Rocket Homes survey, homeownership-related goals grew from 37.3% to 45.1%. The high cost of mortgages, rent, and real estate hasn’t deterred this generation – almost half are looking to become homeowners. A home purchase, moving out of their parent’s house, or saving for a home are some examples.
With that in mind, here are a few questions to ask yourself before buying a house.
- Are you actually ready to settle down? Since buying a house is a long-term commitment, you should consider whether you intend to make any major life changes soon. If you are planning any major life events, such as switching jobs, getting married, or having children, you may want to delay buying a home.
- How’s your job security? If you are worried about losing your job, buying a home isn’t a good idea after a job loss. To put it simply, wait until you have a stable employment situation before considering buying a house.
- Do you know what you can afford from your budget? Owning a home isn’t just about paying mortgages. Determine your budget and home ownership costs by considering the following factors: utilities, property taxes, insurance, and maintenance.
- Are you financially prepared? The down payment, mortgage closing costs, and moving expenses will all require money from your savings after you buy the home. Depending on the type of mortgage and lender, a down payment may be required. Generally, a larger down payment will result in a lower monthly mortgage payment. Additionally, mortgage lenders generally offer the best mortgage rates and terms to borrowers with credit scores over 740. And, a debt-to-income ratio under 36% is often preferred by lenders.
10. Plan for retirement.
There are many companies that automatically enroll employees in retirement plans such as 401(k)s or 403(b)s. The SECURE Act 2.0, however, requires automatic enrollment beginning in 2025 for all new 401(k)s and 403(b)s. The initial default rate must be between 3% and 10%, including annual auto-escalation of 1%, up to at least 10% but not more than 15%.
Employers can enroll their employees in retirement plans automatically to make participation easier. It is possible for employees to opt out of participating. Businesses with fewer than ten employees, new businesses less than three years old, churches, and government plans are exempt from the requirement. In order to comply with the law, default rates must start between 3% and 10%, and increase every year by 1%, up to a maximum of 15%. For businesses’ convenience, automatic enrollment can be integrated with payroll.
Additionally, 45 million Americans are impacted by student loan debt, which amounts to $1.75 trillion according to the Federal Reserve in 2021.
As such, starting in 2024, employers will be able to match employee contributions to their 401(k) when the employee pays off a student loan. This will enable the employee to save for retirement at the same time as paying off a student loan.
Suffice it to say, if your employer offers matching contributions, you should definitely take full advantage of them.
It would also be ideal if you saved 10% to 15% of your monthly income toward retirement. Even 1% to 2% will make a significant difference over the long term, advisers say.
What is the Average net worth of Generation Z?
American under-35s (a mix of millennials and Gen Zers) have a net worth of $76,000 on average, according to the Federal Reserve’s 2019 Survey of Consumer Finances.
In comparison to other generations, what is Gen Z’s net worth?
In comparison to older generations, Gen Zers’ net worth is lower on average. It is estimated that the average millennial over the age of 35 earn over $400,000. Gen Xers have average net worths between $400,000 and $833,000. The average net worth of older generations, such as the Baby Boomers and Silent Generation, is in the millions.
Since Gen Z accounts for the smallest percentage of the workforce, and entry-level jobs typically pay lower wages, it’s not surprising that they have the lowest average net worth of all generations.
How financially healthy are Gen Zers?
Approximately 46% of Gen Zers live paycheck-to-paycheck, according to a Deloitte report. In addition, over one-quarter of Gen Zers don’t believe they will be able to retire comfortably.
Moreover, according to a Bank of America survey, 73% of Gen Z believe the current economic environment makes saving more difficult. Inflation has made financial savings harder (59%) and debt repayment more difficult (43%), and created more financial stress (56%). In addition, 40 percent say they have struggled to afford day-to-day necessities due to rising rents or home prices.
This generation has also put off investing. About 40% of Americans have no investments, with their top reasons being that they do not have the additional funds to invest (44%), they do not know where to start (31%), and they feel investing is too risky (23%).
What are Gen Z’s top three priorities for the year ahead?
Among the goals they have are to get a higher education (40%), to advance in their career or salary (32%), and to find a new job (31%). Saving for retirement (25%) is closely followed by traveling (24%), buying a car (22%), and building good credit (20%).
How has Gen Z’s net worth and financial future been shaped?
In order for this generation to grow and build their net worth, several factors have played a role. Inflation, downturns in the economy, rising educational costs, and stagnant wages have all created significant obstacles to wealth development.