7 Steps for Generation Xers to Reclaim Their Financial Future
January 15, 2014Yesterday, we provided financial tips for the Baby Boom generation. Today, we take a look at Generation Xers, who are suffering the double whammy of experiencing tough economic times at a particularly vulnerable financial stage of life. While most Millennials were too young to own stocks or real estate during those market crashes, and Baby Boomers enjoyed decades of growth in both assets throughout the 80s and 90s, many Gen Xers had the misfortune of starting their investing just as both markets were peaking. This comes at a stage of life in which a majority of Generation Xers own a home (translate: have a mortgage payment) and have minor children (translate: extra mouths to feed). So if you’re a Gen Xer, here are some moves to consider:
1) Create a budget. Generation Xers are struggling the most with managing their money and are the most likely to live beyond their means. Part of this is a result of having to manage competing priorities. The first step is to find out where your money is going by looking at previous bank and credit card statements and categorizing them on a worksheet like this or using a free site like Mint or Yodlee MoneyCenter that can track your spending online. You can then search for ways to cut back on some of those expenses to bring your spending in line with your income and free up money that can be used to pay down debt or save for the future. Another option for busy parents is to give each of you a set monthly allowance for discretionary expenses that you can spend any way you like but when the money is gone, it’s gone until the next month.
2) Pay yourself first. Once you know what you can afford to save, you can prioritize those savings by putting the money aside before you even have a chance to spend it. Gen Xers are the least likely generation to contribute enough to their employer’s retirement plan to get the full match and to have an emergency fund, both of which would be good places to start. Having an emergency fund is particularly important since over 60% of Gen Xers own a home and have minor children.
3) Get rid of high-interest debt. Generation Xers were the most uncomfortable with the amount of non-mortgage debt they had and the least likely to pay their credit card bills in full. Paying down any high-interest debt (anything above 6-8%) should be a top priority for your savings since you’re unlikely to earn more by investing that money. The quickest way is to put any additional payments towards the debt with the highest interest rate. As one balance is paid off, you would re-allocate the payments to the debt with the next highest rate until they’re all paid off. This calculator will show you how soon you can be debt free with this strategy.
4) Run a retirement calculator. The bad news is that Gen Xers are the least likely to be on track for retirement. The good news is that they’re still young enough for more savings to have a significant impact. To find out how much more you may need to save, you can see if your employer offers a program like Financial Engines, Schwab GuidedChoice, or a retirement calculator like this. You can get an estimate of your Social Security benefits here (use future dollars for our calculator) but you should consider reducing the benefits by at least 25% since that’s the projected funding shortfall after 2033, when many Xers will be retiring.
5) Increase contributions to your employer’s retirement plan. For Gen Xers struggling to pay the bills, dramatically increasing savings may not be realistic, especially with a large mortgage payment. Fortunately, that mortgage payment won’t rise with inflation but your income will likely grow faster so you can start putting the difference away for retirement. See if your retirement plan provider has a feature called a contribution rate escalator that automatically increases the contribution rate slowly over time until your target contribution rate has been reached. If not, it only takes a few minutes to manually increase the contribution rate with each pay raise.
6) Simplify your investing. Gen Xers have been shown to have the highest level of confidence in the stock market, which can help you maintain an aggressive investment portfolio and benefit from your long-time horizon. However, don’t let recent market gains tempt you to become too aggressive. In fact, you’ll want to dial it down as you approach retirement. The easiest way to do that is with a target retirement date fund, which is fully diversified one-stop shop fund that does that automatically and is increasingly available in employer-sponsored plans. For more customized guidance, see if you can get financial advice or guidance through your employer or by using online tools like FutureAdvisor and Jemstep.
7) Consider contributing to a college fund. If you have minor children and an adequate emergency fund, no high-interest debt, and are on track for retirement, you may want to start putting money aside for your kids’ future education costs. In a 529 plan or Coverdell Education Savings Account, the investments can grow tax-free for qualified education expenses. However, you’ll want to make sure your other needs are taken care of first since non-qualified withdrawals can be subject to taxes and a 10% penalty on the earnings.