Gen Z generally consists of anyone born between 1997 and 2012. That means about half of Gen Z are adults and getting ready to take on their financial futures. Yet many face several challenges, such as rising college costs and student debt. Fortunately, Gen Z can reduce the impact of today’s financial strains and set themselves up for a bright financial future through many of the same steps others have taken. With that in mind, this article will cover four tips to help Gen Z prepare for their financial future.
1. Create a budget
Budgets lay out your income and all your expenses. This helps you ensure you’re living within your means, avoiding debt, and setting and working towards financial goals. A budget can also help you find and cut unnecessary spending, freeing up money for savings or for expenses you value more. For example, while creating your budget, you might uncover a forgotten Netflix subscription you don’t use. Canceling this can save you money every month.
2. Get a life insurance policy
Life insurance protects your loved ones if you pass away unexpectedly. You might not have a family yet, but the benefit of getting a life insurance investment early in life is that premiums are more affordable while young. You can lock in lower premiums so that when you need the policy more down the line, you won’t have to pay as much to cover them. In the meantime, you can name anyone else as your beneficiary, including parents, relatives, friends, and even charities. You can always update your beneficiaries later.
Here are two major types of life insurance Gen Z individuals can consider:
- Term life insurance: This policy lasts for a fixed period of 10 to 30 years, meaning you must renew coverage if you outlive the policy. However, premiums are typically cheap.
- Permanent life insurance: This policy costs more than term life insurance but lasts for life. Permanent life insurance also comes with cash value, perfect for building wealth early on if you can fit the premiums into your budget. Part of each premium you pay goes into the cash value, which grows tax-deferred at a certain rate. Once that grows large enough, you can withdraw or borrow from it at favorable rates and terms. You can also receive the full amount minus surrender charges if you surrender the policy.
3. Build an emergency fund
An emergency fund is money you can keep in a savings account for events like losing your job, getting in a major accident, or receiving an unexpected medical bill. The fund helps pay for the emergency and cover living expenses, helping you avoid debt and financial stress.
Many experts recommend saving three to six months of living expenses in an emergency fund. You may want to consider saving it in a high-yield savings account, which pays more interest than a regular savings account. This can help reduce the impact of inflation on your savings.
4. Open and contribute to a retirement account
Retirement accounts offer tax advantages to help you set money aside for retirement. They let you invest that money into certain assets or investment funds to help your savings potentially grow faster.
If you have a full-time job, see if your employer has an employer-sponsored retirement account. These generally let you contribute with pretax money, meaning the IRS subtracts these contributions from your taxable income when calculating your taxes owed. These accounts may offer a matching bonus, which is free money for retirement from your employer. Try to contribute at least up to this bonus.
That said, employer retirement accounts may limit what you can invest in. Once you hit that matching bonus, consider opening an Individual Retirement Account, or IRA. There are two types:
- Traditional IRA: Contributions are pre-tax, but withdrawals in retirement are taxed at your ordinary rate.
- Roth IRA: Contributions aren’t tax-deductible, but qualified withdrawals in retirement are tax-free.
The bottom line
These steps may seem simple, but even small actions taken early may pay off significantly down the line. Create a budget to set up a monthly plan for your spending and make it easier to work toward your financial goals. From there, consider getting a life insurance policy as early as possible to lock in lower premiums.
After that, build up an emergency fund, then open and contribute to a retirement account when your emergency fund is full. Following these tips will help Gen Z individuals set themselves up for financial success for the rest of their lives.