Financial Planning Tips for Gen Z in 2023

Generation Z finds it intimidating to consider saving, investing, and preparing for retirement.

As young professionals begin their professional journeys, the stock and bond markets have been in a state of unrest, with the S&P 500 on track for its most dismal yearly performance since 2008. An economic recession is on the horizon. Wages have not kept up with inflation. Credit card debt and interest rates are increasing. Housing costs have skyrocketed. Furthermore, the already large retirement savings gap has become even more pronounced.

Advisers suggest that Gen Z use the start of the new year as an opportunity to assess their financial health. They recommend creating a plan that takes into account both short-term money objectives and long-term retirement savings, even if retirement is far in the future.

Experts have identified five steps that young people should take to ensure their financial stability in the upcoming year of 2023.

Dustin Smith, a financial adviser at Wealth Enhancement Group, noted that nowadays, individuals are not typically taking into account all of their income, investments, and expenses in the same place. He emphasized that before making any financial decisions, it is essential to have a comprehensive and comprehensive view of one's financial situation. This includes accurately tracking all transactions, and being mindful of details such as interest rates and recurring payments.

Bill McManus, vice president and managing director of applied insights at Hartford Funds, suggested that individuals should consider any major expenses they may have in the near future, such as a move or a vacation, and create a short-term savings plan to accommodate them.

It is recommended to have a financial cushion of three to six months' worth of expenses saved up in case of an emergency, especially if you are concerned about job security during a recession.

T.J. Williams, a financial adviser at Wealth Enhancement Group, recommends that those who are employed should prioritize their financial health. He suggests having a cash reserve before paying off debt, even though it may seem counter-intuitive. Not doing so could lead to further debt or the need to sell investments that could be beneficial in the long run.

He suggests taking advantage of any extra money and protecting it from inflation by looking into different banking products such as high-yield savings accounts and money market funds that are offering unprecedented returns. However, it is important to consider any potential penalties or withdrawal restrictions when deciding where to put your assets, according to Williams.

Maria Bruno, head of US wealth planning research at Vanguard, suggested that young people should take full advantage of any employer matching that is available when it comes to retirement savings plans, such as 401(k) for businesses and 403(b) for non-profit companies. Many companies automatically enroll employees into these plans.

Financial experts recommend setting aside 10-15% of your monthly income for savings. If that isn't possible, even a small amount such as 1-2% can make a significant impact over time.

Having personal debt from student loans or credit cards can be more than just a financial burden. It can also have an impact on your credit score, which can affect your ability to get other credit cards and mortgages. Bruno suggested that those looking to pay down debt should prioritize the debt with the highest interest rate.

This year, the average interest rate for credit cards has gone up to 19% or higher due to the Federal Reserve's efforts to control inflation. Additionally, Gen Z's preference for buy now, pay later schemes can lead to quickly accumulating loan balances and harm their credit scores.

When it comes to investing, whether for retirement or other purposes, the most crucial decision to make is how to allocate assets. This involves deciding how much to invest in bonds, which are usually more secure, and how much to invest in stocks, which can be riskier but may generate higher returns in the long run.

Michelle Griffith, a wealth adviser for US consumer wealth management at Citi, suggested that a 60/40 split between stocks and bonds may be suitable for investors who are comfortable with moderate risk. However, it is important for each individual to assess their own risk tolerance by determining their trigger points - the amount of loss they can handle before taking action.

When investing, it is important to diversify across different companies of various sizes and industries. According to Griffith, her younger clients often prefer to invest in cryptocurrency and technology, which resulted in significant losses this year, while they missed out on the gains in the energy sector.

Kyle McBrien, a financial planner at Betterment, stated that riskier assets, such as meme stocks and options trading, are not necessarily a cause for concern; however, they should not make up more than 5-10% of an investment portfolio.