Millennials Are Behind Financially. Here's How They Can Catch Up.

The key is to find the right balance between paying down debt and building your savings

Woman checking finances on phone Photo: iStock

For millennials today, the economic challenges are increasingly daunting—including high inflation, skyrocketing home prices, and the ongoing burden of paying down student loans.

Granted, many millennials are saving more, but as a group they lag behind earlier generations on a number of financial measures, according to the Employee Benefit Research Institute (EBRI). 

The median family net worth for millennials (those under 40) stood at $23,130 in 2019, compared with $32,359 for Gen Xers at the same stage in life. 

Debt is a key reason so many millennials are falling behind financially. 

Although many Americans managed to improve their finances during the pandemic, overall consumer debt increased in 2021, according to recent data from Experian, with the average debt balance for millennials growing by 15.4 percent to $100,906.  

“For many millennials, it’s essential to find a way to pay down debt and save at the same time,” says Marguerita Cheng, a certified financial planner in Gaithersburg, Md.

A Balancing Act

The good news is that many are already doing it, especially those who have access to an employer retirement plan. Middle-income workers are 12 times as likely to save for retirement in a tax-advantaged account if they have access to a plan at work, studies show.

More on Saving and Debt

But some millennials have yet to take advantage of these savings opportunities. About 1 in 5 401(k) participants between the ages of 25 and 34 didn’t contribute to their employer plan last year, according to data from Vanguard.

That’s not too surprising, because many young adults are focused on other financial goals, such as buying a first home or affording child care, as well as paying down student loans. 

When it comes to retirement, in fact, millennials are the most pessimistic generation, as recent research by the National Institute of Retirement Security found. More than 7 out of 10 millennials [PDF] said they’re concerned about achieving financial security, compared with 59 percent of Gen Xers and 43 percent of baby boomers.

“Millennials are pulled in different directions, and addressing short-term needs is a greater priority than saving for retirement,” Cheng says.

What to Do

It’s important not to let stress get in the way of success. Perhaps you may not be able to achieve all of your goals right away, but with the right strategy, you may be able to get there sooner than you think. These guidelines can help.

1. Trim your budget. Take a hard look at where your money is going. You can do this relatively easily with online tools such as Mint (free, with optional paid features) or YNAB (34-day free trial, then $98.99 per year), which can monitor your transactions. Your bank or credit card website can also track and categorize your transactions for you.

With numbers in hand, look for ways to free up cash. You’ll achieve the biggest impact by tackling big-ticket items, such as housing or transportation. But don’t overlook small fixes as well. Maybe you don’t really need all those meal kit deliveries, or perhaps you can sell unwanted items for extra cash.

2. Prioritize your debt payments. If you have credit card debt, you may be paying 20 percent or more. So figure out a plan to tackle those balances as quickly as possible, using the cash flow you have freed up. Use automatic payments to ensure that money goes toward that debt.

Many financial planners suggest targeting the highest-rate card first, but perhaps paying off a smaller balance first will give you the confidence to stick with your plan, says Matt Cooley, a certified financial planner in Boise, Idaho. 

3. Devise a student loan strategy. If you have student loan debts, you may have taken advantage of the pandemic emergency pause in federal student loan payments, which has been extended until Aug. 31, or the limited loan forgiveness programs.

But it’s far from clear whether there will be a further extension of the payment pause or a much-debated blanket cancellation of student debt.

“If you have federal student loans, you may want to consider setting aside money for payments in a separate savings account,” says Ben Wacek, a certified financial planner in Minneapolis.

When payments resume, you could take the full amount in that savings account to make a one-time payment toward the student loans, reducing the interest you have to pay.  And if you need the money for something more urgent, you can redeploy those funds, Wacek says.

You can find information about student loan options at the Consumer Financial Protection Bureau. For free individual student loan advice, you can try The Institute of Student Loan Advisors.

4. Build a rainy fund. Next to paying down debt, amassing an emergency fund is a top priority. If you don’t have cash on hand to pay a medical bill or get your car repaired, you’re likely to end up putting the amount on a credit card, which means more high-rate debt. 

How much do you need to be stashed away? Most planners suggest saving enough to pay three to six months of expenses. Once again, setting up automatic payments into your rainy day account will help ensure you reach your goal.

5. Stash cash in your retirement plan. If you have a 401(k) or another employer-sponsored plan, you may have the benefit of a matching contribution, perhaps dollar for dollar up to 6 percent. That’s free money, so contribute at least enough to get a full match, if you can. Making pretax contributions can also lower your tax bill. (Use a calculator to see the impact of pretax contributions on your take-home pay.)

If you don’t have an employer plan, design your own by funneling savings into an IRA or solo 401(k). The plans can let you stash large amounts away while also saving on taxes.

For those with an employer retirement plan, you may have additional benefits in the form of financial wellness offerings. These programs typically offer free or low-cost assistance with budgeting and paying down debt, among other services. Check with your 401(k) provider or benefits department to see what your plan may offer if you need the help.


Photo of CR Money editor, Penny Wang.

Penelope Wang

I cover everything from retirement planning to taxes to college saving. My goal is to help people improve their finances, so they have less stress and more freedom. What I enjoy: walks through the city, time with family, and reading mysteries, though I rarely guess who did it. Follow me on Twitter (@PennyWriter).