Millennial households are earning now more than ever with a $69,000 median income. But most of them are still buried in debt and living with their parents. The lack of personal finance knowledge is to blame.
Anyone can be quick to judge you on your financial decisions and management, but few will take the time to educate you. Choosing the right track to better your finances is a crucial step towards adulthood.
Personal finance is a term thrown around like confetti, but what does it mean for a millennial today? Millennials are no longer pursuing their teenage dreams; instead, they want to settle, create stability and wealth for themselves and their special ones.
As a millennial myself, I got lost quite a few times in the personal finance world. Budgeting, drain myself working three jobs, saving, investing without understanding what I’m doing, overspending due to stress, you name it – I’ve done it.
The most important thing I learned is not to follow the rules blindly; instead, I take them as pieces of advice and make adjustments. And never work on more than one goal at a time. Are you focusing on saving for an emergency fund? Great, don’t go saving for a downpayment on a house right now.
Take small steps, and they will lead you to giant leaps. Here are the most important personal finance tips I wish someone had told me sooner.
- 1 Create An Emergency Fund Before Anything Else
- 2 Determine Your Debt-To-Income Ratio
- 3 Find Out Your Credit Score
- 4 Make A Debt Pay-Off Plan
- 5 Start Contributing To Retirement Savings Accounts
- 6 Build A Realistic Budget
- 7 Learn More About Investing
- 8 Set Up A 529 Plan And A HSA
- 9 Become An Expert Saver
- 10 Try Everything Once
- 11 Set Long Term Financial Goals
- 12 Discuss Personal Finance With Your Partner And Family
- 13 Distance Yourself From People With Different Financial Mindset
- 14 Aim For Financial Freedom
- 15 Bottom Line
Create An Emergency Fund Before Anything Else
I can’t stress enough the importance of having a setup and funded emergency fund.
If 2020 has taught us something is that you can never predict what’s about to happen. Many were drastically affected by job losses, underpayment, and even eviction due to unpaid bills.
Having an emergency fund is like you have your own back during uncertain and troublesome times.
List out your fixed monthly expenses like rent/mortgage, utilities, groceries, phone, car, medicine, hygiene products and add a buffer. Multiply the sum by 3 times if you’re single or by 6 if you have a family.
Contribute as much as you can to your emergency fund to fund it while you’re with a stable job. Withdraw in exceptional emergencies, like if your car broke down, you lost your job, a medical emergency, etc. Once you’re back on your feet, quickly put the money you spent back.
After you’ve created your emergency fund, look for a safe and easily accessible place to keep it. We have discussed an idea.
Determine Your Debt-To-Income Ratio
Your debt-to-income ratio plays a vital role when it comes to determining your financial situation.
If you plan on taking a mortgage for your own home you want to find out if you’re the right potential candidate, it’s essential to calculate your exposure. It’s all the money you bring home from your full-time and part-time jobs pre-tax vs. all the money you pay each month for debt.
Let’s say you make $69,000 annually before taxes and have $1,000 debt payments each month. Your debt-to-income ratio comes at 17%, which is a great result.
If your debt-to-income ratio is below 36%, it’s great. You’re a great candidate for mortgage approval among lenders.
If you’re above 36%, it means you’re a risky candidate, and lenders will limit your borrowing options. It would be best if you worked on paying off some debt or increasing your income before applying for other loans.
Find Out Your Credit Score
The most dreaded score of your life – the credit score. A good credit score will open many doors to better loans, easier mortgage approval, and even better employment options since many employers check your credit score nowadays.
Many actions affect your credit score, like closing or opening a credit card, getting a personal loan, letting your payments go past due, having your wages garnished, etc.
A good credit score ranges from 670 to 739, a great one is from 740 to 799, and anything above 800 is considered excellent.
To track your credit score annually, get a free credit report from credit agencies like Transunion and Experian or get a FICO credit score from your bank.
Make A Debt Pay-Off Plan
Debt is something almost every person carries on their shoulders, and there’s no shame in that.
Whether you’ve made poor decisions and swiped your credit card left and right or took out a loan to pay for your education, that debt needs to be gone.
One of the most raved about debt pay off method, “The Snowball,” can help you in the beginner stage of your pay off. The strategy focuses on paying off your smallest debt or the one with the highest interest rate first.
It means paying double or triple the minimum for that one credit card until it’s paid off. The freed-up funds that no longer go towards that card are redirected to paying off your student loans. And so on until you’re debt-free!
Start Contributing To Retirement Savings Accounts
It’s better late than never is pretty much right when it comes to retirement savings. I’m part of the large group that didn’t think about retirement savings up until last year.
Nobody talks about retirement in their 20s and 30s. But we all should.
Luckily there are financial services and plenty of free information to help you choose a suitable retirement account and determine your contributions.
Once you get acquainted with the pros and cons of the 401k, IRA, Roth IRA, and others, you’ll see their impact on your future. Maybe you’re missing out on an employer 401k match? That’s like throwing away free money!
Act now, and you will thank your younger self while enjoying the tax-free money in your 60s.
Build A Realistic Budget
One way to build wealth is to track where your money is going what it’s bringing.
Creating a monthly budget for yourself and your household helps you realize where you can adjust and repurpose the money for something more beneficial.
For example, spending a lot of money on fast food and take out is financially harmful, but it also affects your health.
You can use a couple of mainstream budgets like a Zero-Based budget, 50-20-30, or an Envelope system.
It’s important to realize that a budget is created to help you track and improve your spending habits, not limit you to enjoying life. You can put in any category that brings you joy and budget for it each month!
Learn More About Investing
What took me longer than any other tip is to engage in investing. For me and many other millennials, investing is looked at as something people with a lot of money do, like Elon Musk.
It required a lot of reading, listening to other people’s experiences, and educating myself before realizing that I too can engage in small investments.
What came as a surprise is that you can invest as little or as much as you can! You can invest as little as $50.
Start small and safe while discovering what kind of investor you want to be – an aggressive one or more conservative? Mutual funds, bonds, and market funds are all a great start.
Set Up A 529 Plan And A HSA
If you’re a new parent, there are a thousand little things you try to micromanage each day, so your kid’s future education might not come to mind.
Learn more about the 529 plan, savings account that you can use for your kid’s educational cost from kindergarten to college.
Another useful savings account is the Health Savings Account. You can open one and contribute to and withdraw for qualifying medical expenses. You can withdraw the money you end up not spending the same as from your retirement account.
Become An Expert Saver
How to make saving sound better? Saving automatically means you’re staying away from the fun and enjoyable things. But we know it’s far from that.
Create a mindset where the price of everything unnecessary is converted to working hours. Let’s say you want a purse that’s the price of a two weeks grocery budget. Are you willing to work 40 hours to be able to afford it? Is it worth it?
Another important savings rule is not to buy anything if you can’t afford it twice. I learned this the hard way. I bought popular brand wireless headphones that were way over my budget, and I lost them a month later. I couldn’t afford to repurchase them, so I was $180 short of money and no headphones in sight!
Try Everything Once
The Mid 20s to late 30s are your years to try anything financially related you ever wanted.
Are you wondering how people can live on one paycheck? Try it out for a couple of months. It might work for you!
Are you thinking about living more frugally? Try it out; it shouldn’t be as dramatic as some TV shows make it look.
Want to see if you can manage two jobs at the same time? Get a side gig or a part-time job now while your energy is through the roof.
The 30-day rule, couponing, saving 70% of your paycheck, shopping seasonally, or everything else you wanted – now is the time to try it out.
Set Long Term Financial Goals
Short term goals are reachable and motivating, but what about a long term goal?
Investing for the long haul, planning to retire early, building wealth you want to leave to your children are all long term goals.
Find one that you look forward to, and it will motivate you enough to stay on track. Goals can scare you too. It’s the right kind of scary.
Discuss Personal Finance With Your Partner And Family
The key to succeeding in anything in life is support. Try to get your closest ones on board with you on the journey to financial health.
People don’t want to be told they’re doing something terribly wrong, so choose a smooth way to bring up their finance management. In most cases, well, at least with my surroundings, people are eager to learn how to manage their money better.
My partner was a huge spender. When I first started taking personal finance seriously, we sat down, and I tried gently to explain everything his money could do if he didn’t throw it away.
Fast forward to today, he’s saving half his paycheck while paying off a mortgage and still enjoying life!
Distance Yourself From People With Different Financial Mindset
As I said, people don’t want to be told they’re wrong.
A portion of my colleagues and friends don’t think they’re wrong in being buried in debt with no pay off plan. They tend to spend every last dime before payday, and living that paycheck to paycheck lifestyle really isn’t speaking to me.
On your path to improving your finances, you’ll find yourself distancing from people with momentary goals and a lack of basic money knowledge.
And that’s alright because you’ll meet more people like you on your path to success.
Aim For Financial Freedom
The main goal of personal finance is to teach you how to reach financial freedom.
To work because you want to, not because you have to pay off debts. To choose a job according to your preferences not to sit in a terrible place because it pays well and you can’t afford to sit jobless for a while.
Good money management will bring you more than busting yourself to earn more.
Millennials are always criticized for their financial choices by boomers or generation Y.
The truth is we might make more than previous generations, but we have it harder; larger student loan debt, more expensive housing, generally more expensive lifestyle.
I hope these tips help you realize if you’re missing something or what you might be doing wrong. Improving your finances reduces stress drastically, enables you to live a better, more stable, and fulfilled life.