Despite being one of the most educated generations to date, millennials are largely financially illiterate. As a member of gen Y, that’s one of the scariest things I’ve ever heard. Listen, I know making wise financial decisions isn’t always the easiest of tasks.
Not only does it involve being completely up-to-date on the way interest, credit, debt, and other lovely aspects of our capitalist system works, it also means fighting some of our base instincts — instant gratification anyone?
I’m not making these pronouncements from a pedestal — I’m certainly not perfect. I’ve made a number of rash financial moves in my adult life and learned some hard lessons. However, as I trip toward my mid-thirties, I’m learning better ways to approach spending. I’d like to share a few with you.
1. Coddle Your Credit
When it comes to your finances, nothing has an impact quite like your credit score. Your ability to obtain a loan, get approved for a credit card, rent an apartment, buy a car, own a home, and even land a job are all affected by your credit score. And simply because it seems as if the universe is conspiring against us, it is surprisingly hard to build credit, and remarkably easy to destroy it.
Your credit score is calculated based on a quite a few factors, including payment history and the length of your credit history. If you want to keep your it in a beneficial range, you’ll need to be mindful of your financial habits. Here’s how to build and maintain good credit:
- Have credit cards – but manage them responsibly.
- Always pay your bills on time.
- Pay above the minimum payment amount on credit cards.
- Student loan, mortgage, and auto loan payments are all recorded on your credit report — be sure to pay them on time.
- Rent, utilities, cable, cell phone, and internet service payments are not recorded on your credit report — however, if you fail to pay them and they go to collections, that will be reported.
- Keep balances low on credit cards and other revolving credit — don’t charge more than 30% of your credit limit.
- Limit your applications for new credit. Credit inquiries cause a 10% dip in your credit score.
- Don't close unused credit cards, it will shorten your average credit age.
- Leave old debt and good accounts on your credit report.
- Monitor your credit report for mistakes and signs of identity theft.
Your credit score is something you’ll want to keep on eye on your entire adult life. Take good care of it, and it will aid you in your financial journey. Neglect it, and it will only cause you trouble.
2. Budget, Budget, Budget
No doubt you’ve heard this advice before, but it bears repeating. You need to create — and live by — a budget. A budget helps you manage your money by balancing your expenses with your income, which in turn, allows you to do three very important things:
- Determine in advance whether you have enough money to do the things you need (or would like) to do.
- Keep you out of debt (or help you work your way out of it.)
- Save money for long term financial goals and emergencies.
To create a budget, identify your average monthly expenditures by collecting bank, credit card, and income statements for the past six to twelve months. Divide your spending into categories — rent/mortgage, utilities, groceries, insurance, debt payments, medical expenses, savings, gas, entertainment, etc.
Write down how much money you make and subtract your expenses from that number. The result should be more than zero — if it is less than zero, you’re spending more money than you make, and will need to make cuts.
Track your progress using online budgeting sites, spreadsheets, or a ledger — whatever you feel most comfortable with. Start the month with a plan for how you will spend your money. Record what you spend every day.
At the end of the month, check your expenditures against your plan. Use this information to help you plan next month’s budget. As you continue to do this, you’ll find yourself getting better and better at making a well thought out plan and sticking to it.
Once you’re comfortable creating month to month budgets, start mapping out your spending plan for six months to a year down the road. This allows you to predict which months your finances will be tight, and then plan to save a bit to make make them more manageable.
Setting up and sticking to a budget requires serious self-discipline and a lot of sacrifice. However, it will help you establish wise spending habits and manage your finances now and well into the future
Saving money isn’t easy when you don’t have much to begin with, but it’s absolutely essential to gaining financial freedom. There are many reasons to save, but the following three are the most important.
Small emergencies, such as needing car repairs, having to replace broken appliances, or unexpected vet bills, are so much easier to handle when you have money on standby. Trying to scrape money together during a crisis only adds to the stress of the situation. That’s why it’s wise to have $1000 in savings for immediate, short-term emergencies.
Emergencies can also arise when you get laid off, become sick or injured, go through a divorce, or have a death in the family. While you might like to think it’ll never happen to you, the cold, hard truth is that it happens to people all of the time — and you’re no exception.
If a situation arises where you no longer have an income, you’ll be in dire straits if you don’t have money set aside. Saving three to six months income will ensure you don't plunge into debt after a life crisis.
Retirement may seem far away, but it will sneak up on you before you know it. With people living longer lives, and the uncertain fate of social security, it’s incredibly important to save money to take the place of the income you'll no longer receive from your job when you’re older.
You can put your money to work for you by contributing to a 401(k) through your employer as well as a personal IRA. The more you contribute over time, the more you earn in interest. You will want to contribute ten to fifteen percent of your gross income — and if you can, try to contribute up to your employer's match.
It will take time to save up money for both short and long term emergencies. Add it into your budget, set realistic goals, and get started. Even the smallest amount set aside each week will help grow your emergency fund.
Add to your provisions by saving windfall income (such as tax returns), collecting loose change, or by doing one less expensive thing each week (such as eating out) and applying that money to your savings.
Saving money takes a lot of effort, but it’s well worth it. The more you save, the easier it is to keep it up. And having a good deal of money in the bank gives you peace of mind, more options, and a hell of a lot less stress.
4. Own Smart
If you’re lucky enough to be able to afford home ownership (which is no easy feat for most millennials). There are a number of smart financial decisions you’ll want to make regarding your house.
Before you start shopping for a home, pay off all of your debt — car payments, credit cards, student loans, you name it. Make sure your emergency fund is full (3-6 months income) and save up at least 20% of the home price for a down payment. Then, calculate your monthly mortgage payment; it should be less than 25% of your total net income.
Hire an inspector before you buy. While it’ll cost a couple hundred up front, it could end up saving you thousands of dollars on repairs. A home inspector will provide you with unbiased information on the house’s condition so that you can make a decision whether or not to buy. If the inspector does find problems, you can use it as a bargaining tool to lower the price of the home.
Get the right loan! Don't borrow the maximum possible amount, it will only end up causing financial stress. Buying a more affordable home will give you a wide margin of safety. Adjustable-rate mortgages and 30 year loan terms can be inviting. They give you a lower monthly payment, but it’s far better to choose a 15-year, fixed-rate mortgage. It will save you a lot of money in interest in the long run.
Once you’re settled, you can focus on reducing the principal amount you owe on your home loan. Interest is front-loaded on your mortgage. That means that most of what you pay in the first few years is applied to interest. You can shift the balance of the principal relative to the interest by paying a little extra each month.
Divide your regular monthly payment, including property taxes and insurance, by 12. Add this amount to your regular monthly payment. Making sure your lender knows that this extra money is to go toward your mortgage’s principal balance. This will save you a load in interest and help you pay off your mortgage faster.
You’ve probably received enough financial advice from family, friends, and well meaning talk show hosts to make your head spin. There’s really only a handful of things you need to focus on day to day. Stay on budget, don’t make frivolous purchases, watch your credit score, and save money for emergencies and retirement. If you do at least that, you’re golden.