Millennials have different financial priorities than members of other generations. With college debt to worry about, a struggling job market, and rising housing costs in many urban areas, today’s young adult has their own unique financial landscape. The same advice that worked for their parents might not help them meet their own financial goals and may even get them into money trouble. So, what is a millennial to do?
Re-evaluate spending
The biggest change that millennials face when becoming financially independent is learning how to manage their own money. As a generation, millennials enjoyed higher levels of financial security than their parents or grandparents growing up, with discretionary money available for activities, new clothes and toys, and dinners at restaurants. When you do become responsible for your own bills, it can be tempting to keep spending money on these things, thinking that they are “essentials.” But with student loan payments looming and often low-paying entry-level jobs, paying for these “essentials” can easily land a young person in debt.
The best place to start is your budget, or by making a budget if you don’t have one yet. Millennials are tech savvy, so don’t be afraid to use a budget app or online service, such as Mint or You Need A Budget. Some do come with monthly fees so do your research before deciding if you want to spend your hard-earned money on premium features or if a free version will meet your needs.
Most experts recommend building an emergency fund and for good reason. Emergencies, such as car repairs, medical expenses, or an unexpected loss of income, cannot be predicted. The costs come up suddenly and require immediate attention. The recommended amount is 3-6 months of expenses, but don’t get overwhelmed if that number seems difficult to achieve. Start by building a set amount into your budget at the beginning of every month. You may be tempted to just put what is leftover into savings at the end of the month, but I find that it is too easy to overspend if you aren’t making savings a priority. Instead, think of it as another bill that must be paid before you see what’s left for fun, optional activities. Pay yourself first!
Pro tip: Create a separate bank sub-account for your emergency fund. Then pick the amount you want to put into your emergency fund every month and have your bank auto-transfer that amount into your emergency account. You won’t even notice the money missing.
Track your credit
As a newly financially independent person, you may not have a long history of established credit and that’s okay. You probably do have loans from school or a car and possibly even a credit card. These are all opportunities to build your credit, as long as you are making your payments on time. Credit is basically a number value assigned to each individual that shows how financially risky you may be to loan money to. Think of it as your adult financial report card. The higher the number, the better your credit. The better your credit, the more likely you are to be loaned money in the future because banks know that you will pay them back.
Good credit can also get you better interest rates, help landlords decide to rent to you, and even make you more employable. Put those monthly payments into your budget and make sure to get them paid on time.
Many banks and credit agencies offer free credit reports to their customers as a way to build a mutually beneficial relationship. Check to see if your bank offers this service or can recommend a reputable outside company.
Important note: Too many credit checks in too short of a time can actually lower your credit score slightly, so don’t apply for more loans or cards just to see how your credit is doing.
Plan for the future
You just started working, so why should you be thinking about retirement? Because now is the best time to get that account started. Not only will you build a healthy financial habit from the beginning, the money that you put into a retirement savings plan will grow more if it is given time to generate compound interest. Money put into a retirement account in your 20’s will have a lot more time to grow than if you contribute that same amount in your 40’s.
If your employer offers a 401K plan, use it. Not only are the fees generally very low, you can also set up direct deposit from your paycheck so that you don’t have to make the decision every month on when and how much to contribute. It’s all done automatically.
Some employers also match contributions made by their employees to this type of plan. That is extra money in your pocket during retirement. If your employer does not offer a 401K, look into setting up an Individual Retirement Account, or IRA, with your bank or financial institution. You can manually manage your investment or have account managers make investments that are appropriately risky for the preferences you select.
Plan For Taxes
401K plans and some IRAs also offer tax advantages, either now or when you withdraw your funds in retirement.
They also have annual contribution limits. Check with a financial planner to see what option is right for your current budget and financial goals. Many banks or financial institutions offer this service free-of-charge when you are setting up your account.
What To Do Now
The transition to financial independence is a highly-anticipated milestone for many but does come with a steep learning curve.
The important thing to remember at this stage of life is that while your own paycheck does mean you get to decide what to do with your money, it is still wise to spend within your means and think before making big financial decisions. A budget that includes required bills and savings will allow you to celebrate that newfound independence without stressing about when the collectors may be coming around.
Although it may seem very far away, retirement is something you need to start planning for now. Get in the habit of disciplined spending now can reap big rewards and stability in the future.
