| |Money 101 for Millennials
How you handle money over the next few years is key in reaching your future financial goals. One of your goals may be financial freedom – having enough money down the road to travel, pursue your passion and enjoy life.
Given the challenges millennials face, this may seem like a daunting goal.
Millennials face one of the most uncertain economic futures of any generation since the Great Depression. Many came of age or entered the workforce during the Great Recession of 2008 and, as a result, started their careers at lower salaries or not in their preferred field of work. Additionally, Millennials carry more debt in the form of student loans than any prior generation.
A 2018 report found that four out of five Millennials with student debt said paying off that debt was “extremely” or “very” important to them, and one out of five identified debt as a top financial concern overall.
So it’s easy to see why you may be scrounging to find extra dollars to invest toward your future or feeling reserved about putting your hard-earned savings into an investment that carries any degree of risk. In fact, the same report found only one in two millennials are investing.
The good news is that you have time on your side – thanks in part to compound interest. When it comes to investing, the earlier you start the better.
Here are some habit-forming tips that you can start now to help you reach your financial goals.
Habit #1: Create a budget
Budgets get a bad rap. Many believe they deprive you of the things you want in life. Budgets, however, are tools to help you get the things you want. It is simply figuring out how much money you need to cover your expenses and making sure you don’t spend more than that amount. Here are some steps to get you started:
- Total how much you need monthly for the absolute essentials, like your rent or mortgage payment, gas, utilities, groceries, child care and your debts, like your student loan payment (see more on student loans below).
- Budget in your contributions to your emergency savings account (see below).
- Calculate your discretionary expenses – the non-essentials, like entertainment, eating out and any gifts you may need to buy. On tight months, you can save money here.
- Once you have the total you need to cover your expenses, deposit that amount into a separate account at the beginning of each month and use it to pay all your bills. By the end of the month, you should be near zero. Deposit the rest of your pay into a savings account. This is called the budget-to-zero method.
You can download FCNB’s Build a Budget That Works workbook as well as our Monthly Budget Excel document to help you get started.
Remember to review your budget periodically. Your budget should be flexible enough to accommodate things like summer vacation and holiday seasons, when your spending habits will likely change.
Habit #2: Build an emergency fund
Setting up an emergency fund helps you handle a financial surprise without going into debt, or resorting to high-cost loans. Set aside small amounts, like $15 or $20 a week. Aim to have three to six months’ worth of your living expenses in a separate savings account that can be accessed quickly. The key is to only touch it for a financial dilemma, like an unexpected car repair or a job layoff. This is an important habit to build as these surprises usually don’t give you time to adjust your budget.
Habit #3: Automate your savings
Saving isn’t always easy. Making automatic payments can ease the stress. Consider having a portion of your pay directed to a separate savings account. By having the money automatically transferred, you won’t miss it (or accidentally spend it).
Habit #4: Take a hard look at your student loans
Review their terms, conditions and the various repayment options. These will vary depending on whether they came from a private institution (like a bank) or whether they are a federal/provincial loan.
Figure out the total amount you owe, the type of interest rate (in some cases, you can choose between a floating or a fixed interest rate), your monthly payment amount, and how long it will take to pay off the balance. If you have more than one loan, or a line of credit, you may have multiple monthly due dates.
When creating your plan to pay off your student loan, consider:
- Building loan payments into your budget to make sure you can always make the minimum payment: You can even set up automatic payments through your financial institution.
- Increasing the size of your monthly payments: The amount you pay over and above your monthly interest payment will go directly toward the principal, reducing your total loan amount. An easy way is to round up your monthly payment. For example, if your loan payment is $236, round it up to $250.
- Making lump-sum payments: This is one of the fastest ways to pay off your debt and will mean you will have paid less interest, which means more money for you.
Habit #5: Make compound interest work for you
Compound interest has been called the eighth wonder of the world. It is interest that is paid on the original amount deposited and on any interest that has been earned in previous periods. For example, in Year 1, the financial institution pays $5 interest on a $100 deposit. In Year 2, it pays interest on $105. And so on.
Think you don’t have enough money to start investing? With compound interest and time on your side, even $5 or $10 a week is enough to start. Look at your budget. You might be able to find even more. For example, eating one lunch from home versus takeout a week would give you at least $10 to invest. Many brokerage firms and trading platforms are available to you with no minimum deposit required. These firms often offer investment options with low or no commissions or management fees. Many of these firms also offer investing apps for your smartphone (see below). Remember, before placing your money with any broker-dealer, make sure they are registered by checking with FCNB.
Habit #6: Learn about investing
You don’t have to pick stocks if you don’t feel comfortable researching the financial health and history of individual companies.
Many investment products enable you to invest in broad sectors of the market with little or no fees. These products allow you to diversify and spread your risk out over several different companies and economic sectors, rather than putting all your money in one company’s stock.
If you need help building a portfolio, you can also enlist the assistance of a robo-advisor (See our blog on robo-advisors) or consult a financial professional after checking to ensure they’re appropriately registered. You can check their registration by visiting FCNB or use the National Registration Search.
You can also go retro and check out your local library or visit our website for educational materials on investing.
At times, you will be unable to meet your budget. Budgeting is a life-long pursuit. Each month is a new opportunity to recommit to these habits. And, when you are doing well, it’s important to reward yourself.
We can’t stress this enough – right now time is on your side, and with each day that passes, it’s a little less on your side. By cultivating these six personal finance habits, you will be well on your way to reaching your financial goals and paying off your student debt. Remember: Don’t let perfection be the enemy of good.