Financial education almost never makes it to the top of a Millennial’s list of interesting topics. Just as previous generations in the age group of 25-40, today’s young adults often dismiss money management and financial knowledge as tedious, uninspiring, or simply too complex to spend time on. Especially for the younger members with more modest earnings, creating a money management system can seem like a huge effort for a distant payoff.
However, making a conscious effort to gain financial literacy translates into establishing greater control over lifestyle now and in the future. What’s more, because time plays a key role in building savings, the benefit of starting the wealth journey earlier makes more sense than putting it off till later.
True, money and finance generate a plethora of avenues that seem to gain in complexity as numbers grow bigger. Indeed, billionaires and multi millionaires often hire dedicated financial pros to manage their wealth through family offices. But for those working with substantially smaller funds, the principles of money management remains important—even critical— as a means of building the kind of life that allows one to provide care and security for yourself and your loved ones. By adopting a solid financial foundation, you position yourself to do just that.
So, without falling too deep down the money rabbit hole, consider taking the following baby steps as a starting point to saving money and growing your wealth.
Know Your Spending, Create a Budget
Budgeting. It’s probably the first word that comes to mind when thinking through the steps needed to save money.
There’s a good reason for this as a budget boils down to managing the supply and demand of your money. The supply side amounts to your income—the money you bring home on a weekly or monthly basis, including take-home pay, tips, bonuses, cash gifts, and refunds. The demand side amounts to the bills you have to pay in the same time frame, including both fixed and variable costs.
According to Take Charge America, a nonprofit financial education company based in Phoenix, a 30-day accounting of income and spending provides a reasonable baseline in budget creation. By creating a spreadsheet, or just pen and paper, tracking your money flow gives you an accurate picture of your financial position and empowers you to tweak accordingly.
The key point about tracking is to include all amounts, especially variable expenditures. While fixed expenditures like rent and insurance payments remain mostly the same, variable expenditures can take a bigger bite out of your budget. This means recording $5 impulse purchases for a soda and bag of chips at the gas station after filling up your car, along with larger expenditures for jeans, furniture, or other items, even if they were on sale.
Once you’ve written down a month’s worth of your income and expenditures, you’ve got the factors needed to create your budget formula by subtracting what you spend from what you earn. If your expenditures exceed your income, you are cash flow negative.
If this is the case, you’ve got several options. First, look over the variable expenses you recorded to find where you can cut back. Another option is to increase your income with a raise from your current employer or by finding a second job or side hustle.
If your budget tracking shows you are cash flow positive, this means you live within your means, which empowers you to save the excess funds to give you a financial cushion for car repairs or other unplanned expenses.
Prioritize Your Debts
For Millennials carrying student loans, or credit card or housing debt, you’ll want to prioritize paying these expenses to get rid of them as soon as possible. Eliminating debt is among the most efficient ways to accumulate wealth.
Student debt, a reality that can fall into the five- or even six-figures for many, can create a dangerous mindset. Although the reality that getting out of this level of debt is a years-long process, it is best to avoid resignation to an indebted life. If you have a high student debt, it’s worth looking into loan forgiveness, discharge, or cancellation. According to StudentAid.gov, there are ways to obtain student loan forgiveness.
Credit card debt, accrues monthly interest when the bill isn’t paid in full. Although credit card companies allow borrowers to pay a minimum amount each month—usually between two and five percent of the total bill—doing so often means you end up paying much more for items than the original price. As reported by InvestingAnswers, for example, a $5,000 total credit card bill with a minimum repayment of four percent results in an interest payment of $62 and $138 going toward the principal balance.
Considering the card’s APR charge, the bill is one not easily paid down by making minimum payments. With a $5,000 balance with an APR of 15 percent, for example, you’ll pay $2,118 in interest. The scenario puts an entirely new spin on those great Black Friday deals. The bottom line here: avoid credit card debt as much as possible.
Finally, housing debt falls into a limited category of “good debt.” Although you’re paying high amounts of interest at the front end of your loan, mortgages taken out at fixed rates mean the amount of your payment will remain constant while you’re building equity in your property. One caveat, as CNBC notes, is to enter into a mortgage with the understanding that the value of your property might not increase and could even decline.
Additionally, adjustable rate mortgages (ARM) could potentially reset to a level that makes monthly payments unaffordable as happened during the subprime mortgage crisis in late 2007 and 2008.
Granted, plenty of intricacies exist as Millennials work to gain a handle on finances and to build savings. But understanding the playing field and how to maneuver around money ultimately gives you control over your financial future.
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