In my humble opinion, being financially secure is one of the most freeing feelings on the planet. But what does that really mean? It means you no longer live paycheck-to-paycheck and can be on your way to achieving the ultimate goal of financial independence, i.e. a fun and healthy retirement.
According to a recent survey completed by Career Builder, a staggering 78% of American workers are currently living paycheck-to-paycheck. That statistic doesn’t just apply to lower income workers; those making at least 6 figures a year are included. As a part of the Millennial Generation, we’ve been met with overwhelming amounts of student loan debt, car loans, credit card debt, and an inability to stop eating avocado toast (kidding on that last one). All jokes aside, living in fear of not being able to meet your obligations is no laughing matter. As a Millennial, I too had to start my journey to financial security somewhere. I’m here to help you do the same. Here are the 5 best things I learned along the way.
1) Spend less than you earn. This is a surprisingly novel concept for most people, whether you’re a Millennial or not. An easy way to tell if you’re spending more than you earn is if you are currently in debt, more specifically, credit card debt. If you’re spending more than you make, like most Americans, you’re never going to have financial security. One of the simplest things you can do to help yourself is to start asking before EVERY purchase you make, “Is this a want or a need?” Asking this question will start to change your mindset with how you spend. Changing your mindset and spending habits is about 80% of the battle.
The second thing you can do to make sure you don’t spend more than you earn is to make a budget each month, review it, and make sure you stick to it. There are dozens of apps available to make this process very easy; two that I’ve used that work well are Mint.com and EveryDollar. Some banks offer a free budgeting tool you can use if you have a checking account with them, or we even offer a free Excel budgeting worksheet.. The most common mistake I see with budgeting is that people will either make the budget and never review it, or they use an automatic spending tracker, but never actually look at it. If you’re taking the time to make the budget, make sure you follow up and track your actual spending so you’ll know how to adjust each month. The discipline to create a budget and stick to it will go a long way toward helping you achieve your dream of financial security.
2) Quit trying to keep up with the Joneses…or the Kardashians, or whoever you follow on social media. With the popularity of Facebook, Instagram, Snapchat and others, it’s more difficult than ever to escape the influences of those around us. Celebrities and “influencers” are constantly pushing their merchandise in your face via social media. Not to mention, there is also an overabundance of advertisements that show up as you’re scrolling, which are probably targeted based on something you recently Googled. As well, our generation has grown up with the sense that instant gratification is what we deserve.
All this breaks down to is going back to that question I told you to ask yourself before each purchase, “Is this a want or a need?” Stopping to ask yourself that question can be the first line of defense against impulse purchases of detox teas (let’s be honest, these never actually work the way they are advertised) or that pair of shoes you’re sure is going to “go with everything”, so you must have them. You can still enjoy life on a budget. I’m living proof of that.
3) Stay away from consumer debt. Did you just use your credit card to finance your late-night Taco Bell run or your favorite iced mocha at the Starbucks drive thru? Stop and think about how much those decisions will cost you in the long run after the impact of compound interest takes over if you can’t pay your bill in full at the end of the month. Credit cards are one of the easiest ways to get yourself into a debt hole that seems impossible to climb out of. High interest rates can balloon your monthly balance and paying the minimum each month means you’re not even touching the principal.
At 17.5% interest (the current national average credit card APR), carrying a balance of $4,000 and making a minimum payment of $100 per month will end up costing you over $9,000 and will take over 20 years to pay off. That’s if you’re not even adding purchases to the card each month! My advice: pay your credit cards off as quickly as you can, then cut them up and use only the cash you have available within that budget you made in Step 1.
4) Pay yourself first. I know, I just told you to pay off your credit cards. You’re going to have to do some prioritizing to stick to my advice.
Paying yourself first means automatically saving a portion of each paycheck. Your two priorities for saving should be your emergency reserves and retirement funding. Emergency reserves should equal at least 3 to 6 months of your basic living expenses. If you’re the sole breadwinner, I suggest saving closer to 6 months in the event you lose your source of income unexpectedly. While that number may seem daunting at first, making a commitment to set aside a portion of your paycheck via direct deposit or automatic bank transfer will make this process much easier.
Your emergency reserves should be kept in some sort of money market or interest-paying savings account so it’s safe, but at least earning something. It should only be used for true emergencies like your car breaking down or replacement of your paycheck if you lose your job. If you use the cash in an emergency, then make sure you build it back up in case of another unexpected expense.
Retirement savings are crucial and starting early is the easiest way to work yourself toward financial independence. No one knows if Social Security will still exist by the time our generation is ready to retire. Even if it does, it’s likely any benefits we receive will not be enough to live on. Our generation also doesn’t generally have access to a generous pension (with a few exceptions), so saving for your own retirement is going to be extremely important.
If you are struggling with the concept of reducing your monthly take home pay and your company has a retirement plan that matches contributions, start with that amount first. Otherwise, you’re giving away free money. If you want to know how much your paycheck will change when you start to contribute (it’s less than what you would think), use this basic calculator from Schwab to figure out the change. If there’s no company plan available to you, consider making an IRA or Roth IRA contribution each year. You don’t have to put in a lump sum to these types of accounts. You can space out your automatic savings over the entire year and use an automatic investment plan to ensure your contribution gets invested regularly.
5) Invest and be ready for the roller coaster ride. If you’re close to my age, you probably started your career right around the time of the Great Recession in 2008. This is also when you might have started investing in your 401k and experienced the worst losses the global markets have seen in years. It made investing scary for our generation and many of us prefer holding onto extra cash over trying to invest in the markets.
You’ve probably heard the old adage that “Time in the market is more important than timing the market.” It’s true. Investing can sometimes feel like a roller coaster, but staying invested, even when you get nervous, is extremely important. Keep in mind that most of us have at least 30 to 40 working years left to continue saving and investing. That means we also have 30 to 40 years of riding the investing roller coaster. While past performance doesn’t guarantee future performance, in the long run, investing is the easiest way to use the power of compound interest to your benefit. Growing your retirement savings through investments will eventually lead you to your ultimate goal of financial independence.