Confused about where to start when it comes to your finances? Don’t worry, most of us don’t. But it’s important to take control of your financial life early on. Check out these 7 financial tips for millennials to get you headed in the right direction.
Spend (and save) wisely
To see a real difference in your financial situation, you need to be aware and in control of where your money goes. Making a budget could be the single most important thing you can do with your finances.
Think about where you could make changes to save money. Do you need to go out for cocktails with friends, or could you have just as much fun at home with a bottle of wine? Small savings can add up.
Use tech to help
As a millennial, you’re probably used to having an app for everything. So why not for your money? There are hundreds of apps and websites that will allow you to track your saving and spending and pay your bills all in one place.
Most can be used with a computer, phone, or tablets and will offer reminders and alerts, so you stay fully aware of your finances.
Plan for the future
It’s a good idea to have some financial goals in mind. Whatever your goals are, you should make a plan that will help you to achieve them. Otherwise, they will stay as dreams instead of becoming a reality.
As well as making plans, you should also prepare for the worst with an emergency fund. If you can only save for one thing, make it your emergency fund, rather than your dream vacation.
Prepare for retirement
It’s crucial for millennials to make sure they have plenty of funds set aside for retirement. There are several different types of retirement funds to choose from – find a full list here. The most common of these are:
- Company 401(k)s – many employers will match your contributions over a certain amount, so these can be a great option.
- Individual Retirement Accounts (IRAs) – most types of IRA allow pre-tax contributions, so will lower the amount of tax you pay. But early withdrawals i.e. if you need funds in an emergency, are quite heavily penalized.
- Roth IRAs – you contribute after tax, but your money is more accessible since there are no penalty charges for early withdrawals. Also, earnings from a Roth IRA are tax-free after the age of 59½.
If like many millennials, you’re new to investing, it could be a good idea to start trying it out. Find a reputable financial adviser, get a recommendation from someone you trust, and take their advice.
The graph gives an example of how assets in a target-date retirement fund may be allocated. Other examples can be found here.
Choose debt wisely
Since millennials carry an average debt of $47,689, learning to handle debt well is an important thing. Some debts are positive, others less so.
Good debts are those with lower interest rates, often around 6-8% and include:
- Real estate
- Student loans
Bad debt has a higher interest rate and needs to be paid off quickly to avoid accumulating interest. Examples would be:
- Credit card debt
- Buying appliances or furniture.
If you have the latter kind of debt, you can improve things by using extra funds to pay off the debt with the highest interest rate first and then moving on to the next highest and so on. Aim to pay your debt off as quickly as possible.
Be responsible with credit
Your credit score affects so many aspects of your life that you can’t afford to neglect it. Make a point of checking your credit score each year and fixing any errors you find. Just make sure to pay your bills on time.
The table below shows the effect of a late payment on your credit score. The best way to avoid any problems is to set up an autopay on your credit card account, so you never miss a payment. If you can set it up to pay off the full balance, that’s the best. You don’t have to carry a balance over to improve your credit score.
You may not be able to do all these things immediately, but using even one of these tips will help you to improve your financial situation both now and in the future.