What do you think of when you hear the word “millennial”? Most people will roll their eyes and sigh, because millennials are often thought of as the “lost” generation who do not have money management skills. A 2015 study by the Global Financial Literacy Excellence Center at George Washington University found that the majority of millennials don’t have basic financial knowledge, and more than half aren’t happy with their financial situation. Of course, there are some that are better with their money than other generations, but many are prone to money mistakes.
Problem: Lacking a Basic Financial Education
The biggest trap millennials can fall into is failing to understand common sense money concepts. Many millennials didn’t get a financial education in school because most high schools don’t require students to take a financial course to graduate. With so many resources online, millennials should be able to educate themselves on money management.
Solution: Common Sense Money Concepts
To be able to stop living paycheck to paycheck, or to have a considerable amount of money in your savings/checking account you first need to understand basic money concepts. This isn’t something you can only learn in school, you can learn them on your own. It is important as millennials to understand the basics to help you avoid costly money mistakes that will come back to haunt you in the future.
- Know how much you make and spend each month – Check your paystub or bank account to see how much is being deposited directly. If you have a credit card, review your statements and make a list of all of your purchases throughout the month. Separate your purchases into three categories- fixed expenses (rent, mortgages, car loans, etc.), variable expenses (credit card payments, dues, subscriptions), and discretionary expenses (entertainment, vacations, restaurant meals). Add each of the categories up and decide whether you have more going out than coming in and what changes you need to make to your spending.
- Create a spending plan– This is a more constructive approach than budgeting. Creating a spending plan will help you plot out where you want your money to go each month. Figure out what is most important to you. For example, deciding whether to save for a vacation,early retirement or paying for your kids’ college. After this is done, you can align your spending with what you value rather than blowing your money on unnecessary things.
- Don’t charge more than you can pay off monthly– Nearly 40% of Americans have credit card debt and possess a median balance of $2000. This is where common sense comes in and tells you that you shouldn’t charge more than you can afford to repay. If you carry a balance, you will end up paying more than what you originally charged. Also, keeping your credit card balances low will be good for your overall credit score.
- Know why your credit score matters– Nearly 60% of Americans don’t know their credit score. However, this three-digit number plays a big role in your financial life. Lenders use your credit score to determine whether to give you credit and the terms of the credit. Having a good credit score can help you have a lower interest rate, which means you will pay your debt off faster.
- Understand your credit score– If you want to improve your credit score, you need to know what factors cause an impact. FICO is common and score ranges from 300-850. It is calculated from five factors: payment history, amounts you owe, how long you have had credit, types of credit you are using and new accounts. You can see where you stand by getting a free copy of your credit from www.AnnualCreditReport.com.
- Negotiate Your Pay– 57 percent of workers never negotiate for a higher salary. However, the majority of the people who do negotiate their salaries get pay increases. You must first make sure you deserve a raise before asking for one.
- Have six months worth of expenses in an emergency fund- This is often hard to achieve, but if you are able to set aside as much as possible it will pay off in the end. Having that much money set aside will help you get through a job loss or other financial emergency. The key is to have the money in a separate account. Opening an interest-bearing savings account and setting up an automatic transfer from your checking account will build your fund and the money can be easily accessed when an emergency arises.
- Save 15% of your income for retirement– If you are saving anything for retirement you are ahead of a lot of people. Start small and work your way up if you can. The earlier you start saving, the better off you will be. If you get a raise, give your savings a raise.
- Learn the basics of investing– Even if you don’t earn a lot of money, investing your money wisely can help you increase your funds. Be sure to make smart, educated decisions. Place your investments in more than one stock so that if one goes bankrupt you won’t lose all of your money. Always consult a financial advisor.
- How to choose a financial advisor– You might understand basic money concepts, but it can be hard to create a financial plan on your own. The financial advisor you choose should act in your best interest, rather than someone who just wants to sell you products to generate commission. You can find fee-only planners through the National Association of Personal Financial Advisors.
In the next segment of “Money Management Help for Millennials” we will discuss spending without a plan, a deeper look into money management, how to create a spending plan and the different types of spending.
Jana Hart- Extension Agent- FCS/4-H