Somehow as we age, #adulting is just supposed to be intuitive. Yet while recognizing “Reply All” on a work email may not always be in your best interest, when and how to manage your finances doesn’t come naturally to many. According to a recent survey by Wealthsimple, 40 percent of millennials say money is the biggest factor of stress in their lives, and politics was on the list of options. Yikes.
So get comfortable and pour a generous glass of your beverage of choice; it’s time to talk money. I promise this will not be another article that berates your affinity for avocado toast (pro tip, if you prepare it at home it’s half the price!) or underestimates the amount of student debt you’ve been forced to shoulder. I connected with more than 40 Certified Public Accountants (CPA), CERTIFIED FINANCIAL PLANNERTM (CFP®), and executives of investment and insurance agencies to dwindle down this list to the five most realistic and financially savvy things every young adult should be doing by the time they turn the big 3-0. Because retirement savings are like teenagers: pretty futile in the early stages, but leave them alone and give them time, and they eventually mature into functioning adults who research Yelp reviews of their dentist before committing to a cleaning.
1. Track your budget.
“I am so poor I can’t even pay attention.”
Do you know where your money is going? List out your purchases in an Excel spreadsheet at the end of each month and place each transaction into a bucket. Be more descriptive than simply “transportation” because a Lyft to the bar on Friday night should not be marked as a vital expense. Get detailed and introspective to evaluate which purchases are legitimate needs vs. nonessentials. You can’t expect to improve your spending habits if you don’t first know where your money is running off to.
Anna Keisler, an associate financial planner with SG Financial Advisors, LLC, recommends automating your cash flow tracking with Mint, a free app that allows you to view almost all of your bank and investment accounts in one place, as well as any loans you may have (because you are a millennial). If you need additional capabilities, she suggests you try You Need a Budget (YNAB), but note this requires a monthly fee. Once you have a healthy idea of your spending and savings habits, the real fun begins.
Lesley Tenaglia, a mortgage agent at Ultimate Mortgage and Finance Solutions Inc., advises you write a list of financial and lifestyle goals. That’s right—manifest your finances like you would for that front row parking spot. Separate your goals into five, 10 and even 20-year plans based on your determined spending and saving habits. “Ensure your goals and budget are reasonable and attainable,” Tenaglia warns. “Set yourself up for success. Remember that life is also about experience, so make sure your budget and goals allow for you to enjoy your journey.”
2. Establish a safety net.
“I’ve put something aside for a rainy day. It’s an umbrella.”
The job market may be on the rise, but any new grad or millennial will tell you, finding a new job is harder than putting together the monkey jigsaw on Legends of the Hidden Temple. Nearly every financial advisor I spoke with urged millennials to create an emergency fund, but I appreciated the realistic timeline Amy Kemp, financial advisor at Paragon Financial Services, gave for how long it will likely take someone to get back on their feet in the current economic climate.
“A healthy guideline is to have between six and 12 months’ worth of expenses set aside,” Kemp says. “This money should be kept in a savings or money market account where you can have quick and easy access to it.” Saving this much doesn’t happen overnight, so be patient and watch out for savings accounts at big banks like Bank of America and Wells Fargo that have little to no interest rates—if you leave a year’s worth of emergency funds sitting here, you’re losing money. Kemp explains, “Interest rates have slowly crept higher, so you can now find money market accounts where your money can earn as much as 2 percent per year.” Don’t settle with the account you opened when you were 15 just because it’s convenient.
3. Give yourself credit.
“I don’t mean to brag, but I’m helping a Nigerian Prince with a pretty serious financial matter. I can’t really talk about it.”
Welcome to adulthood, where your credit score is (hopefully) lit. Drew Parker, creator of The Complete Retirement Planner, encourages young adults to check their credit score each year, aiming for that sweet spot of 720+, where you will receive the best loan, mortgage and credit card rates. Things that build your credit score include having multiple lines of credit, paying off all bills in full and on time, and spending approximately 30 percent or less of you credit limit each month. Credit Karma is a great free resource to track the progress of your credit score.
If you’re trying you boost your credit score, be cautious—opening up more credit cards to strengthen your score isn’t always in your best interest. David Dick, CFP® and partner at Financial Plan Inc., recommends you pass on the barrage of credit card offers that flood your mailbox. “Rule of thumb,” Dick explains, “if it comes to you without your request, then it’s not a good thing for you. Do your research and pick a credit card that works for your situation and not what the credit card marketing materials say is ‘best’ for you.”
4. Enroll in a 401(k) plan, like yesterday.
“Are you a modern day savings account? Because I keep investing money in you, but I’m not getting much interest.”
Overwhelmingly, the most common response among finance experts was to take advantage of your employer’s 401(k)—especially if they offer any sort of matching funds. You’ll want to invest at least the percentage of your paycheck your employer will match to cash in on the “free money.” However, be sure to look into which investment funds your employer’s 401(k) offers. Many corporations partner with investment firms and that means your 401(k) will likely come with seemingly small expense ratios. (In layman’s terms, this is a percentage of fund assets used for administrative, management and other expenses.) A 1.2 percent expense ratio may seem inconsequential when you’re young and have low investments, but compounded over 30 years, that’s a lot of Benjamin’s you’re missing out on. Look for your options within your employer’s 401(k) with the lowest expense ratios.
Retired professor Timothy G. Wiedman, D.B.A., says millennials should also seriously consider opening a Roth IRA. “Since (under current tax rules) money invested in a Roth IRA can be withdrawn tax-free in retirement, this is an excellent use of [your] money.” In terms of where to invest, Wiedman recommends putting your money into a Vanguard Fund like VOO, which just so happens to have an expense ratio of .04 percent. You can open your own Roth IRA through companies like TD Ameritrade and invest the maximum amount each year, which is currently $5,500.
And for the love of free Wi-Fi, transfer your previous employer’s 401(k) to your IRA and don’t let your hard work go to waste!
5. Find a passionate side hustle.
Interviewer: “Why do you want this job?”
Me: “I’ve just always been very passionate about not starving to death.”
Brad Ruttenberg, CFP® and co-creator of The Money Twins, doesn’t want you to settle on your primary source of income. “Start a side hustle or even find another part time job you find fun,” Ruttenberg says. A side hustle gives you two things. First, you’re diversifying your income, which has obvious financial benefits. But it also gives you an outlet that you will need when life becomes busier. Plus, who knows, your passion project might evolve into something big.
Ultimately, managing your finances is a process, but it can be learned! Business coach and author Amanda Abella puts it simply, “I used to think money and math were the same thing, and they’re not. Having control over your finances is more psychology than it is math.” As you start saving, setting and reaching your financial goals, have an open mind and be patient. And just remember, living on earth may be expensive, but it includes an annual free trip around the sun!
Related: 5 Money Principles You Need to Know