Hey, frugal friends! Enjoy this guest post by our friend and fellow PF blogger, Josh from Money Buffalo. The big 3-0. It’s a number dreaded by most young adults because it means they are now officially old by pop culture standards. It is probably safe to say that the priorities of most thirty-year-olds are more in tune with their parents than their younger Millennial peers. Instead of planning a Spring Break getaway or partying on the weekends, they are sacrificing their carefree pastimes to climb the professional ladder or start a family. Now that I have recently entered the 30’s decade of life myself, I recommend a few financial moves for Millennials to make during their 20s.
Financial Moves for Millennials
Become Debt Free
Millennials are the most indebted generation to have ever entered the American workforce, largely thanks to student loans. The average 2016 graduate owes $37,000. In addition to student loans, throw in a new car loan and a mortgage, and most of the paycheck goes directly to the lenders instead of your savings account. Whether you intend to or not, monthly loan payments can force you to live paycheck to paycheck until they are paid off.
Take a minute and look at how many dollars of each monthly payment is applied to accrued interest instead of paying off the borrowed principal. If you have a credit card, the company will tell you on the statement how long and how much it will cost to repay your balance by only making the minimum $25 payment each month. That’s a lot of money the bank is earning for free.
Instead of constantly borrowing for every large purchase, save as much as possible and try to only buy one thing at once. For example, I waited to buy my $27,000 sports car until I paid off my student loans. That way I only had one monthly payment of $300 instead of $600 in monthly loan payments.
Also, being debt-free allowed my wife & I to make a career transition. I didn’t have to stay in my time-consuming job because I needed to make $80,000 a year to make ends meet. Instead, we saved every dollar possible and now we have our nights and weekends free because I can afford to work a job that makes notably less and still have a positive savings rate today.
Build an Emergency Fund
An emergency doesn’t necessarily have to be a natural disaster that destroys your house and every earthly possession. You might get injured or unexpectedly laid off at work and are suddenly without any income to pay the bills. A savings account solely dedicated to paying for the unexpected is a necessity.
Start small by setting aside $500 or $1000 into a “no touch” fund. Gradually try to build that amount up to 3 to 6 months (or more) of living expenses. As nearly 75% of all Americans live paycheck-to-paycheck and wouldn’t be able to afford a $1,000 emergency, an emergency fund is one of the best financial decisions you can make.
Invest at Least 10% for Retirement
Even though it is probably when most workers earn their lowest salaries, the first ten working years are the most important when it comes to saving for retirement. This is because of compound interest as the earliest contributions have 40 years to accumulate in value assuming a traditional retirement age. A person that waits until their 40s to start saving for retirement will have far less even if they contribute half of their paycheck to “catch up” because of compound interest and time.
Most financial experts recommend saving at least 10% of each paycheck as a twenty-year-old and gradually increasing the contribution amount. Enroll in a tax-advantaged 401k or IRA to maximize your earning potential. It’s also a good idea to use a retirement calculator to help you estimate your monthly contribution to afford the retirement you desire.
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Retirement might seem like a fantasy to a new college graduate that seems invincible. But, by the time you turn 30, you will have discovered there are more productive ways to spend your time than punching a clock for several decades for a paycheck. Plus, you will start to value employee retirement benefits to provide for you and your family beyond your working years.
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If you haven’t realized it already, managing personal finances is a juggling act. You cannot exclusively become debt free and then start saving for retirement because the second finance goal might never happen. Plus, those with robust retirement savings built them over a period of decades through passive income (compound interest). If you cannot invest 10% of each paycheck at the moment, contribute what you can afford to start allowing your money to work for you.
Keep Old Skills & Learn New Ones
I studied political science and Spanish in college. My first job required neither of those skills, but, the hiring manager did recommend that I try to maintain the skills I had learned in college. I am glad I listened because teaching Spanish was my ticket to escape my undesirable job.
As many people change employers and career fields during their working career, you can never predict the future. It’s important to be prepared for employment changes. Maintaining Spanish was important to me, it might be auto repair or accounting for you.
Also, remain open-minded and look for new skills to learn as the employment picture is constantly changing. For example, I knew what an MBA was in college, but, I had never heard of a PMP certification. Among my former classmates, the latter is easily one of the most prevalent titles to follow their names on LinkedIn.
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Before you have children is the best time to figure out what exactly you want to do in the future. Once you have a family, you are less likely to leave your comfort zone and take employment risks.
Prepare For Marriage and a Baby
Call me naïve or ignorant if you desire, but, I never planned to get married or have a family when I was 20. Instead, I was going to travel the world and be Captain Corporate America. I changed my tune when I finally understood the expression “Your job is only good for a single person.” Make the personal sacrifices, instead of partying each weekend, to prepare for where you want to be when you are thirty or forty and finally “settle down” like your parents once did.
Freedom and a disposable income are two primary advantages of being young and single. Don’t party away your weekends. It’s okay to have fun, buy your dream car, and go to sporting events, but, use your free time to improve your finances so that you can afford a life of leisure when you have a wife and family to spend your evenings instead of juggling work and educational demands as well.