As digital natives, Millennials can find almost anything online, but are still struggling with how to start on the path of financial success. I’ve learned that the challenge, for most of you, isn’t finding information, but sifting through all the noise. The financial industry is publishing reams of information every day, but not giving you access to advice that applies to you personally, and a road map of how to start, right now.
Most of you, even those who think you don’t know what to do with your money, are facile with Venmo and PayPal, transferring cash online at a flash. You can work your way through financing a first car or getting a good starting salary at a first job. In other words, you already know more than you think. And, wherever you stand now, you can take three steps that will translate into more financial security in the future:
1. Quickly get a handle on your expenses. When you know where your money goes, you are in control and can be thoughtful about aligning your spending to your priorities. Use a money tracking service online, like Mint or Quicken, to see all your financial accounts in one place and even create your first budget. You will always know where you stand financially: Mint, for example, gives you complete access to your data through the website and your mobile device, whether you use iOS or Android. Better yet, Mint keeps an eye on your money for you. It even sends alerts to remind you to pay your bills or when you go over budget.
Tracking your expenses may also help prompt you to address some important loose ends now that you are on your own, such as:
- Is it time to transfer your cell phone number to your own bill?
- If you have started a new job, when does your health insurance coverage start, and what will it cost you?
2. Save six times your monthly expenses as a cushion for emergencies. Now that you know how much you spend every month, multiply that amount by six. This is the amount you need to set aside in a readily accessible savings account in case unexpected expenses come up, like repairing your car after a fender bender or surgery for your dog. Be disciplined about saving a little every month until your emergency fund is where it needs to be, even if it means sacrificing little luxuries once in a while. Remember to replenish the account every time you use it.
Having your cushion ready whenever you need it will give you a great sense of security and freedom. It will also free you up to work on other savings goals without getting derailed by unexpected expenses.
3. Bite the bullet and start maxing out your 401k and saving in an IRA. Too many Millennials delay saving for retirement because they don’t know which accounts they need, which funds to buy and how much to contribute. My advice: Don’t overthink it. Get help. Your benefits administrator and reputable fund companies like Vanguard and Fidelity can answer those very questions without requiring you to get a finance major in retirement accounts along the way.
Nervous about committing yourself to the maximum contribution for a full year? Start as close as you can to the maximum, then bump up your contribution at the next enrollment date (usually quarterly) after you understand your expenses more clearly. Set a calendar alert so you won’t forget!
Whatever you do, be disciplined about never borrowing from your 401k. Over the years, emergencies will come up, and you will need to cover unexpected expenses like if your car breaks down. Find other ways to cover these expenses. Your 401k is for one thing only: funding your retirement.
One final note. These days, many Millennials are deliberately “traveling light” financially — for example, by choosing not to own a car or by delaying buying their own home. If you are one of these Millennials, remember that you still need to cover the basics: building a cash cushion, paying down debt, and saving for retirement. But by spending less and assuming less debt, you may be in a position to start an investment portfolio earlier than your peers. Do it. Time is on your side, and the earlier you begin, the more you will have when you need it in the future.