Comprehensive Personal Finance Guide for Millennials

personal finance guide

One of the biggest complaints I hear from my friends (and maybe I’ve had this thought before) is that we didn’t learn anything about personal finance in school. I can still recite the quadratic formula but when I graduated college I wasn’t quite sure what a 401k was. Shout out to my 8th grade math teacher, though, that quadratic formula really stuck with me. We get a lot of ridicule about this and though some of it is warranted, the world of personal finance is confusing. Should I be paying down debt? Do I need a savings? What about my student loans? Is your head spinning? Cause mine was! Luckily for you guys, I dug straight into personal finance when I graduated and I’m here with a comprehensive personal finance guide for millenials. Trust me, you need this.

I get a lot of questions about how I finance my travels. The thing is, yes, I search around for deals on flights. I also stay in hostels or I share hotel rooms with friends. Sometimes we picnic instead of going out to eat (lots cheaper). But the reason I can take so many trips is because I’ve already gotten real with my money. I know how much I make, how much I’m spending, what I can save and what I can put towards trips each year. I made this personal finance guide for millennials because you really need to understand your money before you spend it.

Before we get started, I need you guys to make a budget. I mean, seriously, make a budget. Log on to your online banking, go through your statements and find out how much money you’re spending each month. Not only that, find out what you’re spending your money on. It matters. If you want to be fancy, download Mint or a similar app that can help categorize your spending for you. You can’t be financially literate if you don’t have a budget. I’m serious, guys. I use the Pear Spreadsheet and it’s free! It walks you through everything so it’s almost idiot proof. If you want to be traveling, you have to get your money in order first.

Did you take a few minutes (or maybe an hour) to get this together? Great! I’m so proud of you. Honestly, I am. Budgeting is the first step in your personal finance journey. You should have a better idea of what you’re doing with your money.

Let’s move on to the next step.

Get a Savings Account for an Emergency Fund

Do you have all of your money in your checking account? Do you have any money set aside for emergencies? If the answer is no, it’s time to get your ish together. You can set up a savings account online through your bank. I did it in less than five minutes through Bank of America. This account is going to be ONLY for emergencies (job loss, medical bills, car died, ect). I actually even pretend I don’t have this money when I’m trying to make a financial decision. How much do you need for your emergency fund? It can vary but typically between 3-6 months worth of expenses. Remember when we made that budget above? How much did you spend in one month? You’re going to need to multiply that number by 3-6 depending on how comfortable you want to be. This amount is the goal for this account.

Once you get that number, don’t freak out. It can be overwhelming, especially if you are just starting out. Consult your budget and see how much you can take from each paycheck to add to that account. I like to take it from each paycheck because it spreads out the cost over a few weeks rather than a bunch at once. If you pledge to save $200/paycheck, you can save $400 a month. In one year, you will have $4,800 saved.

You’ll get a lot of conflicting advice on this but personally I started my emergency fund before trying to knock out student loan debt. That way, if anything happened, I had the liquid cash to get through it.

pro tip: name your online banking accounts. I named my checking account “bills and booze”, my savings account as “OH ISH EMERGENCY FUND” and my Bank of America credit card is called “Daddy Warbucks”. It’s so much more fun to log onto my account now!

Saving for Retirement

What exactly is a 401k?

Oh god, do we have to talk about 401k’s? I know, we actually do have to have this talk about personal finance. I know retirement seems so far from now, but get your ish together now and your future self will love you (and they’ll be ballin out in retirement). Okay, so the 401k is a retirement plan that is through your workplace. Ideally, you set yours to a percentage that will come out of your check each pay period. In a traditional 401k, this money is saved and invested BEFORE taxes are taken out (you’ll pay taxes on this money when you withdraw it). Basically, your 401k is going to be spread out over money market investments, stocks and bonds. The thing about the 401k is that YOU control how much is invested. If you start when you’re young (NOW), you have the benefit of compounding interest, therefore you’ll have more money in the long run.

Keep that in mind when you set your 401k up for the first time. The more money you put in now versus ten years from now, the better. I’m just looking out for your future baller retirement self, okay? Anyways, let’s talk about what percentage you should actually be contributing to your 401k. This is a personal decision but the best advice you will get from anyone is to contribute at least up to what your company will match. Oh ish, does your company have a match? FIND OUT. The company match is free money. FREE MONEY! Basically, if a company has a 3% match, they will match your contributions up to 3%. So, if you decide you want to contribute 7%, your company will match the first 3% for a total of 10%. I can seriously see you on a yacht in retirement. If you can contribute 10%, do it! I would advise you consult your budget and see what you can put in. The most important thing is that you start.

Another type of 401k (as opposed to the traditional) is a Roth 401k. The difference is that you pay taxes on the Roth 401k immediately and then withdraw your savings tax free.

As a recap:

traditional 401k// employer sponsored. Taken out before taxes, therefore reduces your taxable income. You will pay taxes when you withdraw the funds.

roth 401k// not all employers offer roth 401k. money is taxed immediately instead of when withdrawn.

An important thing to note is that the younger you are, the more you can afford to take on risk.

But, Jacqui, What is an IRA?

You guys thought the 401k talk was the last of the retirement talk didn’t you? I hate to break it to you, but there’s also an IRA, individual retirement arrangement) to consider. This works very similarly to the 401k but this plan is not employer sponsored. It’s entirely up to you to open it and to contribute to it. Like a 401k, you have the option for a traditional or a roth account.

If you are wondering how you should contribute here’s a good rule of thumb: contribute up to your company match for your 401k, max out your IRA and then go back to your 401k and max it out.

CONGRATS, MY FRIENDS, YOU’VE MADE IT THROUGH RETIREMENT.

Was that so bad?

Let’s talk about Debt

Okay, so you are at least contributing up to your company match at work for your 401k. What now? It’s time to talk about paying down debt. There are good types of debt and there are bad types of debt. Credit card debt is bad debt. If you have credit card debt, likely you are carrying a huge interest rate, where as if you only have student loans, it might be smaller. Make sure you’re at least paying the minimums on all of your debt. That’s really important. Now, let’s make a plan to get you out of debt entirely. You can do this one of two ways.

Avalanche Method// pay off your debt in order of the highest interest rate.

Snowball Method// pay off your debt starting with the smallest loan size.

There are some people that get satisfaction and motivation from paying off a loan, no matter the size. Paying off your loans from the smallest balance upwards can provide that motivation to keep going. You will pay more money this way than the avalanche method. I am currently using the Avalanche method to pay down my debt. I make the minimums on all of my loans and then I add extra money to the highest interest rate loan.

When I paid off my highest interest rate student loans, I switched to paying down my car loan more than my student loans. I still pay the minimums on all my loans, but I add extra to my car loan each month. This is because the interest is higher on my car than my remaining student loans. This saves you money in the long run. When I first graduated, my student loans ranged from 3.9%-6.8% interest rates. My car is somewhere around 4.1%. It’s most cost effective for me to pay from the highest interest rate down. Using a budget and the avalanche method, I paid off $14,000 of my student loans in my first year out of school.

Should you be contributing to retirement while paying down debt?

The short answer? YES. At least contribute up to your employer match.

Let’s Recap

Let’s do a quick recap.

  1. Establish a budget.
  2. Create a savings account for emergencies
  3. Contribute to your 401k at least up to your company match
  4. Pay off debt
  5. Max out Roth IRA then your 401k (if you have the money)
  6. Start saving for short term events, like traveling!

I am not maxing out my retirement accounts before I save for travel. I do contribute to my 401k but I do not have a separate IRA that I contribute to at this moment.

The most important part of working traveling into your life is creating and maintaing a budget. If you can do this, the battle has almost been won. I make a very average salary but in the last two years I’ve taken a 2.5 week trip to Europe, been to San Francisco, Los Angeles, NYC (x2), Hawaii, Toronto and Seattle. The best way to make this your reality is to get your ish together when it comes to personal finance. Additional questions? Leave a comment below!

 

 

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