As a new year’s resolution, I vowed to start learning about money management, wanting to become more financially savvy. Having been almost two years out of college, I had finally found a permanent job. I could now afford to go beyond a savings account and aimed to start growing my money, rather than just diligently building a rainy-day fund for impending unemployment. Random Google searches and sporadically reading MSN Money helped in understanding the lingo and the options available as well as building on good money habits.
After months of research, meeting with those with more investment knowledge, and experimenting with my own capital, the following are five tips that I found to be most useful or wish that I had known in hindsight.
Millennials, perhaps more than any other generation, understand that living paycheck to paycheck may not be a choice. With shrinking company budgets and a reported unwillingness to invest in entry-level employees, low salaries are the new normal for recent college graduates already burdened with student loan debt. However, if one should be lucky enough find themselves with excess funds after all bills and necessary expenses have been paid, then as much money as possible should go into a personal savings account.
Monetary savings provide a cushion in case of extenuating circumstances, such as job loss, unforeseen medical expenses, etc. A financial adviser told me to save with the goal of having 3-6 months worth of expenses in reserve without filing for unemployment insurance. But another reason to be more generally frugal is that these funds on hand provide flexibility in key personal choices. If switching jobs, changing career tracks, or going back to school is a possibility, then having some money to do so allows these risks.
In building up one’s savings, the unglamorous coupon is a key way to decrease the cost of everyday expenses. Most grocery and drug stores provide rewards cards at no cost, allowing them to track consumer behavior and determine which items to stock up. As an incentive, they provide customers coupons or pricing specials essential to avoiding high bills. Clothing chains have similar programs through their email sign-up lists, and they often send mass mailings of upcoming online and in-store sales. Frequently, there also differences between pricing in a store versus online (even with shipping costs included), so these emails will help find the best deal overall.
Even though retirement is far in the distance, it never hurts to plan a little further ahead and open a Roth Individual Retirement Account for investments after putting away enough in savings. With a Roth IRA, you will have already paid taxes on your contributions, so you can withdraw those funds at any time for more short-term expenses, like graduate school and buying property. Despite the fact that public sector jobs and about half of private employers offer retirement savings plans, which you should sign up for if they offer to match your contributions, many of them do not carry over from each company or organization. With the number of job changes millennials are likely to have in their lifetimes, a Roth IRA may allow for easier consolidation of varied plans, as you roll over employer plans into your personal one with each job switch. Keep in mind that eligibility for a Roth IRA can vary depending on income level and there are limits to how much you can contribute to your account per year.
As previously stated, the benefit of a Roth IRA is that the funds are used for practical investments, where the returns are much higher than the dwindling rates of savings accounts. For millennials, being so far from retirement encourages putting money toward a riskier portfolio that will grow and keep pace with inflation. The cheapest way to invest is in an index fund, in which there is no active account manager to drive up costs, and the fund’s performance just follows a stock market index like the S&P 500. A number of brokerage firms also offer target retirement funds; the stocks and bond distributions have already been calculated based on age brackets, and will redistribute and take on less and less risk as the investor approaches retirement.
Side hustles are odd jobs that are flexible and provide a little extra cash to spend outside of the regular paycheck. At the very least, they are jobs that teenagers also do for money, such as baby-sitting or yard work. At best, they will encourage your hobbies and perhaps fuel a second career. If you are adept at graphic design or play an instrument, try to seek out opportunities that allow you to hone these skills and increase your network to get paid for your abilities.