Last week a received a call from a reporter from VICE named Allie Conti, who is setting out on a journey to learn about managing money. Like many of her fellow Millennials, Ms. Conti doesn’t have much experience with the markets, investing or even general personal finance:
I never learned about “mutual funds” or “index funds” or “money market accounts”—it all seemed as relevant to my broke-ass existence as theology is to a goat. But these days I wonder if I missed out on a chance to turn a bad job into the equivalent of night business school. I’ve become increasingly aware that, like a lot of twentysomethings, I don’t know what the hell I’m doing when it comes to money. A $3 coffee will turn into a $30 coffee thanks to interest payments on my credit card. I’ll wake up after a night out with a crumpled receipt for pizza in my pocket and worry I just overdrew my checking account. I’ve contemplated simply stopping payment on my laughably unmanageable student loans.
She’s done a wonderful job here of capturing the way that millions of young people feel when confronted with managing their own finances. She started out by asking me a simple, yet loaded question: “How would you advise me to invest $1,000 right now?” Most personal finance experts are quick to point out that young people are in the perfect position to take on tons of risk in the stock market and allow compound interest to do most of the heavy lifting for them in the many decades they have to allow their money to grow.
In theory, this is true, but theory doesn’t get you very far when trying to explain the benefits of retirement savings to someone just out of college. They’re making money for the first time in their lives, but they’re also paying their own rent, their own bills and their own student loan debts. Add in the fact that young people want to enjoy themselves and go out with their friends as much as they can and retirement comes in about dead last in terms of financial priorities.
My usual answer to these types questions of “it depends on your time horizon and what you plan on doing with the money” probably doesn’t sound too helpful at first, but I think we can use it as a starting off point for how young people can think about managing their finances and building up their savings. The way I see it there are four main focus areas for Millennials in terms of their finances. Here they are in order of importance to the average young person:
- Right Now: Spending Money.
- In the Near Future: Trips, Weddings, Fun.
- In the Next Decade or So: Debt.
- Way Out Into the Future: Retirement Savings.
Getting started on any financial goal is very difficult when you’re young because it takes some time to see actual results. This is true of debt repayment, savings, retirement portfolios and earnings. To bridge the gap between now and the end goals, here’s some advice for those just starting out:
- Standard personal finance advice says save 3-6 months for emergencies, but that’s a tall order for most just starting out. A simple first step would be to save up $1,000 in a savings account for any unforeseen expenses. I recommend an online savings account because they offer higher interest rates than the brick-and-mortar banks.
- If you have outstanding debts that are psychologically draining, consider using the debt snowball approach (pay off the smallest balance first) to try and build momentum. Behavior matters more than spreadsheets in these situations.
- There are now more choices available than ever for people to start saving with small amounts of money. Robo advisors are perfect for people just start out who would like an automated approach to saving and investing.
- Have a plan in place for any extra money you bring in like bonuses, tax refunds, annual raises or side income. One of my favorite ways to deal with an unexpected boost in cash flow is to break it up into different buckets. I like to use something I call the one-third rule. One-third of the money can be used to splurge right now, one-third of the money gets used for either debt repayment or replenishing emergency savings and one-third goes towards longer-term savings needs such as retirement. That way you reward yourself now, which hopefully helps take the sting out of saving for the future.
- Assuming your workplace offers a 401(k) plan, no matter what, always put enough money in to at least get the company match. The average match is usually in the 3-4% range. Ignoring the match is like turning down a 3-4% raise every year. You’d be nuts to turn down free money and this is a great way to start slowly building up a retirement savings balance. If you have no idea what to invest in, simply pick a targetdate retirement fund that comes close to your potential retirement age. You can always get more specific with your investment strategy later if you so choose.
- Always focus on the ‘why’ for all saving goals. Don’t think retirement; think financial freedom to do whatever kind of work you want in the future. Don’t think emergency savings; think no credit card debt when something goes wrong. Don’t think about paying yourself first; think about the ability to travel because you’re able to keep your standard of living relatively constant.
No one goes out of their way to teach personal finances to young people so it’s likely you’ll have to figure most of this out on your own. Allie is taking matters into her own hands in an attempt to help others through her own learning process:
So I’ve decided to embark on getting an informal financial education that so many of us sorely lack and document the results in a series of articles. Hopefully I’ll learn how to manage my money; failing that, I’ll at least find out why I ostensibly make some but never have any.
Read the rest of her piece here for more:
How to Invest Money When You Don’t Have Any (VICE)