As the U.S. economy makes a slow recovery from the financial collapse of 2008 and ensuing recession, Millennials (born early 1980s through to the early 2000s) are continuing to struggle with student debt and a slow job economy (See: Do Millennials Stand a Chance in the Real World?). This dreary economy combined with student debt has been financially toxic for most Millennials. In such uncertain times what can Millennials do to put themselves on a path to achieve financial freedom? Here are some personal and practical actions to help get themselves on track.
1. Make a Personal Financial Budget, Don’t Avoid It.
Every business operates from a budget and cash flows. Without it, they are dead. Oddly enough, many Millennials control or produce budgets for business, so why not do one for yourself. Not budgeting personally is a critical mistake. As in business and personal finances, it can lead to living beyond your cash flow which translates into accumulating debt. This kind of pressure on one’s finances will create a condition of chronic debt. Breaking the cycle through budgeting and financial literacy is the prescription that gets an individual back to financial health and personal happiness.
A Simple Budget Recipe
So what’s in a budget? Here’s the simple recipe to build one. Get out a spreadsheet or piece of paper and make two lists, one for cash inflows and the other for cash outflows in a typical month. Under cash inflows, list all the after tax dollars you will collect that month and total it. This is the amount of cash you have available in an average month. Let’s say this totals $5,000.00.
Next, list all the cash outflows you have in a month. These are expense like rent, car payments, gas, groceries, eating out, entertainment, credit card payments, etc. List them all and be brutally honest about what you spend. Don’t understate it, rather overstate the amounts if not sure. Total this amount for cash outflows. For our example, let’s assume this total amount is $5,400.00.
Finally, subtract your cash outflows from you cash inflows and look at the difference. If positive, that great! Ideally, you want to be positive by 10% each month. This means you’re accumulating cash. If the difference is negative, then must find a way to cut cash outflows below your cash inflows now!
How to Reduce Cash Outflows
The challenge with cutting cash outflows below inflows is that Mellinnials enjoy their lifestyles, as we all do. Here’s the rub of the matter, unless you’re willing to trade some short term pain for long term gain, then you’re destine to be financially destitute. What do I mean? The accumulation of debt over time means that other institutions (or people) will enslave you to the monthly payment disabling you from properly caring for yourself and the one’s you love. You’re only choice may be bankruptcy down the road, and it’s not a pretty picture especially when it can be avoided.
In contrast, we’ve all watch immigrant families come to the US with nothing, get stuck in basic paying jobs, and over the course of five years and more, come to own homes and cars without debt and there are even able to customize it the way the want with the help of The Detailing Syndicate services online. None of us want to live like they did in the beginning, pooling resources such as housing and transportation to an extreme. The good news is that we don’t as we’re starting from a stronger position with family resources and good educations. Move home if you have to. Ride your bike. Car pool or use public transportation. Eat at home. Making the tough choices about your lifestyle today will provide the freedom to care for yourself and the ones you care about.
Do the math and know if you’re breaking even or able to save more each month. This is crucial for building a buffer against debt. It’s probably the simplest exercise yet most important one you will do. It involves lifting your finger and putting your inflows and outflows down on paper. If you’re not sure what a family monthly budget looks like and want more detail, look at this example (pdf) – View Monthly Family Budget Sample
2. Watch Your Credit Cards Expenses.
The best way to control your cash outflows is by limiting your credit card expense. Try this experiment. Put your credit cards away for a month a pay for cash (or debit card/check) for all your monthly expenses. Can you do it? The answer to this question say allot about if you’re exceeding your cash inflows or not.
Here’s the statics on the topic. According to a the credit-reporting agency Experian, Millennials are struggling to pay credit card bills on time, while also having one of the highest credit utilization rates of the four generations listed. As a result of these two factors—late payments and high credit utilization—Millennials have the lowest credit scores across all four generations. Consider a credit score as a financial report card, which means you should turn in everything on time and pay the balance in full every month.
The moral of the story is to get your credit card expense under control. Don’t use it unless you can pay the balance at the end of the month. This involves making tough choices every day.
3. To Rent or Not to Rent, That is the Question!
It’s no secret that Millennials are not active home buyers. Given the housing market of the past six years, they can be blamed as there are mixed reviews on home ownership verses renting. Ask a homeowner who lost a home or took as significant financial haircut since 2008 and you may get a different perspective on the financial benefits of home ownership and financial security. This is where judgment plays a big role. Although convention wisdom and the American dream are home ownership, you have to know when it’s right for you.
Here are some priorities and guidelines on renting or buying.
- Get your budget under control (inflows exceeding outflows). A house will cost you more, so if you’re current budget is not in control, your expenses will explode when you buy a home.
- With you budget under control for at least 12 months and you are saving 10% of your inflows, is the amount in rent your paying equivalent to a home that you could afford and server you’re needs? If the answer is yes, then it’s time to start shopping and educating yourself on the home buyers market. It doesn’t mean that you’re going to buy a home, it means that you’re ready to shop.
- Currently, the home markets are low and interest rates are historically low, so it’s generally a good time to buy. However, if in a couple of years from now, real estate is up 50% in your area and it’s a seller’s market, then it’s not a good time to buy. Hang on to your cash and wait. Your wait could be 5 to 10 years, but there will be market price dips and you’ll be in a great place to take advantage of it.
4. Savings – The Achilles Heel.
We all know that savings is a troublesome topic. And, in difficult times, it’s hard to achieve. We all know the benefits of savings and the freedom it gives us. Living under the disciplines of the a personal financial budget will produce savings. This is the obvious part. The tough part is the discipline. And without a vision or hope for you future, discipline often fails. So let’s take about personal vision as saving will become a product or result of it.
Your vision, hope or goal should be around something you like to do that has reasonable economic value in the market place. If you figured this out, you’re on your way. However, many under-employed Millenials are wandering as they can find jobs in their fields of study and the prospects of going back for more education is economically frightening. So they are stalled.
Getting on Track
Here are some tips to help you get moving again without taking on more educational debt:
- Determine want you want to do. Follow your “gut” here and make sure that it has economic viability – an income target greater than 50,000.00 per year.
- Get educated. Use other educations sources that both provide high value and are inexpensive. The good news is that you don’t have to spend $20,000 or $30,000 to retrain. How does less the $40.00 per month sound? You can do this thought quality online services such as the Kahn Academy or Lynda.com. This is achievable for most of the US population and can be paid out off one’s on hand cash. Most importantly you don’t have to quit the job you may or may not like if you have one.
- Think long term. You’re re-training effort may take a couple of years and depends on the effort you put into it. Turn off the TV at night, drop your cable TV services or Facebook time, and take courses at night. You won’t miss anything and you’ll be investing in you. During this time, make sure you live within your means (your budget).
- Get involved in your area of future work. Volunteer, participate, and help where you can. This will give you experience and connect with people in your field. Most importantly, it will give you belief in your abilities.
- Jump in. At some point, you’ll have the right opportunity to move out of your dead end job into the position you’ve been training for. This may be through a company or institution, or most likely, though contracts and the start of your own business services.
- The Results? With higher training focused on a reasonable market place (where there is job demand), you’re income will grow and may even grow dramatically. Most importantly, you’ll have developed the “savings skills” by living in your budget during difficult times.
The skill of saving and investing money for the future starts in tough times. It’s a learned skill and unfortunately, must be learned. Having a future vision of what you want to do and disciplining yourself to train means having the discipline (the ability to defer pleasure) to not only live within your budgets but save as well. Saving early for retirement give you confidence here and now.
Alternatively, if you find yourself on a career track and lucky to have an employer’s 401(k) matching plan, take full advantage of it. Invest conservatively, don’t gamble as the lesson learned about the financial market since 2000 are brutal. If not (i.e. self employed), build your own IRA, choosing a Roth or traditional IRA, and set aside a percentage of your monthly income toward it. Find a good financial planner with track record and low fees (that’s another story). Don’t do it yourself, use professional help with investing.
5. Health Insurance – Ok | Life insurance – Well, Maybe
Under the new affordable care act, part of your expense budget must now be health insurance. And it should be as it is the number one prevention for personal bankruptcy (medical related bankruptcy is the number one cause of bankruptcy in the US). Your health is a priority. Without it, everything is compromised. So if you don’t have it, get it.
However, getting life insurance may seem like a lesser priority especially for Millennials. If it’s in your budget and you’ve done everything you possibly can get your expenses down, then it’s a consideration to be cut or reduced. But, only a temporary consideration until while you get your expense under control. Why?
Life insurance for Millennials generally means helping to care for someone you love in the event of your sudden and unexpected death. This could mean many things for Mellenials, like helping to take care of your parents, or family, or helping to fund someone’s educational aspirations. You may have the intention of helping someone through future income, but if you’re not there, then the opportunity is lost.
Life insurance if often overlook by Millennials as they are focused on themselves at this stage of life. However, in the event of death, without life insurance, they can inflict a double blow to the people they love the most. The first blow is the pain of their loss. This is significant for parents and friends when youth is cut short especially for those closest to the deceased. The second blow is dealing with the financial issues of the decease. This could be parents who co-signed for student loans, or other debts from borrowed family money, as well as funeral expenses. The loss of a son or daughter represent a certain amount of future care to aging parents. Having life insurance in place does not replace that future care, but can make it financially easier.
Millennials who buy life insurance now benefit from low rates while they are in good health. Polices are inexpensive at $10 to $20 per month for basic coverage and easy to get now with no medical exam term life insurance. The benefits for such a small amount are worth the expenditure.
From the simple act of making a budget to considering life insurance, these steps can help set up a Mellennials financial future. Learning to saving is the foundation for having a debt-free life and securing retirement plans as well as a lifetime of financial freedom. As a Millennial in these financial times, it reassuring to know that you can take positive steps to prevent financial issues adding to your burdens.