In the current rapidly changing economy, financial planning is more important than ever for millennials. Defined as the generation born from 1981 to 1996, millennials face financial challenges that prior generations did not deal with, such as student debt, the cost of living that is ever-increasing, and an unpredictable job market. However, all millennials need to take charge of their finances to become financially stable and build wealth is a strategic plan and consistent discipline.
1.Establish Financial Goals
The first path to financial security is identifying what you want. This could be a home purchase, opening a business or service, travel, or early retirement. When you have a clear goal in your mind, you will make the decision that aligns with your objective. Write down your short (1-3 years), medium (3-7 years), and long-term (7+) financial goals. This will give you a sense of direction, encourage you to remain committed to your financial goals, and keep you accountable.
2.Create and Follow a Budget
Budgeting is the most crucial component of financial well-being. Once you understand your income and expense, it will be easier to comprehend the distribution of your spending. Start budgeting with an app or tool, like Excel or Mint, YNAB (You Need a Budget), or EveryDollar. A simple model to use to identify your budget is the 50/30/20 rule.
*50% needs (rent, food, transport)
* 30% wants (eating out, entertainment)
* 20% savings/debt
Budgeting is simply about staying consistent to the numbers you establish. To properly track your monthly spending habits you will need to go over your budget frequently.
3.Create an Emergency Fund
Life is unpredictable; a medical bill, your job disappears, or your car breaks down could happen at any moment. An emergency fund can help cushion the blow from life’s unpredictable surprises without causing you to go into debt. You will want to save three to six months of living expenses in a separate, liquid account. If this seems daunting; that’s ok. Start small if you need to. Even if you only save a couple dollars a week, eventually it will build up!
4.Manage Debt
Most millennials carry student loans and have credit card debt to manage. You can manage your debt in the following ways:
You want to pay off your highest interest debt first.
Consider refinancing or consolidating your loans to lower your interest rate.
Try to avoid any unnecessary new debt.
Managing and paying down debt will ultimately help reduce your stress, help you have a sense of financial stability, and aide in building your credit score which can open you up to additional financial opportunities.
5.Start Investing Early
Time is your greatest asset, especially when investing. Even small, modest investments will compound over time. A few places you want to consider:
Employer-sponsored retirement plans (401(k), 403(b)) from your job – ask your Human Resource department if they offer a company match!
Individual Retirement Accounts (IRAs).
Low-cost index funds or ETFs.
The earlier you start, the more time it has to grow!
6.Safeguard Yourself with Insurance
Insurance may lack excitement, but it’s very important to protect your financial future. Health, life, and disability insurance shield you from the unexpected derailment of your financial plans. If you are self-employed, make sure to research affordable options for coverage so that you are covered.
7.Keep Learning About Money
Financial literacy is a continuous journey so remember to dig into books, blogs you trust, podcasts, and want online courses to take a closer look at money. The more information you gain, the better position you will be to make financial decisions during times of adversity.
8.Think Long-Term
While millennials have time on their side, that doesn’t mean your retirement plan should be postponed. The idea is to start saving as the earlier you save, the effects of compounding will help you. As your income increases, increase your savings rate. Your future self will thank you.
How to Reach Financial Independence Before 40
While achieving financial independence before turning 40 may sound like some sort of fantasy, it is easier than you might think. With the right mindset, strategy, and discipline, you can build a nest egg large enough to cover your living expenses without working a traditional 9-to-5 job. It all comes down to intentionality in planning, investing wisely, and then executing the plan.
1.Define What Financial Independence Means to You
Financial independence (FI) means something different for everyone. For some, it means retiring from traditional work and traveling the world. For others it is about being financially free to pursue passion projects without worrying about the bills.
First things first, calculate your FI number. The FI number is the amount of money you need invested to live off the returns. A common rule for calculating your FI number is the 25x rule. This simply means you calculate your annual expenses and multiply it by 25.
Using this rule, if you need $40k/year your FI number would be: $40k x 25 = $1 million FI target.
2.Live Below Your Means
Living below your means is one of the most important principaux if achieving financial independence.
Tracking your expenses is critical at this point.
Identify unnecessary items you can cut or reduce. Potential examples include: eliminate subscriptions, luxury shopping, eating out and/or socializing too much.
Instead of cut or eliminate things from your life completely, think about value-based spending. Value-based spending means investing in things that add real value to your life. For example, experiences or necessities you can not do without.
Living below your means does not equal deprivation. It means making choices that support your long-term financial freedom versus short-term indulgence.
3.Save Aggressively
To achieve financial independence at an early age, you will have to save at a high rate, ideally between 40% to 60%.
You can increase your savings rate in a few different ways, such as:
Formally automating transfers to your savings account and investment accounts.
Avoiding lifestyle inflation as your income increases.
Finding ways to earn more through side jobs, freelancing, and/or passive income.
The higher savings rate you achieve, the quicker you can build wealth and subsequently retire.
4.Invest Early and Regularly
Again, while saving is important, investing is what drives your complete independence. Allowing compounding interest work for you.
You will want to invest in low-cost index funds or ETF’s to have steady, long-term growth.
Always max out your tax-advantaged accounts such as 401K’s, IRA’s, and Roth IRA’s.
You can also consider real estate, or dividend-paying stocks to manufacture additional passive income.
The idea is to allow your money to work for you, even while you sleep.
