by Jessa Barron of NextAdvisor
How financially savvy are millennials? Our recent study on millennials and finance revealed that while 69% of millennials know how to check their credit reports and scores, 34% said they’ve never checked them and 39% said they don’t even know where their credit scores fall. Between student loans,
increasing rent costs and all the other financial responsibilities
20-somethings face, implementing smarter money practices and coming up
with a savings plan can be difficult. That’s why we’ve put together a
list of a few personal finance tips to help millennials better their
money habits.
Establish a budget and stick to it
Money management plays a big role in personal finance,
and establishing a budget is one of the simplest ways to help you
manage your money responsibly. After all, if you don’t know your
income-to-spending ratio, you’ll be more inclined to spend beyond your
means, which could land you in debt or even damage your credit. To
start, you’ll want to make a list of when your major bills are due and
how much you need to set aside for these necessities each week or each
month (e.g., rent, cell phone bill, utilities, student loans, car
insurance, credit card bills, grocery expenses, etc.). Next, you should
make a list of luxury items — expenses that aren’t necessarily needs,
but things that you spend money on regularly, such as your monthly gym
fees, entertainment expenses, like Netflix or going to the movies, and dining out with friends.
If you’re not sure how much your usual expenses and bills are, delay
your budgeting for one month and collect all of your receipts during
that time. At the end of the month, go through the receipts and
determine how much you spend in one month.
Once
you have a running list of all your expenses, do the math to figure out
how much you’re actually spending and adjust/set spending budgets
accordingly. If you notice that you’re overpaying for something like
cable, a gym membership or your cell phone bill, call the provider to
see if you can cut back on your service to save a few bucks or consider
cancelling the service altogether. After you have a grasp on your
financial obligations, you can not only understand where your money
goes, but also determine how much money you’ll have left over from each
paycheck that you can spend elsewhere or put into your savings. It’s
important to note that while creating a budget is a great way to help
with money management, it does no good if you don’t actually stick to
it. So try to follow your weekly or monthly budget as closely as
possible to avoid overspending. Similarly, if you’re having a hard time
sticking to your budget, don’t be afraid to adjust it accordingly. While
the ultimate goal is to wisely manage your money and build up a
savings, it’s not something that will happen overnight. As such, it’s
perfectly fine for you to start small and work your way toward your goal
as you become comfortable with budgeting.
Contribute to your savings account
As
we somewhat noted above, there are a couple of ways to use leftover
money after you budget. Putting it into a savings account to build an emergency fund or
setting it aside for that Europe vacation your friends keep talking
about are a couple of options, but regardless of the reason for saving,
the smartest thing you can do is separate that “saved” money from your
“spending” money. If you don’t already have a savings account, there are
a couple of options for you. Traditional brick-and-mortar banks may be
convenient, especially if you’re a current customer, but they often have
minimum balance requirements or other stipulations you need to follow
in order to avoid a monthly fee. On the other hand, online savings accounts usually
have more lenient guidelines for opening and maintaining an account,
which means less fees, as well as offer higher interest rates, which can
give you a better return on your money. While you may not be worried
about interest rates, especially if you’re just looking for a place to
separate saved money from spending money, it’s worth looking into
because as your savings grows, it’ll give you more of a return — the
money you’re saving will earn interest, leaving you with more than what
you started with.
Plan for retirement now
Although
you may think that your 20’s isn’t the time to start thinking about
retirement, this is the perfect time to start planning because when you
start early, your money has that much more time to grow, similar to what
we noted about savings accounts. If the company you work for offers
employer contribution match or 401(k) benefits, you should definitely
take advantage of that while you can. Some companies will match whatever
you’re contributing (e.g., if you contribute 5% of your paycheck toward
your retirement, they will match that and also contribute 5% at no cost
to you), while others offer a standard percentage contribution no
matter what you choose to contribute (e.g., they’ll contribute 3%
regardless of whether you contribute or not). Either way, it’s
definitely something you’ll want to participate in, as it’s essentially
free money that earns interest over time for your retirement. If your
employer doesn’t offer retirement options or benefits, you can opt to
open an individual retirement account, also known as an IRA or a Roth
IRA. Check out this blog post to
learn more about these types of retirement accounts, and to decide
which option is best for you. It should be noted that if your employer
doesn’t offer retirement options and you don’t have enough saved up to
open an IRA, you’ll want to start with a savings account, then move the money when you’re ready.
Practice responsible credit card habits
Millennials prefer using debit cards over credit cards — 54% of millennials we surveyed said
they prefer debit cards for everyday purchases, while only 23% prefer
credit cards. Regardless of whether they’ve either personally had bad
experiences with them, or they’ve heard horror stories from friends or
family members who are in major credit card debt, it’s not wise to avoid
using credit cards, as they’re one of the easiest ways someone can build a credit history. Whatever the reason for avoiding them,
all consumers should know that credit cards aren’t the reason for debt —
using credit cards irresponsibly is. Just because you have a $4,000
limit on your credit card doesn’t mean you should use the majority of
that credit limit and risk maxing out your card. In fact, doing so will
have a major impact on your credit scores because it directly affects
your credit utilization ratio, or your balance-to-limit ratio that compares your total credit used to your total credit limits.
In
addition to being aware of how much you charge to your credit card,
you’ll want to make sure you stay current on payments, as your payment
history accounts for 35% of your credit scores. Credit cards can also help earn some added perks and manage your budget. For example, if you use a card like the Blue Cash Everyday Card from American Express,
which earns you 3% at the grocery store (up to $6,000/year in
purchases, then it’s 1%), 2% at the gas station and more, for your
everyday purchases at the grocery store and gas station, you’ll get some
top-notch cash back rewards for purchases you’re already planning to
make and budgeting for. As long as you are using your credit card
responsibly by only spending what you know you can pay off each month,
having a credit card can help you increase your credit scores, manage
your money and put you in better credit standing.
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