Saturday, December 31, 2016

Thrifty Thinking: Millennials and Money: 4 Habits to Start Practicing Now

  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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