(Note: this is part one of a series; read Financial Journey Part 2: Milestones for 34 – 55-Year-Olds and Part 3: Milestones for 55+ Year-Olds)
When you begin your financial journey, the first few years out on your own can be some of the scariest of your life.
If you’re like many millennials, you might have graduated from college and suddenly found you owe way more money than you thought. In between finding a job that will even allow you to make your student payments and Nana’s incessant questions about when you’ll be buying a house for all of her future grandbabies, it’s a wonder where to even start with managing your finances.
Everyone’s situation is different, but here are the main things most millennials should plan for as they begin their financial journey and aim for a bright future.
Decide on your financial journey goals
Benjamin Franklin once said, “if you fail to plan, you plan to fail,” and we agree with him. The first thing you should do is decide where you even want to focus your energies and financial strategy.
Maybe you want to buy a house, or maybe you couldn’t give two hoots about that white-picket-fence duplex in the suburbs. Maybe you want to travel, or maybe you’re more of a homebody.
It can be a good idea to hire a Certified Financial PlannerTM to help you workshop your goals. You can learn what’s really possible for you in your situation, what sacrifices you might have to make, and where you’ll need to step it up in order to live that lifestyle.
“The more emotional distance you have from the person, the more objective the advice can be,” says Donnie Carpenter, a CFPTM with First Move Financial. “Your best friend doesn’t want to disappoint you, and may not be the best person to ask if you should buy a new car or used car and put the rest into savings.”
You can find fee-only financial planners who work on an hourly basis and specialize in working with young people through the XY Planning Network.
Learn how to budget and save
If your financial goals are the targets, then your budget and savings strategy is the roadmap that’s going to get you there. There’s just one thing standing in the way: ourselves.
“We often spend everything that we earn and get used to that level of spending so the first foray into saving can be painful,” says Carpenter. It’s true: no one likes to budget, at least not at first. That’s normal and to be expected.
Instead, try a range of different budget strategies. There’s no one right way for everyone, so it’s important to dabble here and there until you find something that works for you. We’re personally fans of the spreadsheet budget system because it’s so customizable to you, but if something else works better, then use that.
To really nail down your savings strategy and make it less painful, Carpenter recommends a simple approach: decide how much you’ll be saving each month. When you get paid, take that money out right away and shuttle it into your savings account so you don’t even “see” it. You can even automate this at your bank so you don’t have to think about it.
Start an emergency fund
If Murphy was ever right about anything, it’s that what can go wrong will go wrong—and you can bet the cost will come out of your pocket. That’s why it’s important to start saving up now before things go wrong.
Carpenter advises aiming for an emergency fund worth three to six months’ worth of spending. The rationale behind this is if you lose your job, that’s a fairly good runway for you to find a new job.
You can also consider saving for “unexpected” expenses like car repairs and vet bills. These can throw a huge wrench in your plans when they pop up if you’re not prepared, but it’s still a good bet that Herbie or Fluffy will need fixing at some point.
After all, every financial journey has some unexpected detours- and not all are pleasant.
Make a plan to deal with your student loan and/or other debt
Student loans are a nasty multi-headed beast, and to fight them, Carpenter advises to “learn everything you can about your repayment options” so that you know the best options for you. “Don’t just jump into a consolidated loan, and don’t fall into the trap of asking for a forbearance each year, because that will cause your interest to become part of your loan and it will start earning interest.”
In other words, if you don’t have a good attack plan, the beast could grow even larger and be more difficult to defeat.
Instead, consider adding some room in your budget to make extra payments toward your debt. This will pay it off quicker so that you’ll pay less interest overall, and you’ll be free to move on with your life sooner. After all, you’ve got better things to worry about.
Start your retirement account
This might be the toughest one of all. Retirement is soooooo far away, why even bother saving now, especially when it might seem like you owe an Empire-State-Building-sized amount of debt?
But believe it or not, right now might be the most important time of your life to save. Any money you save now will have the longest period of all to grow. This means that each dollar you put away now will earn more money than if you’d saved the same amount at age 60, right before you retire. I don’t know about you, but I want my money working as hard as possible for me.
Carpenter advises to “start wherever you can. If you can start with at least 5% of your income that’s great, but anything is better than nothing.” If you can save more, obviously do that too—but for now, just worry about getting started at all.
Bottom Line at the Starting Line of the Financial Journey
You might be panicking right now with everything you have to worry about to get your finances right. Don’t overwhelm yourself; it’s a good idea to pick one task at a time and focus on it until it’s second nature, and then move onto the next item. Before you know it, you’ll be on your way to meet your financial goals, whatever they may be.
Interview source: Donnie Carpenter, CFPTM