Financial matters can seem complicated as a Millennial.
Can you identify with the average 25-35 year old? You probably graduated college with $30 something thousand dollars in debt, which you are still paying off years later, without having made a real dent in your student loans.
You tell yourself it is time to adult and buy a house, but the markets are hot and you barely make enough to pay rent, so there is not deposit in sight. You want to YOLO and enjoy life, but there is little money, and in the end you think projects like having kids or working less hours are going to be impossible.
FACT: The average American household cannot come up with $400 cash for an emergency, why should your generation be different? (WashingtonPost)
Wrong. The Millenial generation has a wonderful asset on its side: time. Time to grow your net worth, enjoy compound interest, and have a bright financial future. It is not a sprint, it is an ultra marathon. So to stay the course and remain motivated, you need to think about your long term goal. It could be buying that dream house, working less hours to have more time to spend with family, taking a sabbatical to travel the world, retiring early,… anything that is truly yours. It will make saving much easier.
Try to think about saving money in terms of buying freedom, or options.
FACT: Every time you save $50, it is a day you can spend on the beach in Thailand, or home with your kids. Say $50 is takeout for two that night you are too tired to cook. How can you avoid that?
By cooking in advance so you have frozen options to warm up in five minutes. The idea here is to replace a non memorable dinner that does not bring you any particular satisfaction with another, much more valuable experience. Preparedness is one of the most overlooked money savers.
FACT: A $50 takeout meal once a week adds up to $2,600 at the end of the year. That is a great vacation for two!
Or, if you decide to invest the money over the next 30 years, a $28,432 boost for your retirement nest egg (investing just that $2,600 after one year, nothing else). Note: For all calculations here, we are using a rate of return of 8% which is less than the S&P500 has returned over the past 30 years, but not an indication of future returns.
So are you ready to implement some healthier financial habits? Let’s get started.
1. Get Out of Debt
The first step when it comes to getting serious with your money is getting out of debt. Paying double digit interest on that credit card will cripple you for as long as you carry a balance. Paying down debt is a sure return on your investment. When you invest money in the stock market, it can go up, but also down. Paying off debt at 10% is a guaranteed 10% return on your money.
So let’s write down all your debt and figure out a payment plan. How much do you owe in
Other unsecured debt?
If you have a mortgage, let’s keep it for now, as in general the low interest on the debt makes it a lower priority to pay off.
Sort out your debt by interest rate and start making extra payments on the debt that carries the higher rate.
Try to transfer your high interest debt into a 0% credit card, so all your payments are applied to reduce the principle instead of servicing the interest.
Refinancing your student loans and other debt can also reduce your monthly payments, so if you keep making the same payment you were used to, you can shave months off your loan’s life.
As you reduce your debt and make payments on time, you will increase your credit score. That in turn will open even more doors for you, as you will be able to apply for lower interest rates, and reward credit cards. Having good credit is very important as it can save you thousands and thousands of dollars in interest. Let’s not even talk about late fees and overdraft fees.
Again, a debt payoff plan can seem daunting, so picture your debt-free life. What will you do with all the extra money once you don’t have to make all these monthly payments? Build wealth and a great life for yourself.
2. Careful with Lifestyle Inflation
Just a few years ago, you were a happy student going around campus on your bicycle or beater car. You had five roommates, ate ramen noodles and wore the same pair of jeans for weeks on end.
Now that you landed your first job, you suddenly need a new car, a two-bedroom apartment to yourself, nights out because you “work so much and deserve it”, and international holidays? Succumbing to lifestyle inflation can be detrimental to your financial health. So take. It. Easy. Yes, you can have all of that. In due time.
A great way to build up your savings is to live on last year’s budget. Say your living expenses were $1,000 a month in college. Now that you make $2,000, can you live on $1,000 for just one more year? And next year, when you make $2,500, can you live on $2,000? Part of these savings will go to taxes, or be a welcome emergency fund when your car breaks down, but the goal is to get into the habit of saving and spending less than you earn.
Back to picturing our goal, if you save $500 a month from age 22 to 32, and invest it on the markets at 8%, then do not invest another penny (you’ll have $92,082 after 10 years), and let it compound from age 32 to 62, you can retire with $1,000,983 in your nest egg! Making these kinds of sacrifices in your younger years will be much easier than once you have a family and a house to pay for. Use this calculator for more inspiring projections.
3. Living Well on Less
Contrary to popular belief, you don’t need to be a millionaire to live well. The key to happiness is to need less, not have more. A lot of the things we spend on every day are things we don’t question. You are hungry, you get into a fast food, you buy a meal. You want a laptop, you go on Amazon and order it. And when there is not enough money, you swipe your credit card and pay it off over several months or years.
As it turns out, this lifestyle is very expensive.
The average household throws about $50 worth of food every month, according to the Motley Fool.
Some people get rid of clothes they’ve barely worn, or that still have tags on! The idea here is not to deprive yourself of life’s little pleasure, but to be conscious of where your money goes every month, and spend on what matters to you.
If you review a month or two worth of bank and credit card statements, and sum up your spending in each category (food, utilities, clothing, hygiene, leisure, etc.), you should be able to identify areas where you overspend. A quick fix is to give yourself an allowance every month for these things, and stick to it.
Having a set budget to spend on food every month will force you to look for things on sale, coupons, and cook more at home for example.
4. Build Up Your Savings
As you create a solid foundation and increase the gap between your earnings and your spending, you want to start building your savings more deliberately.
They should be split into three categories
Mid term savings
Long term savings
Emergency savings are the funds that will save you from charging your card when your car breaks down or your roof starts leaking. Start with a small goal, like $500, that will already help you cover most emergency situations. If you ever dip into it, make it a priority to rebuild your emergency fund as soon as possible.
Mid term savings are funds you will spend on a regular basis, like Christmas or a summer holiday. Your car insurance renews once a year and you need $600? Save $50 a month in a car insurance account. $1,200 for healthcare? $100 a month. These things are not emergencies. They come around every year and can be planned for, so you don’t pay interest on it.
Expert Tip! Paying cash upfront can also get you a better deal than monthly plans.
Finally, long term savings are for things such as a downpayment on a house or a college fund for your kids. Since you are looking at a longer time frame, you can afford to lock the money in exchange a higher rate of return. Again, start slow and build on solid ground. You don’t want to put all your savings there then pay a penalty to access $500 when you chip a tooth.
5. Pay Yourself First
Our brains are working against us. We want instant rewards and tend to navigate away from pain. That is what makes saving so hard sometimes. But you can outsmart your brain and trick it instead by paying yourself first. The theory is very simple.
When you get paid on the first of the month, you see all that money in your bank account, and it is very easy to spend it. Which makes saving whatever is left at the end of the month a bad idea, because not much will be left, if anything.
On the other hand, if you ask your company to retain your 401k contributions at the source, or set up automatic transfers to send the money straight to a savings account, you will treat whatever is left as your disposable income from the month, hence saving effortlessly.
6. Create Additional Sources of Income
If you only rely on your job’s income and you get fired, you just lost 100% of your income. That is a very dangerous situation to be in. If you have five clients and lose one, you still have four more sources of income for your subsistence.
Hot TIP! Extra income doesn’t have to come from a job. It could mean investing in real estate and getting rents every month. Or investing and getting dividends.
Since you are used to living on your current income, you should be able to save the majority of your extra income, and grow wealth faster.
Think about skills you have that you could market. Maybe you are good at fixing computers, or could tutor kids after school. Anything that doesn’t interfere with your day job but makes you stronger financially in case of a job loss. Making an extra $100 a week tutoring one hour a day could easily cover your food bill. Or pay for your nights out without compromising your savings rate.
7. Get Free Money
Taking advantage of your company’s match on 401k contributions is easy free money to help you grow your nest egg. If your company offers such a benefit, you really don’t want to pass on that. A standard company match is usually a dollar for dollar match up to 3 per cent, or a 50 cents match per dollar up to 6 per cent of your gross income. You should try to at least take all the free money your are entitled to. If you have extra savings to invest, the maximum 401k contribution limit set by the IRS for 2017 is $18,000.
If you make an average salary of $50,000, to get the full company match on 6 per cent of your income, you would invest $3,000 per year, and get an additional $1,500 from your company.
These $375 a month will turn into $562,610 after 30 years, covering over half your goal of retiring a millionaire. What’s more, since 401k contributions are taken out of your gross income, if you are in the 25% tax bracket, that means your $250 contribution is really just around $190 taken off your paycheck.
If you can save more, look into other tax deferred and tax advantaged savings vehicles like IRAs, 527 college funds or Health Savings accounts.
8. Grow Your Wealth
We have shared a few examples above of how little amounts can add up to six figures over the course of three decades. Growing your wealth takes patience and time, but once compound interest gets rolling, it can snowball quickly.
In order for that magic to happen, returns are crucial. Making 0.1% on your savings will turn $100 into $103 over 30 years.
Making 8% annually will turn the same $100 into $1,093 over the same period! That is how a $190 a month 401k contribution becomes half a million dollars in retirement.
The markets are unpredictable, and there is no guarantee that is what is going to happen, but playing with historical calculators will give you an idea of how indexes such as the S&P500 have behaved over time.
Investing is not as complicated as it sounds. If you can buy a laptop online, you can buy stocks. You just need to open a brokerage account and get started. Do your research, and look for a low fee broker, because fees can eat up your returns too. If you want to keep it simple, which you should until you really understand what investing is about and can read charts, stick to index funds. Invest small amounts regularly, and don’t panic when the markets take a plunge. If anything, it is time to buy more and be patient.
Never invest money you can’t afford to lose. And make sure you keep enough in your emergency fund so you don’t have to dip into your investment account and risk taking a loss because you need to access the money fast.
While you are young and in the lower two tax brackets, you can harvest capital gains tax free. How it works is you sell your stocks if you have been making a profit, and buy them again, hence increasing your base cost for the stocks. Let’s take an example: you bought $100 worth of stock, and the stock is now worth $150. You should pay capital gains tax on the extra $50 you made. But if you are exempt from capital gains tax, you can sell the stock, then buy it back for $150, and if next year the stock is worth $200, instead of having to pay tax on a $100 gain, you would only pay tax on $50, assuming you are not eligible to harvest again.
Another incentive to invest early, even though you are not making a lot of money yet. Tax harvesting can also work on years where your income drops because of job loss, or taking a sabbatical, or any situation that puts you back in the 10% or 15% tax bracket.
There are other ways to minimize your tax burden in order to grow your wealth faster, and you should consult with a tax specialist to know the options best suited to your personal situation. The cost of having a professional file your return often pays for itself in tax savings.
To stay the course and remain motivated, tracking your net worth will be a great help. At first, you won’t notice the uptick and progress will be slow. Don’t despair, instead, celebrate the small milestones. Your first $500 in savings, your first $1,000, $5,000,… by doing something special… but affordable!
It becomes much easier after that to arbitrate between spending X amount on Y item, or allocating the funds to grow your wealth.
Summing it Up: How You Can Retire a Millionaire
We have put together this infographic to show you how, with minimal lifestyle changes, you can set yourself up for a great financial future, and retire a millionaire. The final figures are based on an 8% rate of return over 30 years. So even if you are already in your mid thirties, they make for a comfortable retirement in your mid 60s.
Stop wasting food! The $50 a month the average American household throws on food adds up to $75,014 in 30 years.
Living with one car could save you $8,400 per year. Doing so for just five years before you have kids and investing $42,000 instead will result in a $308,000 nest egg!
Refinancing your mortgage to save $100 a month will add $150,029 to your retirement pot over the next 30 years.
Getting on the cheapest cell phone or internet plan for $20 less each month turns into $30,005.
One $40 night out per week adds up to $259,551.
Using these savings to take advantage of your company’s match on your 401(k) is free money. An average company match is 50 cents per dollar you invest up to 6% of your income. On a median income of $50,000 this is a free $1,500 a year. Or $187,536 after 30 years.
With the right mindset and motivation, it doesn’t take a lot of sacrifices to give yourself the future you deserve. In particular when you have time on your side to enjoy the magic of compound interest.