There’s something about a new year that brings about a desire for change and progression. As part of this, I thought I’d create a financial guide for millennials, our generation, where I share everything I have learned so far. The goal of this four part guide is to open a conversation and share information on how to maximize your personal financial life and learn about smart financial planning and budgeting for this generation.
There is a ton of financial information out there. After all, I had to learn this all somewhere, right? But, I find that practical financial information geared towards our generation of 20- and 30-somethings written by 20- and 30-somethings is overall lacking. Thus, I wanted to put together this huge guide. Settle in because it’s a looong post and I don’t hold back any info.
In fact, I actually broke this down into four parts that are going to be released over the next couple weeks. You can subscribe here or follow me on any of my social channels (i.e. Facebook, Twitter, Instagram, etc.) so you don’t miss when a new guide comes out!
Each part is going to be hyper-focused on a different topic. I strongly encourage you to comment and start a discussion sharing any financial advice and tips that have helped you along the way! After all, sharing is caring and learning is how we all move forward!
Here’s what you can look forward to with the different parts. Links will be updated as they come out!
Part III: Saving
Part IV: Spending
What makes you qualified to write a financial guide for millennials?
Super valid question. To be honest, I’m not sure how qualified I even am. I’m not an accountant. I’m not some mystical financial guru. I don’t write books, or even posts, on finances. I am your run-of-the-mill, every day millennial. Basically, I’m like you, which means that, like you, I’ve probably have had to deal with most of the same things you have.
However, over the last several years, I’ve become laser-focused on finances. I did not grow up in a family with a lot of financial freedom. There is no silver spoon in my history. I started working under the table when I was 13 years old and haven’t stopped working since. Anything expensive or luxurious I bought had to be saved up for over months. I’ve seen and experienced what can happen firsthand if you don’t have a handle on your finances, and it’s a very easy slippery slope to go down. Growing up without financial security made me, as an adult, determined to create as much financial security as I can muster, which meant lots of reading and lots of actually applying what I learned.
Josh (my husband) and I are not bankrolled by our families. Our entire income is dependent on us, which is a little unusual for our generation and even our parents’ generation. I know people well into their middle-ages that still receive regular checks (and rely on those checks) from their parents. No judgment, but that’s also not what comes to mind when I think of financial freedom and security.
We have debt (hi, student loans). We have a car payment. We’re renters. We’re not rich. We’re not poor. We’re somewhere in the middle, hanging out in the “average” zone, and on the way up from there. Does any of this make me qualified to create a finance guide? I’ll let you decide.
For now, take everything you read here and chew on it. The most important part is you deciding what works for you.
Establishing Debt-to-Income Ratio
why the ratio is important
Your debt-to-income ratio tells you where you currently stand financially. A good ratio usually also means a good credit score and a good chance you’ll get a better deal when buying a house, a car, or any other major purchase that requires a finance check. It’s basically the pulse of your financial health. In general, you’ll be hard-pressed to find any lenders if your debt-to-income ratio is higher than 43%. A good gage and range is anything below 36%, but the lower, the better. Here’s some more info on it if you’re curious.
two part ratio: the debt vs. the income
The ratio is based off of two main parts: your debt and your income. Your debt is anything and everything you make payments towards each month that come in the form of loans. This includes car payments, mortgages, student loans, personal loans, credit card payments, outstanding medical bills (i.e. ones you are paying down over time instead of all in one shot), etc. Income is anything that you bring in, which for most of us, is the number on the paycheck after taxes, 401k contributions, and health insurance has been taken out. This is also known as your gross monthly income.
how to calculate your ratio
Finding your debt-to-income ratio is very straightforward:
Your Debt-to-Income Ratio (in percent) = (Your Total Monthly Debt Payments/Your Gross Monthly Income) x 100
If you want to get an even better picture, you can go back to your bank statements over the last year and do this with each month. At the end, you can add together all the percentages, divide by 12, and then you will have your annual average debt-to-income ratio (in percent). This is also helpful to do to get a better picture as to whether you are lowering or increasing your debt-to-income ratio over time. (Hopefully, you’re lowering it!)
How to Create Your Monthly Budget
Now that you have a good general idea as to where you stand, you can move forward with creating a monthly budget. Creating a budget is first in this post series because it’s the cornerstone to making some progress towards financial freedom. Something that I have come across time and time again when learning from the pros is that even the richest of the rich have monthly and annual budgets. That’s how they keep their money and their financial security. Without an active budget, you’re dancing a dangerous tango.
forget percentages and do what works for you
There’s all sorts of theories out on the market as to what percentage of your paycheck should go where. Well, I’m here to tell you that it’s all “meh” information that’s not going to be useful. This is the most personal part of the budget in the sense of you really have to do what works for you, not a polled majority. The fact is, while allotting 30% of your monthly income towards necessary expenses like rent, car, groceries, etc. sounds great, it’s not a freedom most of us in this generation have.
As a generation, we have insane student debt. Once we graduate college, we discover that most people still want to pay us only slightly above minimum wage, which is very different from a workable, living wage. Rent is astronomical. The last recession in 2007/2008 pretty much shot down the ability for most of us to get a decent price and mortgage on a house. Which means, we can laugh that 30% idea right out of the room.
Thus, this is the part where you have to do your own homework. What do average rent prices look like in your city? What about gas prices? What sort of monthly car payment are we looking at from your local dealer? For some of us living in cheaper locations, we may be able to minimize expense percentages fairly easily. However, others of us are going to have to be creative given current salaries.
And, the most important piece of the puzzle, what is the goal of your budget? Is it to pay down outstanding debt? Is it to bulk up your savings accounts? Is it to get down your cost of living to something that doesn’t leave you empty handed at the end of the month? Is it to just track where your money is going? The main goal needs to be decided before you move forward, otherwise your budget serves no purpose.
pull out your bank statements
Ah, the dreaded bank statement. I’m constantly seeing memes going around on Facebook from friends about the overarching fear of even logging in to see what your bank account currently tells you. I’ve been there. It sucks, but you have to bite the bullet, rip off the bandaid, and actually take a close look in order for any this to work.
Most bank statements start with your total income and your total expenses at the top. It’s useful for a general idea of your current budget and for having a miniature heart attack if you haven’t been paying attention (been there, too). The tedious part of this is categorizing and adding everything up. You can’t skip it because this is how you get an idea of where your money is going each month and how much of it is being spent.
Yup, that means you’re actually going to have face how much you spend on Starbucks and pizza. Nope, it’s not wrong. Practice these breathing exercises and you’ll be just fine.
create your income and expense column
Now, it’s time to actually get down to creating your budget. If you work a consistent 9-5 job, then your income should be pretty straightforward. If you’re paid hourly, take a minute to look back at the previous 3 bank statements to get a better idea of your monthly average. If you’re paid bi-weekly, create 2 lines (one for each paycheck) since you won’t be receiving all of your income at one time. Also, be sure to include whatever you didn’t spend in the previous month in this month’s income column.
For your expense column, create realistic spending goals for each. Some categories are going to be a hard number, like your rent, car payment, and/or debt payments (student loans, credit cards, etc.). Other categories are going to require you to create an educated and reasonable limit, like groceries, eating out, clothes, etc. This also usually includes your utilities, like gas, electric, water, wifi, etc. The categories that don’t have a hard number attached to them are the ones that you’re going to have to pay special attention to over the month to be sure you don’t go over budget.
leftovers = discretionary
When creating your budget, do it by necessity first. You need basic survival things: food, shelter, water. Thus, paying your rent/mortgage, groceries, and utilities (including car if you use it to get to work) should be your top priorities. Also include any of your pets needs in that list, if you have a pet. Next, you have to pay your debt (otherwise your credit can take a major hit, more on that in a later part). After you budget for all that, what is left over is discretionary, meaning where you place your priorities is up to you.
In my opinion, allotting a good amount of what is left over into a savings account, or multiple savings accounts, is the smart and best thing to do. (Again, more on savings in another part.) However, none of us want to be hermits. So, if you enjoy going out with friends or supporting your local coffee shop, then create a reasonable budget amount and then stick to it.
if you struggle to stick to it: only pay in cash
If you find that you overspend each month, always leave Target with double what you were planning, or generally have a hard time actually sticking to this whole “budget thing”, then only pay for things in cash. It’s psychologically more painful to pay in cash than to pay with card. In addition, if you only stick $50 in your wallet for groceries, then you know you can’t go over. This is a great trick to do when you’re just starting out on the path towards a more serious budget guideline.
Lowering Your Expenses
Getting your expenses down to the bare minimum is the goal. No one wants to see their hard-earned cash every month get tossed here and there to pay for things that are mostly nuisances that rarely add value to their life. These are some tricks to lowering your monthly expenses. When in doubt, just ask. There’s no harm in calling up a lender or one of your monthly providers and asking if there’s a cheaper option or better deal.
negotiate your bills
Everything can be negotiated. A couple months ago, we completely switched Internet providers. This saved us 40% on our monthly bill and came with a better deal than the previous guys. Always ask to see if there is something better that your current provider can offer. If they’re not willing, scope out the market. Don’t settle on a company until you know what other deals are on the table.
negotiate your loans
You may be able to lower your monthly loan payments if you’ve already been making good payments on it. Most loan companies will lower your APR and/or your monthly payments if you ask. This also includes credit card companies. Another great area to do this is with your car and mortgage. If you’ve already paid down the initial loan amount, you can most likely go in and negotiate a lower interest amount and monthly payment without setting you back in paying it off. Again, most of this is just going to boil down to you calling up the company and asking. The worst they can say is “no”.
get rid of subscriptions
If you’re not using your gym subscription, cancel it and stop paying. Do you really need to pay for Spotify Premium and Pandora? Who is honestly going to watch HBO, Hulu, Amazon, and Netflix all at the same time? It’s these little things where it’d be worth it to cancel it in the long run. If you really do find that you use it a lot, keep it. At least you’re getting it’s value. But, you can always re-subscribe if you find that you miss a certain service. However, for half of the subscriptions you cancel, you most likely won’t notice it’s gone.
end frivolous spending
Yes, that top is super cute. Will you die without it? No. Will you still be attached to, or even remember, it in a week? Probably not. If you find that the day after payday, you’re hitting up the local shops and eating out every night, then it’s time to take a step back and look at want vs. need. Remember: prioritize the necessities of your budget. Everything else that doesn’t fall within those boundaries are extras and non-essentials. Hearth & Hand at Target does have amazing finds, but they’re not amazing enough to send your bank account into the red when it comes time to pay your rent. Chocolate and wine is great, but they don’t qualify as real groceries. Those shoes would absolutely be perfect for that party, but so would the ones already sitting in your closet at home.
live a less convenient life because you’re young and you can do it now
Does it sometimes suck to not get what we want when want it? Obviously. If we could have it our way every day, we’d probably each have 27 puppies and an endless supply of our favorite indulgences (for me, that means books, coffee, and yarn). But, that’s not real life. Bite the bullet when you’re young and live a higher quality life for all the latter. That means opting for the apartment with a roommate instead of paying double to live by yourself. Buying the used car instead of paying an extra $100/month for a brand new, off-the-lot car. Making the $4 latte the occasional treat instead of the everyday routine. It’s these little things that will lead up to big savings in the future!
Next Week: Part II
what to expect and look forward to
Next week, I’ll be diving in and taking a closer look at income. This may seem pretty insignificant and rather straightforward, but you’d be surprised at how much headway we can make in this area. The fact is that the majority of us are underpaid for our level of education and experience and for the living expenses we face nationwide. I’ll go into how to combat that (hint: it’s not easy, but it is worth it). I’ll also talk about how to decrease debt, how to not fall for the trap many fall into when they get a raise, and how to get a better overall income and income stability.