As a Gen-Xer, I know things haven’t been easy for the current crop of 20-somethings. Many of you graduated college and walked right into the buzzsaw of the most severe economic contraction since the Great Depression. And while the economy is slowly recovering, your generation has to try to make it with a record burden of student loan debt. On average, the cohort that will be graduating this year will have more than $30,000 in accumulated student debt each. Many of you going to private colleges and universities, or who are going to law school or medical school, will be graduating with student loan balances in the six figure range.
Well, you doctors are probably going to be ok. (Your income will double or triple when you finish residency in most places, and you’ll probably have a chunk of federal loans forgiven by the time all is said and done).
As for the rest of you… well, what do you want? A cookie?
Yes, you got a raw deal. The timing didn’t work out for you like it did for your grandparents. College costs went way up. Wages only went up a little. Meanwhile, other countries have developed manufacturing bases that are giving American workers some real competition. We’re no longer the undisputed manufacturing behemoth of the world. And a lot of displaced workers who would have gone to work making things are having to find something else to do. So they’re competing for your job. And blah blah blah.
Nobody can repeal the economic cycle. That’s just the economic reality of it. But you can take positive steps to take control of your finances – starting right now. The new year, 2016, represents an opportunity to make positive changes in your financial habits that will pay dividends for the rest of your life.
Read a personal finance book every month.
The best books for you depend on your personal financial situation and your level of knowledge and financial acumen. Someone with a graduate degree in finance might have a different reading list than someone with a degree in art. But here are some terrific books that are very readable, aren’t too technical, and will benefit just about anybody:
- The Millionaire Next Door
- Debt-Free by 30: Practical Advice for the Young, Broke and Upwardly Mobile
- The Automatic Millionaire, by David Bach
- The Total Money Makeover, by Dave Ramsey
- The Richest Man in Babylon by George S. Clason
- Think and Grow Rich, by Napoleon Hill
- The Truth About Money, by Ric Edelman
- Personal Finance for Dummies, by Eric Tyson
- The Intelligent Investor, by Benjamin Graham
- Your Money and Your Brain, by Jason Zweig
This part is free. Or nearly free. And it will help you tremendously. Get a handle on every dollar coming in and going out. Use applications like Mint.com to help you get organized, or do it all on paper. It doesn’t matter what system you use, as long as you use it. This one act will help you accomplish everything else you set out to do. It will also protect your credit score. You are a lot less likely to miss payments or bounce checks if you’re organized than if you’re not. This can save you many thousands of dollars when you start paying a home mortgage!
Increase Your Emergency Fund.
An emergency fund is money you can access tomorrow, if need be, to solve an immediate financial crisis. Need to fix your engine or transmission? Figure $1,000 to $2,500. Lost your job? Figure 3 months of basic living expenses. Ultimately, that’s your goal: 3 to 6 months of living expenses, either cash in the bank or in a safe money market fund that you can tap in a hurry. Ideally you’ll have it separate from your spending money.
Don’t fall into the trap of thinking because you haven’t maxed out your credit cards yet that you have an emergency fund. Credit cards have a way of canceling your account just when you need them the most. Don’t rely on credit cards for this purpose. Or for much of anything else, for that matter.
For God’s sake, learn to cook!
For most of you, the single biggest thing you can do to reduce monthly expenses will be to invest in some good cookware and use it every day at home. There are loads of great recipes on the Internet.
Got a significant other? You can spend a fortune on eating out. Indeed, for many urban millennials, this is their biggest discretionary expense. Instead, take what you would spend going out somewhere nice just once, and invest in some decent cookware. Looking for date ideas? Taking a cooking class together is a fantastic dating idea that will pay dividends for many years to come. And you’ll both eat better than ever, for a fraction of what you would pay eating out all the time.
Think you can increase your emergency fund or pay down debt if your food costs went down by 50-70 percent? You bet you can!
Protect yourself and your loved ones.
Life insurance, long term care insurance and disability insurance will never be a better deal for you than it is right now. Buy some term life insurance. If you’re in your 20s or 30s and healthy it will cost you less than a pizza dinner every month for hundreds of thousands of dollars in protection for your loved ones. What? No children? Not married? Get it anyway. If you wait until you’re a parent or you have a dependent spouse, you may not be able to get it, because your health has changed. There are a lot of diseases that present themselves in young adulthood that could make it difficult or impossible to qualify for disability, life or long term care insurance. Get some basic coverage in place now.
Max Your Match
Do you have a 401(k) plan at work? Does your employer match part of your contribution to any extent? Do not pass ‘Go,’ do not collect $200. Go directly to your HR office and have them increase your monthly contribution to the maximum your employer will match. This is free money. If cash flow is tight, you may be able to have HR reduce your withholding to free up some money for your 401(k) or traditional IRA. Contributions to both are normally tax deductible, anyway, so reducing your withholding should increase your cash flow to make these contributions without substantially increasing your out-of-pocket tax bill come April 15th of next year.
Zero Out Your Credit Cards
Credit card interest and car payment/consumer loan interest is awful. You can’t deduct the interest you pay on personal debt, and interest rates are usually much higher than your student loan and mortgage debt, if any. Write all of your credit card and consumer loans down and pay them off. Dave Ramsey, author of The Total Money Makeover, listed above is a fanatic about debt reduction. He advises listing all your debts, smallest to largest, and making minimum payments on everything except the smallest one. Then taking everything you can every month and hurling it at the smallest debt until it’s gone. Zeroed. Zilched. Kaput. Then move to the next one.
Yes, the mathematically correct approach is to pay down the highest interest debt first, rather than the smallest one. But that doesn’t give you an immediate emotional charge like getting a goose egg on the board early. That’s a moment to celebrate. And because you’ll get such a charge out of that small victory, you’ll be able to harness incredible emotional energy to attack the next debt, and the next and the next, until all your credit card and consumer debts are paid off.
For a more detailed explanation of this technique, called “debt snowball,” see Ramsey explain it himself, here.
One caveat: If your largest debt is also the one with the highest interest, I’d put everything else on the back burner and attack that one first. Otherwise that higher interest rate will eat at your progress on the debt snowball. But every payment you can make reduces the interest you pay each month and frees up more money to pay down principal.
Note: I do not agree with Ramsey on some aspects of investing strategy and insurance planning. However, when it comes to helping people get out of debt and motivating people and couples to change their financial behaviors for the better, he has no equal.