Hey there fellow millennial! Here are 3 easy personal finance tips from yours truly!
I say three because most of the advice you will read from me are centered around these 3 MAIN concepts.
Top 3 Personal Finance Tips:
If you have just one out of these three items, don’t worry! You’re still in a good spot.
Just focus on getting the other accounts as soon as possible (or make it one of your goals in the next 3-6 months).
Emergency Fund (aka Rainy Day Fund)
I know what you’re thinking. We’re still young (or at least young at heart) and there shouldn’t be a need for an emergency fund.
Let’s face it.
We’re not getting any younger and some of us have started families or are planning to and we NEED to plan for the future.
For those of you who are single, think of this as an extra layer of cushion just in case.
In case of what?
If you suddenly get injured while snowboarding down the slopes of Lake Tahoe or end up quitting a job that didn’t work out.
Either way, you will need an emergency fund as well. If the words “emergency” don’t really appeal to you, you can also consider this as a “I won’t have to work for 3-6 months” fund.
This is the first personal finance tip and arguably the MOST important.
So how much should be in this fund and where should this fund be?
Now the general consensus is 3-6 months of expenses you would normally need to pay if you didn’t have a job.
But I generally like to over prepare than under prepare so I lean more towards 6 months.
Plus, it takes most individuals about 6 months to get a new job/new source of income.
Here’s an easy tip to get this number without digging through your old receipts in a shoe box.
Download the MINT app and sync up your credit cards to the application.
Use the app to get a sense of what your average expenses are from the last 3-6 months are and then use that number as a ballpark.
There, now you have the number. Super easy right?
Now, the fun part. Playing the money saving game to fill up your emergency fund.
But first, open an account to save those funds.
Keep in mind, the emergency fund needs to be liquid or as close to cold, hard cash as it possibly can. Because again, it’s for an emergency.
What’s the point of having an emergency fund if you can’t pull out the money?
That’s like shooting yourself in the foot.
So, your choices are putting it into a CD account (with no penalty), savings account or money market account.
I picked these three options because it’s the closest you can get to liquid cash.
THAT or hide in a secret compartment in your couch. (Please don’t do that!)
Let’s break these accounts down so you can see why.
You need to be a little more careful if you end up choosing a CD account.
Because most CD accounts are for longer-term investments and the funds won’t be as easy to pull out.
You will face penalties if you do so.
So why is this type of account still on the list?
If you can find an account that offers flexibility on withdrawals irregardless of the maturity date for the CD account, then by all means, open the CD!
Because a CD account offers more interest than your typical bank’s savings account. Usually a 100 TIMES MORE.
You’re talking about at least a 1.15% interest account versus a measly 0.01% interest savings account.
And the reason why you would want these funds in an interest account is because IF YOU ARE NOT USING THEM, they should be working to EARN you MONEY.
If these funds, again 3-6 of expenses are just sitting in an account that doesn’t earn you money then it’s a waste of resources.
But hey, you just told me this is the most important personal finance tip.
Hold on, it’s still important.
I’m just saying you could be missing out on interest if these funds were in your other accounts (ie. savings).
So put these funds to work wherever they are.
Okay, okay. You’ve convinced me. Where can I find a NO penalty CD?
The first one that comes to mind is Ally Bank’s No Penalty CD account.
Ally Bank is an internet bank that is easy to use and easy to set-up. For all of you millennials out there who are super savvy with computers and the internet.
It should be a breeze to open an account in minutes.
Don’t want to deal with CDs? You have another option and I’m pretty sure you’re familiar with it.
Savings Account/Money Market Account
These two accounts are pretty similar. But money market accounts usually have higher rates AND they allow check writing.
Because these accounts are similar to a mix of savings and checking accounts. Think of it as a hybrid account.
That being said, there are some savings accounts with higher interest rates than money market accounts. Like internet banks.
But either one of these will give you MORE interest than any other brick and mortar bank with an interest rate of 0.01%.
So please, do yourself a favor and put your emergency fund in ONE of the THREE accounts I’ve listed above.
Alright, so by now, you have an account ready to drop in your emergency funds.
Auto-Deduction is YOUR Best Friend in Personal Finance
Most people don’t like personal finance because it’s too much of a hassle or they weren’t taught how to manage their finances.
So here’s another tip to make it easy.
The BEST way to build your emergency fund is set-up automatic withdrawal from the account that your direct deposit drops into. Ie. whichever account your paycheck drops into.
This could be either your savings account OR checking account.
It doesn’t matter.
The important thing is to have this deduction set up. So it’s a set and forget it schedule.
If you don’t think about this money, chances are you won’t miss it and you won’t spend it.
A lot of our favorite subscriptions use this business model. Ahem, Netflix, Amazon, your GYM membership, etc.
Auto-deductions on your credit card? No problem!
But here, it’s setting up the transfer of funds to an account that will grow and serve as your emergency fund.
Put it in a weekly or biweekly schedule (dependent on how often you get paid). AND, ideally, the same day as your payroll day.
Otherwise you may change your mind.
Recall that you estimated a number from the MINT app for your emergency fund. This is the end goal.
So take this number and if you’re really aggressive about saving this amount, divide it by 12 weeks to get the number needed for auto-deduction.
Set it up and watch your emergency fund grow!
Now let’s move onto to the next housekeeping item of your personal finance.
It’s called planning for your retirement.
I don’t know about you but I am highly doubtful that social security will be available when I am ready to retire.
Which is going to come around in about 30 years or so? Phew, I still have some time!
Seeing my parents get their retirement funds each month and looking at how much it actually is worries me a LOT.
And just so you know, it’s not much.
I am pretty sure most people cannot just live off of social security so you cannot have all your eggs in just one basket.
So even if in the odd chance I get some social security benefits, I plan on using my retirement account to supplement it.
Or just have most of my retirement money come from my retirement account.
Thankfully, TIME IS ON MY SIDE and YOURS.
There’s a lot of time between now and until I retire so I can use it to my advantage to start saving for retirement early.
If you don’t have a retirement account yet, open one NOW.
Take action now because there are no medicines for regrets.
The sooner you have it open, the less you need to contribute to get caught up to where you actually should be. And in case you are wondering where you should be, there’s a neat retirement calculator you can use.
Shocked? I hope so. (Turn on the adjustment for inflation for additional enlightenment as well.)
There’s nothing more that triggers action than a nifty calculator to tell you that you are not on track.
Well-known Retirement Accounts
There are generally two types of “buckets” that you can open for your retirement account outside of work.
You may have heard of ROTH IRAs or TRADITIONAL IRAs. I personally have a ROTH IRA but you can’t go wrong with opening up either one.
IRA stands for Individual Retirement Account.
I made the below image to highlight the KEY differences between the two.
And you can pretty much open these accounts with a bank or a stock broker depending on what you want to do with these stocks.
But note that BOTH of these accounts are subject to the contribution limits that the IRA imposes each year.
For 2019, the maximum amount you can contribute to either one of these accounts is $6,000.
IRAs Opened at a Bank
To be completely honest, your options are pretty limited. You will still have the power of compounded interest of course.
But the options are either CDs (Certificate of Deposits) or an interest account.
So if you are afraid to take risk then opening an IRA at a bank is pretty easy and safe. Set-up an automatic contribution schedule and you are good to go.
IRAs Opened at a Stock Broker
BUT if you are looking to maximize your IRA for the long-term then you should consider opening your IRA at a stock broker.
Some of the more common ones are Vanguard, Fidelity, T Rowe Price and Charles Schwab.
Which one do I use?
I use Vanguard and have been using them for at least 5+ years. They have a variety of options to put your money in and the mutual funds are relatively low-cost.
You wouldn’t want the profits of your investments to be eaten up by costs would you?
I’m referring to maintenance costs and account fees. Vanguard doesn’t charge account fees but there are management fees for the funds you invest in. Like around 0.15% or so.
Compared to their competitors, they have one of the lowest fees.
So if you do want to start with Vanguard, one of their starter funds is the STAR mutual fund which involves securities that are a mix of low-risk and somewhat risky stocks.
It is a good one to start with and the initial funding for the account is $1,000. (To put this amount in perspective, it’s almost 3 months of Starbuck runs if you drink Starbucks each day.)
This is the one I started with before readjusting my level of risk and rewards.
And I have recommended it to my friends and family even though I don’t get any rewards for doing so.
But if this fund is too confusing, then Vanguard (and many other brokers) also offers something called a target fund.
Where you set the year you expect to retire and buy the fund with that expected retirement date.
So for me, if I am expecting to retire in year 2049 then I will buy the Vanguard Retirement fund 2049.
And the neat thing is the fund itself adjusts automatically as you get closer to your retirement year.
What do I mean by this?
Usually, if you get closer to retirement, you are expected to draw out funds so the funds should be put into securities that are a lot less volatile.
So when you initially buy the retirement fund, it has securities in it which is a lot more volatile (more risk more reward) and then it changes each year.
Courtesy of the manager at Vanguard managing the fund. aka Fund Manager
How much should I contribute to an IRA?
It’s pretty straightforward as there is a limit imposed by the IRS (Internal Revenue Service).
For 2019, you can contribute no more than 6k.
Any more than this amount will put you at risk for penalties.
Goal: aim to max out your IRA each year before moving on to the investment strategies.
Which can help with growing your money.
But wait! There’s OTHER ways to save for retirement. Which I touch upon here (for some additional reading!).
Continuing on to the next tip!
If you’ve read this far, you can see that the first two steps in managing your personal finance revolves around saving money.
And the last step is not that much different.
At this stage, you have an emergency fund for any rainy day and a retirement account for future retirement uses.
Now what is this account for?
It’s to help with growing your money even further. As you saw from the retirement calculator I mentioned before, it will take a LOT of money to retired comfortably.
And that can be scary.
But what you can do is put away money in areas where it can grow on its own without too much of your involvement.
The last thing you need is to be in retirement and have to worry where your money is coming from.
Think of it as growing your own personal money tree (and it starts with a seed).
Who says money doesn’t grow on trees?
Well not in the literal sense but I hope you get what I mean. =)
What types of Investment Accounts?
It really depends on what your risk tolerance level is. To play it safe, you can put this extra money into additional CDs.
If you like the potential of the stock market but don’t like the risks, there are dividend stocks.
Like Apple (AAPL), Starbucks (SBUX), AT&T (T) and many others. These stocks pay out dividends (similar to interest) tied to how many shares you own.
You could use the dividends to purchase more shares of the stock or have it paid out in cash.
There’s also the stock market indices like the S&P500.
Any one of these will yield more than your typical savings accounts.
You can also be creative and mix it up a little so again you don’t put all of your eggs in one basket.
Note that if you got to this stage, this is just extra.
Because at this point, you have an emergency fund and you have something for retirement.
Feel proud of yourself because most people struggle with just these personal finance issues every day.
But if you need a little more help, sign up for my FREE Financial Coaching! I’m here to help you get started on your personal finances.
Where are you with your personal finance? And what are you currently struggling with?