7 Basics to Personal Finance – Millennial & Gen X Edition

The decade kicks off with continued economic predicaments in areas such as the wealth gap, student loan bubble, the affordable housing crisis, and wage limitations. These major talking points in modern society play a crucial role in the current state of the millennial and gen X generations financial prosperity and outlook for the future.

Although these outside influences have an effect on daily living to a certain degree, there are more sensible paths to take regarding financial responsibility. This blog will highlight 7 important areas of personal finance that every millennial and gen X-er should consider no matter what stage in life you are in.

1. Evaluate Your Debt Choices

This concept is especially important for the generations whom this blog post is tailored for. Millennial and gen X generations still await a great many financial decisions for the good or bad in their lifetime, therefore implementing this rule is critical. Evaluating your debt choices simply means evaluating the cost vs. benefit of any financial decision that puts you in debt. As someone with banking experience I understand how easy and tempting it can be to make these decisions without calculating the reward or return, however debt will keep you financially stuck due to interest rates overtime.

A large portion of this demographic took out student loans, which many are finding difficult to match jobs within their salary requirements when the loan payments begin. Furthermore, student loan forgiveness is not a viable option for the everyday college graduate by any means. These governmental programs will be debated for years but won’t apply to most people anytime soon.

If you must take out a loan or line of credit then ensure the return is a worthwhile investment, and don’t make it a habit. Also it is helpful to leverage equity in your home before accruing a high credit card balance where interest rates are around 24%-26%. Living below your means is always spoken of because it holds such importance to your financial future.

2. Open a Roth IRA Account

I’m sure the statement “Begin saving early to retire with confidence” or something along those lines has registered with you at some point in your career. Although it most likely didn’t stem from an educational setting, as schools often don’t teach personal finance. A Roth IRA is a form of an individual retirement account offering tax-deferred withdrawals upon age 59 1/2. Monthly contributions will provide for dividend returns and compound interest over time, setting you up your entire life for a stress free retirement.

The important factor to keep in mind when considering your recurring contributions is your overall financial picture. It is more difficult to contribute to the Roth IRA account if you are in debt or in need of cash. The penalty for early withdraw on Roth IRAs are around 10%. If you have read this far I would advise you to schedule an appointment with your bank as soon as possible. Every day you don’t invest in to your future is money lost in retirement.

3. Pay Yourself First

This is becoming an increasingly popular financial concept, and one that I learned years ago through my father’s advice, which I then rediscovered in Robert Kyiosaki’s book “Rich Dad Poor Dad”.

The concept actually describes the process of how it works, you literally pay yourself first. Think about it, you are required by law to abide by tax deductions from your paycheck where a small portion of the revenue goes to the government first. Then typically individuals first payment is to monthly mortgage or rent for housing. Only after basic needs and necessity costs are you able to ‘pay yourself’ and by this point most individuals have run out of income to spend.

Instead set aside a small percentage of income to a savings account before ‘paying others’ such as your needs based costs. This will require strategy as you will discover it is much more realistic to have this automatically done for you through paycheck deductions in to a 401k or Roth IRA.

4. Closely Monitor Expenses

This is the most difficult to stick to and constantly changing process that is more difficult than it sounds. A very detail oriented task is to closely monitor and evaluate your expenses other than necessities. Do you regularly evaluate your monthly bank statement expenses to ensure you aren’t unnecessarily losing money each month? This is a basic principle to adopt when managing your expenses. This step works in the long-term with step #1 in managing your debt.

Every unnecessary expense is an investment opportunity squandered. This is an economics 101 term called ‘opportunity cost’. For example, if you spend $30/month for a gym you don’t use often, that’s $30 a month you could be investing in your retirement account. Over time that $30 invested gains returns and dividends helping you retire with greater funds. Therefore an expense as innocuous as a gym membership could be costing you thousands of dollars in the long run in opportunity cost. Another example is opening free checking accounts with no minimum monthly fees, and considering your overdraft options.

5. Stick to Overdraft Free Bank Accounts

More online banking institutions are gravitating toward grace periods or eliminating overdraft fees in total. A few examples of theses are chime, ally, and axos. Typically overdraft fees for standard checking accounts are around $34 when your bank account goes below the available threshold. This concept is similar to an interest rate on a credit card which goes in to play when you spend more of your available credit, in this case when you spend more than you have available in your checking account.

In time I’m sure that most banks will have eliminated the infamous overdraft fee, otherwise brick and mortar banks will continue to close at rapid pace. Nonetheless you have the option to avoid them right now. If you already have a bank account with these fees, at least ensure you opt-out of automatic overdraft options.

I’ve seen unfortunate scenarios where consumers have had their checking account transferred to collections for a payment plan. This will damage your credit and prove it tough to get a favorable interest rate on mortgages, personal loans, auto loans, etc.

6. Create Multiple Streams of Income

This is a core principle of my personal finance & Investing, along with one of Michael Moran’s founding values. Providing value in various areas of life and business is a key challenge to pursue in growing yourself and your business. Robert Kiyosaki taught me this principle in his book “Multiple Streams of Income”.

This process is essential to provide yourself stability and freedom through cash flow, allowing for a more diverse revenue stream protecting from singular threats and liabilities surrounding your main source of income. This philosophy has also proven to mathematically provide financial freedom in the long run so long as the revenue streams are viable.

7. Automate Your Plan

Automating your financial plan is crucial to staying disciplined and on track. I strongly recommend signing up for monthly paycheck deductions, including direct deposit split savings options to place a certain percentage away in another account for savings. Utilizing this feature will automatically aid to your long-term plan because this process happens whether you login to your bank account or not.

It is prohibitive toward your plan to ‘give yourself a choice’ in sticking to your plan and putting away 10% for savings. Don’t allow yourself to make a choice regarding your financial plan. The best route is to craft a realistic plan, make it automatic and continue living worry free. Read more on the importance of making your financial plan automatic in the book “Automatic Millionaire” written by David Bach.

Trust the process!

Michael Moran

Managing Partner at IHG Management

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