It’s Never Too Late to Get Financially Fit (Part 2 of 2)

In Part One of our getting “Financially Fit” series to celebrate March being National Credit Education Month, we looked at the fundamentals of personal finance that should be a bare minimum of financial knowledge for everyone. Especially when it comes to their credit. In Part Two, we’ll discuss why Millennials and their families are having an especially hard time today, along with five tricks you can start using today to get financially fit.  

Millennials and Gen Z come out of college with a degree … and a ton of student debt

A recent Bankrate survey shows that the current $1.5 trillion of student loan debt is becoming a heavier burden than many young people can bear. Personal finance writer, Kelly Anne Smith, discusses the more sobering numbers from the survey:

“In total, 31 percent of Americans say they currently have or have had student loan debt stemming from their own education. An additional 13 percent of American adults financed another family member’s school expenses through student loans.

Among respondents who have had or currently have student loan debt for their own education:

• 34 percent of respondents say they are delaying building their emergency savings.
• 29 percent are delaying saving for retirement.
• 27 percent are putting off paying other forms of debt, including credit cards.”

The problem with this, of course, is that many young people haven’t developed sound financial know-how and college is prime territory for predatory credit card companies that take advantage. They offer credit to college-aged kids that seem like good deals, but often become a gigantic burden down the line. So not only do these kids graduate with tons of student loan debt, but crippling credit card debt as well. And, as you can see from Smith’s article above, nearly one-in-three are putting off paying down credit cards.

At best, some of them make minimum payments on their cards, which eliminates the bad damage late payments can have on their credit score. However, the high interest paid each month swallows up the minimum payment made, and the balance just keeps rising.

What else should I know about my finances?

So, what can you do if you have a ton of debt from loans and credit cards? The first thing to do is to not panic. There are literally tens of millions of Americans in the same boat as you and many are worse off. Second, create a workable budget and stick to it. (Stop rolling your eyes at me, Sparky … you wanna get out of debt or not?)

Here are five things I encourage everyone to remember when it comes to personal finances

1. It’s not about how much you make, it’s about how much you save

I had a friend that made a six-figure salary for more than 15 years in his job but when he passed away unexpectedly at age 48, he died in debt. His life insurance didn’t last his family one year after covering all his expenses and debts. Conversely, a woman I graduated college with has worked at non-profits her whole life and has probably never made more than $60,000 in salary. She has saved money well and put three children through college. She and her husband (just a normal blue-collar guy that spent his life at a Ford plant) will retire in a couple years when they are 60 years old and have enough money saved to travel throughout their retirement.

Don’t obsess about what you DON’T have and concentrate on what you do have.

2. Build up enough cash on hand to cover yourself

According to financial experts, many Americans couldn’t easily come up with $500 in cash for an emergency if it happened today. Part of saving money means having a balance between cash you invest, and cash you keep on hand. A good rule of thumb is to always have at least 3 months of living expenses on hand. Personally, I prefer 6–12 months.

Don’t look at it as you need to have the whole amount today, next week, or even next month. Start saving whatever amount you can today in your “Emergency Account” and never, ever, ever touch it for anything but an emergency. And no, pizza cravings are never considered emergencies.

3. Tax your side gigs the right way

I’ve worked as a freelance writer for years and my late sister, the CPA, suggested using a 50/25/25 model to make sure I had enough money to pay taxes every year. I tax all of my freelance income at 50 percent (meaning I put half of everything I make on my side gigs away in an account to pay taxes with at the end of the year). I put half of the remaining 50 percent into savings and the last half goes to living expenses. So that means for every $100 I make, I put $50 away for taxes, $25 into savings, and leave $25 to use as income I can spend on living expenses, travel, restaurants, etc.

After I pay my taxes, any money left over goes into savings. Easy peasy.

4. Saving even a little bit eventually turns into a lot

While you can start saving money at any age, this goes especially for you young Millennials and Gen-Z workers. Regardless of how much money you make, you should work to save and build a financial foundation. It’s one of those things that seems impossible or even insignificant when you aren’t earning very much, but you must continuously remind yourself that small steps really do add up.

The Motley Fool has a terrific article that shows the power of saving as little as $10 per week can have over the long term. Say you start putting away $10 per week on your 22^nd birthday. Using some assumptions for normal financial trends that they spell out in the article, here’s what their finance calculator came up with.

The average American household brings home about $1,000 per week, meaning setting aside $10 is basically one percent of household income. Yet, setting aside $10 per week over 45 years will yield $165,776 by the time you turn 67 years old.

Here's what would happen if you began increasing the weekly savings rate:

• At $20 per week you'd have $331,553 by age 67
• At $40 per week you'd have $663,105 by age 67
• At $50 per week you'd have $828,882 by age 67
• At $100 per week you'd have $1,657,765 by age 67

These calculations consider the historical average rate of return of investing in stocks with dividend reinvestment. You may do even better if you choose to invest in individual stocks as opposed to index funds.

Furthermore, if you add just five additional years (i.e., you save and invest for 50 years instead of 45) to the above saving and investing example, the returns really skyrocket. Here's what you'd have after 50 years of saving and investing using the same weekly contributions as the prior example:

• At $10 per week: $238,351
• At $20 per week: $476,702
• At $40 per week: $953,404
• At $50 per week: $1,191,755
• At $100 per week: $2,383,509

The first few months of saving are always the hardest. But after about a year of cultivating the habit, your mindset completely changes, and you’ll realize the value of saving over the long term.

5. Spend time around people who are smart with their money

When you’re starting your path to financial security, you probably won’t have much money to save or invest. Which means you want to be smart with the money you do have. If you hang around people that blow their money, chances are, you will too. They’ll lure you into that mindset of “Oh, they only want to go to the bar this ONE time and it’s been a really long week, so I deserve this.” Then, after a couple rounds of drinks, an appetizer or two and that delicious plate of chicken wings, you’ve dropped $50. Oops ….  

Find friends, family, co-workers or mentors that can help you learn to live within your means. Most of them will be happy to share their knowledge (and the mistakes they made) with you. Take a course at the local community college about personal finance so it won’t be such a scary mystery. When you get to a certain point, find a personal accountant or financial consultant to help out.

Getting out of debt and not worrying about how you’re going to pay your bills is the greatest feeling in the world for most people. No matter what your situation is today, you can get there too.