Personal Finance Tips for Millenials

saving and spending (Photo credit: 401(K) 2013)

According to a 2007 study by the American Psychological Association, 73% of those surveyed claimed money is a primary source of stress in their lives. But personal finances don’t have to be a formidable enemy to avoid. In fact, by making a few smart choices now, you can eliminate future financial burdens and alleviate stress. 

Reduce Debt 

Too often, millennials choose to celebrate landing that first job by making a large purchase. Before you rush out to buy a new car, know the difference between “good debt” and “bad debt.” According to Forbes.com, “good debt” is generally debt with a lower interest rate than the rate you could be earning by investing. For example, a home loan would commonly be considered “good debt,” while a car loan or credit card debt are more likely “bad debt.” 

If you already have debt from a credit card, car loan, or student loans, start by paying off the debt with the highest interest rate first. Top Ten Reviews suggests writing out a game plan for how and when you are going to pay off your debts. Pay off as much as possible, as quickly as possible. 

Start Saving 

Now Utilize a budget. Keep your spending under control and allocate a designated amount each month to your savings. A good strategy would be to have three types of savings funds. 

Emergency Fund 

According to U.S. News, in a stretch of hiring slowdowns, it is crucial to have an emergency fund to cover an unexpected period of unemployment.This fund should be enough to cover your living expenses for three to six months. 

Short Term Savings

• Planning on buying that new car after all? Want to take a weekend trip to Vegas? Minimize your debt by planning ahead and saving now. 
• Having a short term savings fund can give you the financial freedom to do the things you enjoy, without breaking the bank. Long Term Savings 
• When you’re in your twenties, “retirement” seems light-years away. However, being in your twenties is the best time to start saving for retirement, because of the power of compound interest. The earlier you start saving, the more interest you’ll earn! 
• If your employer sponsors a 401K plan, make sure you are taking advantage of this opportunity. In addition, consider opening a Roth IRA. The Roth IRA is especially a good option for someone at the early stages of their career, because once you exceed a certain level of income, you can no longer contribute. Essentially, with a Roth IRA, you can pay taxes now and avoid paying taxes on any future earnings from your investment. 
•  Consider a Target-Date Retirement Fund. Not only do these funds typically have low expense ratios, but they eliminate the added work load of trying to manage your portfolio yourself. These funds are fully diversified and managed by investing professionals. As you approach your target retirement date, the fund will automatically become more conservative. 
• It’s important to remember that withdrawing early from a 401K or an IRA will have significant financial penalties. This is why it is important to have your emergency fund and a short term savings fund; do not tap into your long-term savings. 

Put Your Technology to Work 

Today, there are so many resources available to help get your finances under control. For example, Mint.com is a great tool to monitor your budget and track your spending – and the smartphone app is both fun and user-friendly. Another example would be using annualcreditreport.com or Credit Karma to watch your credit score and prevent identity theft. 

Make your life easier by setting up automatic payments. Find out if your employer offers automatic paycheck deductions for your 401K. In addition, most banks allow you to set-up automatic scheduled transfers. Make your finances your first priority by scheduling an automatic transfer into your savings account. Pay yourself first. You can also set up automatic payments to pay off your student loans and pay your monthly bills. Automatic bank drafts ensure that you always pay on time, thus avoiding any unnecessary late charges. 

Reigning in your finances can seem like a daunting task at first, but you can conquer your financial fears by managing your debt, maximizing your savings, and using technology to your advantage. 

Chris is a blogger for his blog The Financial Park. He is also a golf fanatic and loves to be outdoors. You can find him on Twitter @ChrisLindsey23.