The Ten Money Commandments for Millennials
A paradox of life: it takes hard work to make things look easy. Money is no exception. We all want to live in a financial utopia, but without building healthy habits and a strong foundation, it’s almost impossible. But where to begin?
Just learning how to get in good financial shape is difficult. We’re left sifting through trash media content, dodging scammy salespeople, and feeling overwhelmed by all the manufactured complexity. It’s exhausting and confusing. No wonder most young people give up and leave their finances in the hands of the money gods (or expensive “advisors”). But here’s the dirty little secret of personal finance: it doesn’t have to be complicated.
If you’re one of the millions of Millennials and Gen-Zers trying to map out your financial future or dig out of a hole, review these ten money commandments. Follow the path, then bask in the glow of financial bliss.
1. Spend less than you earn.
Living below your means is a cliché, but that doesn’t mean it’s wrong. In personal finance, making sure there is less money going out than coming in is half the battle. If you’re already doing this, congratulations, move onto the second commandment. If not, it’s time to cut back. Start with the biggest expenses first, like housing, cars, and vacations. Keep going downstream, eliminating costs, until you’re consistently spending less than you earn.
2. Pay off high-interest debt.
Nothing is free in this world, and that includes money. When you borrow it, there’s a cost. Sometimes that cost, the interest rate, is relatively low. Other times, it’s high: rates on car loans can easily reach 10%; credit cards 20% or more. Don’t let the percentage sign fool you, this is a very real and very high cost. It needs eliminated as quickly as possible. Start with the loan with the highest rate and pay it off aggressively. Then move on to the next-highest rate loan, and so on. Be ruthless.
3. Start an emergency fund.
Shit happens, so prepare for it. First, go through this exercise: If something happened where you didn’t have any income for a long period of time, how much would you need to fund your lifestyle? Be conservative and choose a timeframe longer than you think is probable and a spending rate slightly higher than you think is normal. Whatever the final calculation (for example: a nine month timeframe with monthly expenses of $4k, the goal is $36k), open an account and start saving toward that number.
4. Get the 401(k) company match.
This only applies to workers that have access to an employer-provided retirement plan that has a match. This setup allows for tax-deferred retirement savings (more on this below), plus a little bonus from your company (i.e., the “match”). Typically, it is capped at 3-10% of your salary, but can quickly add up to thousands of dollars. Even considering vesting schedules, not taking advantage of the company match is like throwing away free money.
5. Save in tax-advantaged accounts.
The key benefit for most retirement accounts are the tax advantages: By contributing to your own retirement savings, the government is willing to reduce your taxes, either now or when you eventually stop working. The most common retirement account is the 401(k), but there are several others, such as IRAs, Roth IRAs, SEPs, SIMPLEs, 403(b) plans, etc. And don’t forget the all-important HSA. Contribute as much money into these accounts as you can. Future You will graciously thank Current You.
6. Get insured.
For most people under 40, the two most important types of coverage are life insurance and disability insurance, which protect yourself and your family in case you die (life) or can’t work (disability). The first question to ask is, do I need insurance? If the answer is “yes” or “I’m not sure,” talk to a fee-only financial planner (not a commissioned salesperson). The key is to understand how much insurance you need and what you can afford. And remember, insurance is not meant to be an investment vehicle; it’s simply a risk mitigation strategy.
7. Pay off low-interest debt.
To keep the debt-reduction momentum going, start paying off loans with interest rates below about 10%, like student loans and car notes. Again, start with the highest-rate loans first. If your only debt is a mortgage, take some time to think about how you’d feel with a paid-off house versus more liquidity. There is no right answer here; choose what’s best for you. The goal is to create flexibility and peace of mind.
8. Save for life’s big purchases.
It's important to save for things like weddings, babies, and houses ahead of time. These can easily cost well into the five-figures, and sometimes six-figures, so ideally the cash is already set aside. Even if you don’t have plans for marriage, kids, or a mortgage, it’s best to open a savings account and begin adding extra cash on a regular basis. A pile of cash is a pile of options.
9. Create savings buckets.
It seems obvious to start saving for a vacation 6-12 months ahead of time, so why don’t we do that for our other large, fun expenses like golf lessons, concert tickets, eating out, online courses, etc. Rather than pay for these activities as part of monthly spending, it’s better to set aside the cash incrementally, ahead of time. Open an account at an online bank, create a few different savings buckets, and add money to them whenever you can. You’ll be able to freely spend on the things you love to do.
10. Sit back and relax.
Money is stressful, but don't forget to enjoy it. Figure out what truly makes you happy and go H.A.M. You put in the hard work. Now it’s time to rest easy.
If you have any questions along the way, don’t hesitate to get in touch.
Devin Faddoul, CFP® is the founder of Adda Financial | Outsource your financial life. Focus on your real life.