For many Millennials, personal finance can be hard to understand most often because they lack basic education of the topic. There aren't personal finance classes in high school, college or business school that taught them the basics of financial literacy. It's understandable that they might be lost. Personal finance should be easy to understand, so it's easy to succeed. In order to succeed, Millennials need to understand their personal financial situation and some basic personal finance concepts in order to develop better habits.
Here are five personal finance basics for Millennials.
1. Set Goals
Think about what your short and long-term goals are. For some Millennials, experiences may be more important than saving for things such a home or retirement. Your goals can be whatever you would like them to be, but you must identify, quantify and prioritize them. Think about weighing your short-term goals more heavily than long term. You have more time than your parents do to achieve your goals. (For more from this author, see: Savings Options for the Self-Employed Millennial.)
2. Master Cash Flow
Spend some time with your cash flow to get a handle on monthly expenses including student loan debt, credit card bills and other obligations. You will need to have a plan for these before you can move on. Create your budget and see if you can stick to it for three to six months. By understanding your cash flow, you can be disciplined so that when extra income comes in, you can afford to save it towards your goals.
3. Build Emergency Savings
Having an emergency fund that can cover three to six months of living expenses is essential. Life happens. If you lose your job or a medical need arises that emergency fund will come in handy. You don’t want to be caught off guard and not be able to come up with needed funds.
4. Save for Goals
If you have mastered those steps, you can move on to saving for your goals. Some short-term goals may require money to be kept on hand in cash if you can’t afford to take a risk on that money. But long term goals, such as retirement, require taking some risk. Even if you can’t save much in a retirement account, something is better than nothing. And if your employer provides a match, try to contribute enough to get that free money. You have lots of time before retirement so by starting to save now, you can take advantage of compounding to grow your assets. If your employer doesn’t offer a plan, there are ways to save on your own through individual retirement accounts (IRAs) or Roth IRAs.
5. Find Consistency
It’s up to you to determine what your goals are and how you are going to save for them, but you must be in control of your money. Build good money habits now that will grow with you as life gets more complicated, and it will. Marriage, a home and kids can all make managing your personal finances more complicated but if you established good habits in your 20s, then it will be easier to maintain them. As you advance in your career or work a side hustle, you will also be able to put aside more money towards those big goals.
Understanding personal finances and developing good habits is key to Millennials successfully managing money in the short and long term. (For more from this author, see: Retirement Planning for Millennials Now.)