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Modern education has so many gaps, one of which is that the concept of financial literacy gets completely glossed over. Of course, you’re expected to name all six wives of Henry VIII, but when it comes to the amount of money you should keep in your emergency funds or budgeting, it seems like modern education has nothing to offer.
Fortunately, in the internet age, you have infinite pools of knowledge to dip into. With that in mind, here are the top 10 essential personal finance tips millennials should hear as soon as possible.
1. Learn how to create a budget and stick to it
It’s completely irrelevant how much money you’re making if you don’t know how to spend it properly. You see, some people know how to control their expenses, and no income’s so high that you won’t be able to spend it if you’re reckless enough.
In his book Rich Dad, Poor Dad, Robert Kiyosaki talks about the importance of understanding the difference between assets and liabilities as a key to reaching real affluence. Proper budgeting is how you get in control of these liabilities and understand them a lot better.
2. Avoid debt
The first thing you should do with the surplus in your budget is pay off your debt. Sure, there’s nothing inherently wrong with debt, it’s just that, as a layman and someone just entering the world of financial literacy, you probably have no clue how to use it the right way.
Start by paying off your credit card debt and covering any other loans that you may have already taken. This will also boost your credit score and allow you to get a better deal when you need a loan – like to get your own home (and stop paying rent) or get a car.
3. Invest your surplus
Another thing you can learn from Kiyosaki is that dormant money is a wasted opportunity. To him, every dollar you own is a worker grinding toward buying you a new Ferrari. The thing is that if you invest money, you have the potential to passively grow your assets without actively having to work toward this goal.
The critical thing lies in understanding where to invest. Ideally, you would start by reading a bit on the subject and trying to get in touch with professionals. Following the market is bad; layperson investors usually chase their tails. You need someone who understands how these things work on your side.
4. Diversify your portfolio
Keeping all your investment money in a single asset is outright irresponsible. You want to find different asset types, most of which have a particularly low correlation. If one of them starts going down, the rest will not follow. This protects your investment money and ensures that at least some of your funds are going up.
The majority of your investment money should be in something safe. Can your S&P 500 investment go down by 95%? In theory, yes. But if this happens, the world is likely ending, so who cares. The rest of the money should go into commodities, real estate, and cryptocurrency. Speaking of which…
5. Educate yourself on cryptocurrency
Crypto is incredibly volatile. This is not good or bad; it’s just stating a fact. This high volatility means you have a higher chance of losing your assets. Still, there’s also an increased probability that you’ll have a low buy-in for an asset with the potential to grow in value drastically.
Imagine buying Bitcoin while it was still $1 or $10. You can’t go back in time, so you need to find crypto to invest in today. Start by educating yourself on the subject matter as best as possible. Investing without understanding the risks is just reckless, and it’s closer to gambling than investing.
6. Learn some investment strategies
While just investing is a good enough plan, you could do much better. For instance, if you could learn and apply an actual investment strategy – like dollar-cost averaging, you could stand to make your investments far more reliable. Some of the other strategies you want to consider are:
- Buy and hold
- Value investing
- Growth investing
- Income investing
Remember that the suitability of an investment strategy depends on your current investment goal. Each strategy has pros and cons, and none are guaranteed to work. The bottom line is that you should research and listen to advice before making up your mind.
7. Plan your life around big financial goals
Having a child, getting married, buying a house, etc., are not just major lifestyle decisions. They’re also major financial decisions; you need to plan around them. Sure, getting a house will help you avoid rent and get equity in one of the most essential assets in your life, but it’s also a 30-year-long financial commitment.
A wedding is costly, but being married may change how you pay taxes. The same goes for having a child. It’s great, but there are extra costs and events that you have to plan for years (even decades) in advance. So, the next time you have a big idea, approach this from both angles.
8. Have an emergency fund
A lot of debt spirals start with an emergency expense. You have one thing to pay for that you can’t afford right now, but your pay is just around the corner, so you go and get a payday loan, regardless of the fact it has 300-500% APR.
You can avoid all of this if you have an emergency fund. The amount of money in this fund dramatically varies, but there’s a consensus that you should have enough to cover your expenses for at least three months. Optimally, you should aim for nine months. This is one more reason you need to do budgeting first – to get this “monthly” amount that you’re striving for.
9. Start saving early
It doesn’t matter how little you can set aside; you must start investing as early as possible. Accounts like 401(k)s or IRAs are free money if you’re disciplined enough and start on time. The long-term value is incredible, but you cannot afford to be irresponsible about it.
Also, when your income starts growing, you’ll naturally feel the urge to increase your spending to improve your living standards. When you have money, you need to save it and use it wisely. This is when you need to start thinking about a savings fund, investments, and assets.
10. Passive income is a great idea.
While you’re young, you feel like you can easily take 2-3 jobs without breaking a sweat, but you only have so many hours in the day. Also, if you push this idea too far, your private life and work-life balance will suffer.
This is why you need to consider passive income as another great idea. Passive sources of income earn you money even when you’re asleep. While buying a rental property is probably the first thing that pops into mind, it’s not the only idea you have available.
Making money is just a part of leading a more affluent lifestyle
The bottom line is that you also need to know what to do with the money that you’re earning. The best part about the above-listed tips is that they’re scalable. No matter how much money you’re making, you an still benefit from applying these tips.
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