Updated October 8, 2023
Mike Zaccardi, CFA, CMT
Young savers and investors are faced with so many challenges these days. The rising cost of living has hit millennials and Gen Z particularly hard, but there are several quick wins you can take advantage of now that will set you up for financial freedom down the road. With a bit of planning and a dash of commitment, financial independence can come quicker than you think.
1. Create a budget (don’t worry - it's not what you think)
Let’s be real. Only finance nerds and those with too much free time actually keep a meticulous budget of all income and expenses along with a forecast of what they think the future holds for their cash flows. You don’t have to do that. If you really want to get in the weeds, by all means, take advantage of all the personal finance tracking apps (hint: Allio’s Holistic View) or just use an old-school spreadsheet.
At Allio, we realize that folks are busy! There are simply not enough hours in the week to keep receipts and analyze every which way cash is moving in your life.
But here’s what you can do: just jot down ballpark numbers of what your take-home pay amounts to each month along with expense buckets. The whole idea here is just to lay the groundwork for what your best next steps will be to get right with your money.
For example, if you find that you have a big-time monthly deficit, then tackling high-interest-rate debt may be priority one. But if you (and maybe your partner) are solidly in the green each month, then you can be on the offense by optimizing your investments. You see what we’re getting at here? It’s not so much about creating a budget, but more so about game planning your next money move. This is like your financial foundation. Now, let’s start building a solid homestead.
2. Snatch the 401(k) match
Investing heavily through your employer’s 401(k) plan is not for everyone, but it’s usually a savvy move to contribute up to the level at which your company will toss in money on your behalf. Commonly, that means you should put in 6% of your pay, and your employer will match 3% of their own (making a total of 9%). It is important to review the plan’s vesting policy (which is how long you have to be employed with the firm before you can keep the matching contributions). If it’s a long vesting schedule (say, five years), then bypassing the 401(k) altogether might be warranted.
One more thing on this topic: if you are in your early career, consider making “Roth” 401(k) contributions that are done on an after-tax basis. That means you’d be paying taxes today at a relatively low rate so that the account can grow tax-free forever.
3. Build a small emergency fund or rainy-day account
Whether you are a seasoned pro with your finances or are just starting out and saddled with student loan debt, having an emergency fund of a month’s worth of expenses in cash or an account that can be easily accessed is key to long-term risk management. The last thing you want to have happen is to encounter something like a sudden job loss, a significant health scare, or some other financial folly that throws your whole financial life into a tailspin.
An emergency fund of cash can earn a decent interest rate today and you can protect yourself from unexpected setbacks at the same time. Honestly, it’s kind of a win-win situation right now. If you build such a fund, allocate a portion of your income every month to a dedicated account (be sure it earns a decent and safe interest rate). If you can, increase your contribution percentage each month until you hit a long-term target of three to six months’ worth of expenses set aside.
4. Defeat debt (but do so strategically)
We saw some shocking numbers just recently on how much debt consumers have accumulated as well as what the average rate is on what folks owe on credit cards (like 20%-plus). While not all debt is bad, you absolutely want to rid yourself of credit card debt that has a rate of 10% or more. This is where financial priorities become unique to you - no one set of steps meets each person’s situation.
For instance, if you carry a credit card balance with a rate of 25%, that should be your first priority on your financial security to-do list. On the flip side, if you have a mortgage at 3%, hold on to that like gold and do not pay it off any quicker than you must. What's more, if you have student loan debt that could be forgiven at some point in the future, don’t be so fast to erase that from your personal ledger either.
5. Top off your emergency fund and/or pay down other debt
Earlier, we mentioned that maintaining a cash cushion helps to avoid money pitfalls that can crop up. But for young people, it’s simply not realistic to build an emergency fund that has six months’ worth of expenses carved out. Once you’ve accomplished the steps listed, then you can home in on beefing up your emergency fund.
Applying the same logic, suppose you or your partner have debt with a 7% interest rate. That’s not terrible and it’s certainly nothing to lose sleep over. Still, if you are able to invest in your 401(k), have already rid yourself of super-high-rate debt, and built up a decent rainy day fund, then go ahead and work toward knocking out that amount owed. You can apply what’s known as the snowball method or avalanche tactic.
6. Open and fund a Roth IRA and check if you have access to an HSA
Individual Retirement Accounts (IRAs) are tax-advantaged investment accounts that can turbo-charge your ride to financial independence. Similar to how a Roth 401(k) works, you contribute cash to the account, invest in it throughout the year, and can then watch it grow tax-free forever. You can withdraw your contributions whenever you want (tax-free and penalty-free). IRAs are something you open and fund on your own whereas a 401(k) is done through your job.
This is a bit of a bonus, but if your employer offers a Health Savings Account (HSA), definitely look into contributing to that. Many companies offer a matching feature on your HSA like how they might with a 401(k). HSA is a “triple-tax-advantaged account,” and money in an HSA can be used to pay for qualifying health-related expenses, but you can also simply treat the account like an IRA and pay for healthcare costs out of pocket (just be sure to keep your receipts for when you ‘reimburse’ yourself in the future).
7. Invest in yourself
We aren’t talking necessarily about learning new skills, going after an MBA, or becoming an ultra-brainiac in your field with this step. While those are all great things, millennials and Gen Z are increasingly mentally stressed. Anxiety is higher than ever, and the mental health crisis among young people seems to get worse each year. Investing in yourself might mean seeking emotional and psychological help when needed. You simply cannot have financial security if your mental health is not strong. Investing in self-care might be the highest ROI of all.
The Bottom Line
You are just a few steps away from financial security. Money issues can be daunting - we get it. But long-term confidence with your money is earned not with some life-altering mindset or set of actions, but just one step at a time. Financial issues are key, but so too are taking advantage of your talents, upgrading your skills, living within your means, and seeking both money and mental support as needed. Building financial security takes time, but soon you’ll be on the path to financial freedom.
Allio’s mission is for everyone to enjoy financial wellness. You can get started today by downloading the app and automating your investing strategy with Allio.
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