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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Time is on your side--smart money management for Millennials Smart is the New Rich: Money Guide for Millennials is an interactive, step-by-step guide to all things money. From credit, student debt, savings, investing, taxes, and mortgages, CNN's chief business correspondent Christine Romans shows this newest generation of earners how to build wealth. You'll learn the old-fashioned approach that leads to a healthier financial lifestyle, and open the door on a straightforward conversation about earning, saving, spending, growing, and protecting your money. You'll learn how to invest in the stock market or buy a home, even if you are still paying off student loan debt. Romans offers expert insight on the "New Normal," and why the rules of the credit bubble--the one you were raised in--no longer apply. Checklists and quizzes help solidify your understanding, and pave the way for you to start putting these new skills into action. For thirty years, the financial rules for life revolved around abundant credit at the ready. A quick look around makes it obvious that those rules no longer work, and Millennials just now coming of age and entering the workforce need a new plan to build a solid financial foundation and healthy money habits. This book puts you on the right track, with step-by-step help and expert guidance. * Learn what you should ask yourself before spending any money * Revisit some old money rules that are actually good habits * See simple rules for managing student debt * Learn how to talk about money with friends, dates, and parents * Find out what makes a Millennial successful in the workforce The economy is out of recession and growing, but many young people feel left out of the recovery. It's why smart spending, saving, and debt management is so critical right now for them. A smart money plan is no longer a "nice to have" extra, it's mandatory. Smart is the New Rich: Money Guide for Millennials is your guide on how to use time and some good money manners to build wealth.
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Veröffentlichungsjahr: 2015
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Table of Contents
Title Page
Copyright
Dedication
Preface
Acknowledgments
Chapter 1: How to Think About Money: Budgeting Basics
Pay Yourself First
How Much Should You Save?
The Rainy-Day Fund
Roadblocks to Money Success
The Holiday Red Flag
Your Money Quiz
Chapter 1 Action Plan
Notes
Chapter 2: College Investment
The Million-Dollar Payoff
It's Cheaper to Save Than Borrow
Four Ways to Keep College Costs Down
What Do You Want to Be When You Grow Up?
Not All Degrees Are Equal
Chapter 2 Action Plan
Notes
Chapter 3: Managing Debt
Paying Off the Debt
Interest Rate Triage
A Safety Net for Low-Income Grads
Public Service Loan Forgiveness
Live Like a Student
Chapter 3 Action Plan
Notes
Chapter 4: Job Market Fundamentals
The Long Healing Process
Fastest-Growing States
The College Degree Advantage
Chapter 4 Action Plan
Notes
Chapter 5: Millennials at Work
Resume #fail
You've Got Two Minutes
The Hidden Jobs Market
Don't Call Them Soft Skills
Keep Your Eye on the Ball
Lean In or Lean Back
Online Tools to Help Set You Apart
Chapter 5 Action Plan
Notes
Chapter 6: House Money
Missing the Real Estate ReboundSo Far
Generation Renter
Get Ready to Buy
Mortgage Rates
Location, Location, Location
Affordability
Living at Home
Chapter 6 Action Plan
Notes
Chapter 7: Family Money
Dating and Money
The “Talk”
What Kind of Debt?
Piggy Bank Parents
Friends and Finances
Crowdfund Our Wedding
Chapter 7 Action Plan
Notes
Chapter 8: Understanding Investments
Getting Started: Tax-Advantaged Retirement Accounts
Time
Is a Four-Letter Word
No 401(K)? Invest Anyway
Building Blocks
Chapter 8 Action Plan
Notes
Chapter 9: Credit Karma
Debit Cards
Overdraft Protection
So You Want a Credit Card?
What Is the Credit Score?
Expensive Credit Monitoring
What Is the Fed?
Time to Buy a Car
Chapter 9 Action Plan
Notes
Appendix A: Web Resources
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Appendix B: Cover Letters: The Good, the Bad, and the Ugly
Appendix C: PayScale 2014–2015 College Salary Report
About the Author
Index
End User License Agreement
Pages
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Guide
Cover
Table of Contents
Preface
Begin Reading
List of Illustrations
Figure 1.1
Figure 2.1
Figure 4.1
Figure 4.2
Figure 5.1
Figure 8.1
List of Tables
Table 1.1
Table 1.2
Table 1.3
Table 2.1
Table 2.2
Table 2.3
Table 2.4
Table 2.5
Table 2.6
Table 4.1
Table 5.1
Table 5.2
Table 6.1
Table 6.2
Table 6.3
Table 6.4
Table 6.5
Table 8.1
Table C.1
Table C.2
Smart is the New Rich
Money Guide for Millennials
CHRISTINE ROMANS
Cover image: © CNN
Cover design: Wiley
Copyright © 2015 by Christine Romans. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data is on file.
ISBN 9781118949351 (Hardcover)
ISBN 9781118949375 (ePDF)
ISBN 9781118949368 (ePub)
To my parentsfor teaching me the value of the dollar,and that happiness isn't about money.
Preface
I remember the exact moment the power, influence, and potential of your generation first struck me.
It was midnight, four hours after the first polls closed in the 2012 presidential election. My colleague John King handed off CNN's “magic wall” to me and I quickly began studying the exit polling data. Surrounded by swooping cameras and a blinding grid of lighting, I stood in the CNN Election Center tapping through and cross-referencing table after table of numbers and responses from voters who had just left the voting booth.
Barack Obama had been reelected president of the United States just hours before, and the numbers were rolling in throughout the night telling us who voted and why. Measures for same-sex marriage were on the ballot and passed in three states. Washington and Colorado legalized marijuana. In all, there were 180 ballot measures in 38 states. As I scrolled through the results, I was struck by the fact that your generation had become a power player in social change in the United States. Those polls showed a generation that considers itself innovative and diverse. One that is open-minded and, better yet, flexible enough to change your mind. You have values you believe in, but you respect others' values. As I clicked, tapped, and dragged data across that magic wall, it became quite clear that this generation known as millennials is one to be reckoned with.
And you are different from your elders.
All of my reporting shows you are the first generation to value experience over possessions, which is a huge change for a U.S. economy based on the idea of me, more, now. Your parents' generation bought bigger houses, cars, boats, and second homes, and they spent more time planning vacations than their retirement—all thanks to a mirage of easy credit. But that's over—and you know it.
You're a generation forged by the Great Recession, the War on Terror, and an explosion of consumer technology no generation before you could have dreamed of. You've grown up comfortable with technology, and you expect it to change the world. And that technology brings you different experiences and values that you put above most other “things.” Look no further than the ideological and economic heart of this country right now, thriving with millennials at the helm: Silicon Valley. Understated is better. T-shirts, jeans, and ideas trump Wall Street bling, pinstripes, and financial engineering. Yahoo! CEO Marissa Mayer's car of choice sums it up: She drives a BMW that's nearly 20 years old!
You are the most educated generation in American history, and you have the student loan debt to show for it. But you are also coming into your prime spending years, which makes you the most coveted consumers in the world—tech-savvy, discriminating, and young. Companies spend more money marketing to you than to anyone else. Your brand loyalty is the holy grail; you've got 40-plus years of spending ahead of you, and everyone wants your money.
I want you to spend your money in ways that make you happy, but I also want to help you begin to save some and grow it.
Why write a money book for millennials? Because you have the most valuable ingredient for building wealth: time.
Money can't buy time. You have it for free.
It is the single most valuable ingredient in building wealth. And since you already picked up this book, you clearly have the will to put it to work.
Here's what these pages hold for you.
I've written this book to be read start to finish for a comprehensive look at managing your money: From your student loans to credit cards to investing for the first time. Or you can choose the chapters that speak most to your situation: negotiating your first job (Chapter 7) or building your credit score (Chapter 9). As the book title suggests, this is a guide. Just as the guidebook you would buy before a backpacking trip through Denmark or a honeymoon in Brazil, this guidebook combines my years of reporting on your generation and money with tips and tools to help you start building your wealth.
At the end of each chapter is an Action Plan—essentially the things you can do today to build wealth.
Chapter 1 gives you the budgeting basics that will help you build the mentality to save and the tools to get you started.
Chapter 2 shows how to choose a major, and how to make any major work in the postcollege rat race.
Chapter 3 reveals the smart ways to pay down student debt and still build for the future.
Chapter 4 is the essential read on the state of the U.S. labor market and your place in it. Anyone looking for a job and trying to excel in that job needs to know what's happening in the most dynamic labor market on earth. This is a critical macroeconomic look at the place that will be the engine of your personal economy—the job market.
Chapter 5 is the millennial handbook for getting ahead at work: how to interview for and negotiate your first salary. Does the thought of a nine-to-five job at an office of gen x-ers and baby boomers terrify you? How do you start your own company and make work work for you? Should you “lean in” or “lean back” at work? We will explore the subtle gender differences in the workplace, with advice about the different ways men and women negotiate. Remember, the salary you accept at the beginning is the starting line for a 40-year career. Where you start is critical.
Will you buy or rent? Chapter 6 offers strategies for the biggest questions in real estate, including how to survive living at home with your parents, how to split the rent bill with your roommate, and how to get your roommate's ubiquitous boy/girlfriend to kick in some of the rent, too.
Couples and families are more likely to talk about religion, politics, or sex than money. Chapter 7 explores how to frankly talk with your parents about money (and borrow some from them). And it discusses the right questions to ask early in a relationship to make sure you are a good money match. Is it appropriate to ask how much the other person owes in student loans on the third date?
Some of you may want to skip ahead to the investing chapter—of all the money moves you make, investing early will have the biggest impact on where you end up. Most of your grandparents could rely on a pension for their retirement, and your parents lean on a 401(k) for life after work. But you millennials will have even fewer investment tools handed to you when it comes to securing your financial health and wealth. So it's up to you.
Consider this: If you save $5,000 a year for five years in your twenties and then never invest a dime again, you'll have more money in your retirement than someone saving $5,000 a year all through their thirties and beyond. Chapter 8 shows you the common traits of 401(k) millionaires. (Hint: Time is on your side again.)
There's good debt—mostly student loans and mortgages—and bad debt—almost always credit cards. Chapter 9 offers valuable help for keeping your debts in perspective, with tricks for paying down the good debt and obliterating the bad debt, and how that will affect your credit score. The credit score is your money IQ. We look at how to keep it high and what to do to fix it if it is low.
My hope is that, whether you read this book straight through or choose the chapters that mean the most to your own personal finances, you'll find advice and information in these pages that will empower you to start planning your financial future now.
Christine RomansSeptember 2014
Acknowledgments
This book would not be possible without the considerable efforts of my husband, Ed Tobin, whose encouragement made me think I could actually write a third book while raising three young boys and working a full-time job, and whose news judgment and editing made it actually happen.
I'm so fortunate to be surrounded by the phenomenal reporters and editors at CNNMoney, who peel back the economic statistics and show how they matter to our readers and viewers. For any of you settling down with this book, make no mistake, CNNMoney.com will be a valuable resource as you use the building blocks within these pages to grow your wealth.
Special thanks to certified financial planners Ryan Mack from Optimum Capital Management and Doug Flynn from Flynn Zito, who entertained my endless questions about retirement planning, budgets, and investing. To Mitch Tuchman of Rebalance IRA for tailoring an investing plan precisely for Smart Is the New Rich readers and to Stephanie Genkin for sharing in these pages the aspirations of her millennial clients.
To the many millennials we interviewed for this book, and whose anecdotes are within these pages: Thanks for your honesty and, no, I didn't use your last names!
A special thanks to my producer, the brilliant Logan Whiteside, who loves numbers as much as I do and scours the monthly labor market reports with me with equal glee. To my coanchor, John Berman, who makes a 3:00 a.m. wake-up (almost) fun. To CNN president Jeff Zucker, thank you for making Berman and me wake up before 3:00 a.m.! But more importantly, thank you for the encouragement to follow my passion for education and economics coverage.
To CNNMoney's Laurie Frankel and Mike Tarson, thank you for your wonky love of tax-deferred versus taxable retirement strategies and dogged reporting on education and real estate, respectively!
Special thank-you to the folks at Wiley and NS Bienstock for your support.
Chapter 1How to Think About Money: Budgeting Basics
I think the best advice I've ever received is to plan for the future and to save your money. To plan for the future in a way you can have the same lifestyle after you've finished your job? That takes some planning and saving.
—Danica Patrick1
The common denominator of so many successful people I interview is an urge to save money and build for the future. Danica Patrick is the most successful woman in U.S. auto racing—a race car driver, fashion model, and marketing maven. The best advice she ever received? How to take the last turn, how to navigate the pit, how to get the most out of the last drop of fuel? No, the best advice she ever received—and gives to others—is simple and classic. Save your money.
It's really not complicated at all. Money saved today and invested properly—amplified by time—means wealth in the future. It's the little black dress of prosperity. It never goes out of style. Among the many gems from legendary investor Warren Buffett, this sums it up best: “Someone is sitting in the shade today because someone planted a tree a long time ago.”2
No one is going to plant that tree for you. The key words here are you and time. Unless you win the lottery (you won't) or have a trust fund (nice, but unlikely) or have the brain of Mark Zuckerberg (don't we all wish?), you will grow wealth only one way: by spending less money than you earn. Investing your savings over time grows wealth.
Prosperity Formula
There is a surefire, can't-miss way for millennials, loosely defined as young adults ages 18 to 35, to become millionaires. Call it a get-rich-not-so-quick scheme. Fidelity Investments studied the habits of people who earned less than $150,000 a year but had retirement account balances topping $1,000,000.3
What's the secret of these 401(k) millionaires? They started saving young, and they socked away a big part of their paychecks. How big? Fourteen percent of their pay each year—before any company match in a 401(k).
They started young, maxed out their savings, and took the “free money” that is the 401(k) company match—that is, the money your employer offers to contribute to your 401(k) plan. They weren't too conservative in their portfolios. The younger you are, the more stocks you should own. In fact, on average they had 70 percent of their retirement savings in stocks. (Bonds and savings accounts yield very low returns for savers and conservative investors. More on this, and alternative investments if your employer does not offer a 401(k), in Chapter 8.)
Bottom line: They started early. And you can, too.
Let's make something clear from the start if we are to spend the upcoming pages together. I don't believe you are a generation of lazy, narcissistic, reckless-spending, entitled tech junkies. (A Google search of the term “millennial” or “gen y” is entertaining.) In fact, I'm incredibly optimistic about the innovation and open-mindedness you're already bringing with you to the workplace. As I have crossed the country speaking with students and graduates and reporting on companies and economics, I have found that, despite the pile of bad luck you were dealt by the financial crisis, you are a generally optimistic and entrepreneurial bunch. You're the most educated generation in U.S. history, and you understand technology in an intuitive way that no other generation can.
The economy is slowly healing, and you're poised to succeed. I'm more optimistic by the day about your job prospects. Hiring for the class of 2014 jumped a stunning 8.6 percent from 2013.4 Whether they're looking for accounting, computer science, engineering, or M.B.A. graduates, more than half of companies surveyed reported they were stepping up their hiring.
We'll discuss the job landscape further in Chapter 4, but for the purposes of how you think about money, the subject of this chapter comes against an improving backdrop. The jobs market is healing. The current recovery was among the slowest postrecession jobs recoveries, but finally all the millions of jobs lost in the Great Recession have been recovered.5 Technology will provide new opportunities we can't even predict today. And your generation—innovative by nature—will play a central role in that.
Yes, there is a considerable problem of too much student debt and too few jobs for recent graduates. But I don't think that all millennials have been permanently sidelined by their student loans, nor have they been permanently left out of the jobs market. We'll explore managing that debt in Chapter 2 and getting a job in Chapter 5, but in this discussion of how you think about money, it's time to relegate debt and jobs to background noise. Repeat after me: You have something to offer the workforce, and you can manage your student loans.
The typical student loan burden can be manageable. According to a report from the Brookings Institution, just 7 percent of households with student debt have a burden of $50,000 or higher.6 About a third of bachelor's degree graduates have no debt at all, and the average debt of those who do hovers around $30,000. There is a rule of thumb in college savings and planning: You can afford to borrow for college about as much as you expect to earn in your first year's salary. If you are the typical business major, that means you can afford to borrow around $50,000. Humanities and social science graduates can afford to borrow less.7 The average starting salary for the class of 2014 rose 1.2 percent from the prior year, to $45,473, according to the National Association of Colleges and Employers (NACE),8 with wide variations by discipline (Table 1.1).
Table 1.1 Average Salaries by Discipline
Business
$53,901
Communications
$43,924
Computer Science
$61,741
Education
$40,863
Engineering
$62,719
Health Sciences
$51,541
Humanities and Social Sciences
$38,365
Math and Sciences
$43,414
Source: National Association of Colleges and Employers
If your student loans are getting you down, remember this: A college graduate will earn, on average, a million dollars more over the course of a working career than a high school grad.9 Handling student debt diligently will be a key part in your strategy for building wealth. The vast majority of college borrowers with less than $50,000 in student loan debt can certainly be moving forward in their financial lives and using their best asset—time—to work for them. Don't let anyone tell you it's impossible to plan for the future while still paying off the past. It can be done. (Chapter 3 will help you organize your approach to managing debt.)
This is not a book for defeatists. It's a book for young people of any means who want to build wealth. Whether you have loan debt, were fortunate enough to graduate debt-free, or are considering college or studying now, it is critical to save early and train yourself in habits to make your money grow.
Most of us didn't grow up reading the Wall Street Journal, and many high schools teach rudimentary economics if anything at all. In grade school, children still learn to count change, yet there is little if any real preparation for the dizzying array of college financing schemes, prepaid debit cards, peer-to-peer loans, and countless other accounts millennials get pitched every day. Financial literacy is not something the United States does well, and most families would rather talk about religion or politics than money. There's no shame in getting started now. The old cliche that it is better late than never does not apply here. You are reading these words now, and you have the most valuable ingredient you need: time.
In the workforce and in the headlines you have undoubtedly heard and read those old clichés attached to the newest generation. They don't work as hard. Consumer technology makes them lazy and entitled. They are selfish. However, a seminal study of millennials by the Wall Street research firm UBS found something very different—and very exciting—for any member of this generation looking for success. That study found that millennials have learned the lessons from the financial crises during which they grew up and are now primed to save more money and build wisely for the future. Think of your generation as being as powerful as the baby boomer generation—you will have an equally huge impact on the economy once you hit your stride financially.
“Millennials shatter stereotypes, believe in hard work, worry about parents' financial health, and define success as a combination of money, healthy relationships, and enriching experiences.”10
—UBS Investor Watch
The UBS study found this generation more likely to save, more frugal, and more resilient than prior generations. UBS found that words like entitled and lazy don't fit the reality.
UBS asked millennials to define success: How do you know when you have arrived?
Emotional (39%)
Having a happy family (45%).
Having a deeply meaningful relationship with my spouse/partner (37%).
Staying true to the values I believe in (18%).
Leading a calm, simple life with people who care about me (17%).
Financial (30%)
Having financial freedom (48%).
Being able to provide for future generations of my family (15%).
Being well-compensated for what I do (14%).
Owning things I aspired to have, such as art, a second home, a boat, and so on (12%).
Experiential (24%)
Living a full life with a wide variety of experiences (37%).
Enjoying the work I do (29%).
Being someone from whom others seek advice/opinions (4%).
Knowing interesting, creative people (2%).
Achievement (7%)
Achieving more than my parents or my peers (7%).
Reaching a very senior job position, such as a C-Suite position (7%).
Owning my own business (5%).
Being able to give significantly to charity (3%).
Source: UBS
In fact, money matters to millennials, UBS found, but they fall short of the “greedy” tag one might apply to their elders. Success to millennials means hard work (69 percent), saving and living frugally (45 percent), and a good education (37 percent). And success is not just about money. This generation's definition of success is more nuanced, adding emotional and relationship factors to the formula and not just traditional measures of financial health.
Achieving that success takes some simple first steps. And the most critical is the monthly budget.
Pay Yourself First
The first key to building wealth is to live below your means. The money you don't spend you put to work. For many years, it was the American way to spend more than we earned, using credit to pay for the rest. Millions of Americans burned through their money, justified by the false assumption that the price of their home would rise forever. Easy credit made people feel rich. When the recession hit, these spenders took the biggest hit financially. Today, smart is the new rich, and being smart begins with a budget. Even the word budget makes most of us cringe. It's a loaded word, full of limitations, that we think is more suitable for older generations. But a budget is the money version of a healthy diet. Once you identify the empty calories in your budget, you'll feel better and more focused.
A budget is simply a plan. And it's the nonnegotiable habit for growing wealth. Patrick O'Connell, executive vice president of the Ameriprise Advisor Group, works with thousands of financial advisers across the country. “The price of success is paid for in full in advance,” he tells me. Having a budget and saving money every month is paying yourself first.
“We see many millennials interested in building wealth who have to start building the savings plan first. Pay yourself first, and work the expense base off the remainder,” O'Connell says. He likes to start with these three steps:
Three Steps to Building Your Budget
Identify how you are spending money now.
Evaluate your current spending and then set goals that take into account your long-term financial objectives.
Trace your spending and make sure it stays within your guidelines.
Often, we feel as though we have a general idea of how much money is coming in and going out each month. But you've got to put down on paper every penny.
Financial expert Stephanie Genkin, a Brooklyn-based independent fee-only planner who advises millennials, says it's always possible to become a saver.
“I worked with a young woman who had no debt but liked to treat herself to expensive new clothes and books every month. We talked about what it would be like for her to scale back on her spending in order to put away a little money each month for retirement and a rainy-day fund. I got through to her by telling her what her life might be like 10 to 20 years from now without savings. She now contributes 3 percent to her 401(k) and automates a fixed amount of her paycheck to a savings account.”
There are helpful online tools and budget apps like www.mint.com to analyze your habits and craft a budget. Check out your bank or credit union website for tools to use for budgeting, tracking your spending, and automatically paying bills. Websites for money managers Fidelity and Ameriprise Financial have helpful tips for organizing which bills to pay. It's incredibly important to really know how much you are spending each month in every single category. Only then can you spend less than you bring in and grow the difference.
I grew up with a frugal father, who had very simple rules about money that he often boiled down to entertaining little rhymes, one of which is the basis for every budget: “Keep your burn rate less than your earn rate.” It means spend less than you earn. The budget helps you figure out how.
To get started, you need to ask yourself a few questions.
Does your income money last as long as the month?
Are you spending more than 28 percent of your take-home pay on housing costs?
If you live at home, are you saving a little each month for a deposit on an apartment?
Are you carrying a balance on your credit cards?
If so, how many months will it take to be credit card debt–free?
If your phone breaks, do you have money to get a new one?
Your best friend from childhood just announced a destination wedding. Do you have the money to make it (not to mention the bachelor/bachelorette party)?
If you have a job, does it offer a 401(k), and are you contributing enough to get the company match?
Do you have three months' living expenses handy in case of an emergency?
Take note that I didn't even bother asking the age-old financial adviser question: At what age do you want to retire? That's because (1) it's nearly impossible for any young generation to really get their head around this question, since it's the last thing they think about; (2) forced savings plans like 401(k)s and IRAs (more on these in Chapter 8) help address the retirement issue; and (3) there are more pressing financial decisions facing millennials in the near term. Beyond the aforementioned “I have to pay for a new phone” dilemma, there are a host of other costs millennials have to prepare for, notes Ameriprise's O'Connell.
“Buying homes, selling homes, cars, children, weddings—you name it. So think about medium term financial goals and start building momentum. The first $5,000 or whatever your goal is to accumulate is the hardest,” says O'Connell. “After you reach that first goal, it becomes easier. So you want to focus on a strong financial foundation.”
How Much Should You Save?
We'll more fully explore these questions, how to answer them, and how to get there in the pages ahead. Planning a budget means recognizing how far you are from these goals. You have to know what is coming in and going out before you can slot money for investments, real estate, and retirement goals. Write down every little expense—including the price of your morning bagel, change for doing laundry, the amounts for phone/Internet bills, and what you shell out for entertainment. Track your spending, make realistic goals, and be consistent. Once you're on track—with housing costs in line with what you can afford, high-interest credit card debt paid off, and student loan payments automatically paid each month—the next step is building wealth.
Throughout human history, civilizations endured because people planned for the future by socking away a little of today's wealth for the next year. They saved some of this year's crop to plant again the next year to guarantee stability (and wealth) for coming years. Eat all your seed corn now, and you'll starve later. It sounds rather Game of Thrones, I know, but, really, unless you budget, save, and prepare, you're leaving an awful lot to luck.
That's a bleak way of saying that Americans spend too much and save too little. On average, Americans save about 4 percent of their income each month. The savings rate has slowly improved since the Great Recession ended, but it still is not high enough. A reachable target is 10 percent, and those Fidelity 401(k) millionaires put away 14 percent on average, starting young.
As you prepare your budget, if you can't get to 10 percent right away, start more slowly. Squeeze just 1 percent out the first month, then 2 percent the next month. Ratchet up the savings, and trim the spending bit by bit.
“You've got to save every penny.”
—Carmelo Anthony, New York Knicks, CNN March 2012
I often hear from readers and viewers that they don't have any money to save, that their finances are out of their control, and that until they get a better job or move to a different city or pay off their student loans, they can't save another penny.
I always circle back to the advice from my friend and frequent CNNMoney guest Ryan Mack. He's the president of Optimum Capital Management, and he is a true believer that anyone can make a budget and find money to save in it, no matter their circumstances. His mother raised two sons with scant money, sometimes on public assistance and in public housing. She made it into the middle class, and Mack uses her example in his own business to inspire anyone to build wealth. He says wealth is built slowly and surely through the little daily decisions we make with our money. He says all of us have a responsibility to be “good stewards” of our finances. Mack explains:
The good steward is my own mother who didn't have a lot of money to raise her two children but spent her days shopping at a thrift store, cutting coupons, and working her way off subsidized living in a way that allowed her to purchase her first home. The good steward understands that it is never about how much money you make, it is all about what you do with the money you make. It isn't about spending money to make an impression on others. It is all about spending money to make an impression on those personal goals and values that you find to be important to keep on your path to creating a financial legacy for future generations. This steward takes risks, lives within their means, but most importantly when they analyze their online spending statement, more often than not they purchased items that moved their household forward and didn't detract from its value.
Take a look at the online spending record of your credit card bill or check your bank statement for the past few months and try to divine the priorities that statement suggests about you. Is eating out more important than buying new clothes? Do you have an iTunes addiction? Is your Netflix bill off the charts? Love a daily latte? Without a budget, you have no idea how much you are spending each month on these things.
What you find may surprise you. In its report “Young America and Its Vices. Beer. McDonald's. Starbucks,” Level Money (which offers a simple budgeting app for people 35 and under) found millennials spending big money in three major categories: coffee, burgers, and booze.11 Turns out cash-strapped millennials still find plenty of money to spend on tastes-good-but-not-so-healthy options. Spending varies widely by region, but Level Money found the highest spending on booze in Massachusetts, Colorado, and New York and the highest spending on coffee solidly in the Northeast (Table 1.2).
Table 1.2 Caffeine Addicts
State
Average annual spending
% purchasing more than once a week
Maine
$307
15%
Massachusetts
$277
12%
New Hampshire
$263
12%
Source: “Young America and Its Vices,” Level Money
Young people in the South spend more than twice what their New England cousins spend on fast food (Table 1.3). Top venues? McDonald's,
