Who doesn’t like to save or make money with a few tweaks to their personal finances? These tips might seem obvious or not so obvious, but they’re a roundup of some of the best ways to improve your personal finances right now. Whether you’re a Do it yourself-er, rely on friends or family for advice, or actively seeking a financial planner, these personal finance hacks are all worth knowing. Be sure to share the insights with friends!
1. High Yield Savings Account
Everyone should have an emergency fund in place to cover unexpected expenses. It’s a staple to any solid financial plan.
However, it can be frustrating to earn next to nothing from cash sitting in a traditional savings account. Most large banks such as Chase or Bank of America, pay interest as low as 0.01%. If your emergency fund consists of $15,000 in cash, that’s earning a whopping $1.50 a year. As we know, inflation erodes the purchasing power of that cash. While an emergency fund serves its purpose as the first line of defense against expenses that could derail other parts of your financial plan, you should earn more interest than that.
High yield savings accounts, such as the one at Ally Bank, offer rates as high as 1.45%. From our previous example, that’s earning $217.50 a year. An extra 200 bucks a year from simply putting your emergency fund in a high yield savings account isn’t too shabby. Might as well earn the highest rate you can while still being FDIC insured.
2. Pay Off Credit Card Debt
Credit card debt usually carries a high-interest rate. In analyzing your own financial situation, if you’re paying interest on credit card debt every month, it’s going to be one of the first things to tackle. There’s absolutely no reason to be paying interest in excess of 10%.
Consider using a zero-interest “bridge” credit card to consolidate your debt and allow you time to get your cash flow under control. Credit card debt that accumulates out of control typically stems from a lack of understanding your cash flow or simply a spending problem. If either or both exist, they should be addressed immediately. Credit cards are a great tool if used correctly. Unfortunately, they can create quite the problem if used incorrectly. The good news is there’s always a solution if you’re committed to getting it under control!
3. Lower the Withholding Amount on your Taxes
If you’re receiving a large tax return every year it’s not necessarily a good thing. Yes, that’s right, a large tax-return is not a good thing. It means you’re giving Uncle Sam a zero interest loan and you should consider lowering the amount you withhold for taxes. The time value of money says that a dollar today is worth more than a dollar in the future. You would rather have access to the tax return funds earlier so it can be earning interest, or invested, rather than “loaning” it for zero interest.
4. Cheap Renter’s Insurance
The online renter’s insurance site Lemonade offers rental insurance as low as $5 per month. Not only that, they’re a certified B-corp. Meaning their social impact is part of their mission and business model. A portion of the premiums go towards causes you care about.
5. Fund a Health Savings Account
One of my favorite personal finance hacks. A health savings account or HSA is the premier health/retirement/tax-advantageous account available. In order to open one, you’ll need a high-deductible health plan first. Contributions are tax-deductible, lowering your current year’s income taxes and withdrawals are tax-free for qualified medical expenses. Funds can also be invested in an HSA for long-term growth. After age 65 the HSA can be used for anything, including medical expenses, without penalty. This effectively turns it into an additional retirement account mimicking an IRA. Amazing!
To illustrate, a great strategy for young, healthy individuals, is to fully fund an HSA every year, even before fully maxing out an employer’s retirement plan. Pay medical expenses out of pocket with after-tax dollars rather than using HSA funds. Then, the money inside the HSA is tax-advantaged and can be invested! This allows the HSA to be an additional retirement account or used for medical expenses in retirement (when you’ll likely need it at some point).
6. Participate in your Employers ESPP
An ESPP or employee stock purchase plan offers a great benefit if you have the cash flow available to participate. Most employer ESPP’s offer a 10-15% discount on the company stock. You’ll contribute funds towards the purchase until the grant date, at which time the funds you’ve accumulated will be used to purchase the company’s stock at a discount. Once received, you have the option to sell it immediately creating an instant 10-15% gain. Of course, you’ll have to pay taxes, but that’s a solid return for little risk. You can then use that cash towards other goals or simply diversify it in a taxable brokerage account.
7. Contribute to a Roth 401(k)
The age-old question of whether to contribute to pre-tax or traditional 401(k) or an after-tax Roth 401(k) was recently made easier due to the majority of taxpayers falling into a lower tax bracket starting in 2018. Most employers offer a Roth 401(k) in addition to the traditional 401(k). If you’re unsure whether you have the option, simply ask your HR department. Typically, if you expect to be in a lower tax bracket when you retire, a traditional 401(k) is the right choice. If you expect to be in a higher tax bracket when you retire, a Roth 401(k) makes sense.
It’s impossible to predict the tax environment when it comes time for Millennials to retire in addition to our own individual tax situations. What we do know is that we’re in a low tax environment right now and taking advantage of lower tax brackets is probably smart. Therefore, paying taxes on the money today, and contributing to a Roth 401(k) may be in your best interest. Keep in mind, you can always switch contributions between the two and your employers match always goes into the traditional account. Having funds in both types of accounts is the long-term goal, as it’ll provide the most flexibility when taking retirement distributions.
8. Pay Yourself First
No matter how much money you make, someone who always remembers to “pay themselves first” will more likely build sustainable wealth over the long run. For example, let’s say you’re used to getting a raise every year around 3%. If you don’t actively increase your retirement contribution or invest 1-2% of that raise every year, you’re succumbing to a lifestyle creep. The more money you make, the more you spend. When it comes time to retire, you’d have to drastically change your lifestyle if you hadn’t increased your savings and investments. Consciously paying yourself first, will ultimately build long-term sustainable wealth over the long run and ensure you won’t have to make drastic lifestyle changes when it comes time to settle down.
5 Financial Mistakes Millennials Make
These are the most common mistakes millennials make when it comes to finances.
Waiting to Invest
This could be the biggest mistake anyone could make when it comes to investing. Unless Elon Musk develops a time machine in our lifetimes, there is no way for us to go back in time to invest our money.
Time is the biggest advantage millennials have to secure a strong financial future. The power of compounding, coupled with decades of investing, can achieve miraculous things. If you want to be wealthy later in life, the EASIEST way to get there is through investing, patience, automatic contributions, and discipline to your strategy.
Upgrading Lifestyle Before Increasing Savings
We’ve all been there. You receive birthday money, an annual bonus or raise, and we go out and spend it like it falls from trees. There’s certainly nothing wrong with enjoying yourself, especially in celebration, but a good habit to get into is put aside a partial amount in savings or investments.
Before you go out and enjoy yourself, or make a big purchase set aside a solid amount. If you’re getting an annual 3% pay raise, consider increasing your 401(k) contributions the next year by 1 or 2 percent. If you receive a lump sum bonus, take as much as 10% to help pay down student debt, build an emergency fund, or fund a Roth IRA.
The habit’s you form now will go a long way, and you won’t regret forming this one early.
Not Taking Risks
Millennials can afford to take risk with investments. Most millennials have 30 or 40 years until they will need to withdraw from their retirement accounts. Again, time gives investors a distinct advantage.
Being risk averse in retirement accounts could cost you purchasing power down the road. What $100 buys today, will not go nearly as far 30 years from now. It’s important to outpace inflation, which averages 2-3% historically, by taking risks with your investments.
Neglecting Retirement Savings for Student Loans
Paying off student loans should be the top priority for most people due to high-interest rates. However, this does not mean you should ignore other financial goals.
Without Elon’s time machine we can’t recover lost years of retirement contributions. Not to mention, if your company has a 401(k) employer match, you’d be dismissing free money by not participating. Even if you contribute the minimum matching percentage to a 401(k), and focus your remaining cash flow on paying off student debt, you’re still getting a head start on building long-term wealth.
Lack of Planning
A favorite quote of ours is from the French writer Antoine de Saint Exupery. He said, “a goal without a plan is just a wish”.
His words ring true with just about anything in life. Whether it’s personal, professional, or financial. If you want to achieve something, there needs to be a plan in place to do so.
A clearly outlined plan of attack most definitely increases the chances of achieving financial goals. Yes, it takes time to understand where you are at financially now, and where you want to be financially later, but the time is well spent.
People who have a clear understanding of their monthly budget/expenses, monthly savings rate, debt reduction strategy, and investment strategy are more likely to achieve their financial goals. The satisfaction of reaching a milestone in net worth, or paying off debt, is addicting. It all starts with a plan.
The key is recognizing the mistake and to learn from it. Are you making any of these mistakes? If so, what strategies have you used to take control?
Did you find these personal finance hacks for Millennials helpful? Have a personal finance hack you utilize that you’d like to share with us? Please let us know by emailing me at levi@millennialwealthllc.com.
