5 Decisions Millennials Must Make to Grow Rich
Discover how to overcome common financial challenges and grow rich by making 5 important decisions.
Laura Adams, MBA
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5 Decisions Millennials Must Make to Grow Rich
A Money Girl podcast listener named Ben wrote:
“Thank you for doing the podcast, it’s been very helpful to me. What advice do you have for people in their 20s that will make a huge difference later on and ensure a lifetime of financial success?”
In this episode I’ll discuss some common financial challenges that young people face and how to overcome them. You’ll learn 5 important decisions that Millennials, or anyone who’s just starting out, must make to grow rich.
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5 Decisions Millennials Must Make to Grow Rich
If you were born after 1980, you’re part of the Millennial Generation and are between the ages of 18 and 33 as I’m writing this article in 2014. You’re also known as Generation Y because you came after Generation X, which is my generation. Gen X are people born from about 1964 to 1980.
The Millennial Generation has some other not-so-flattering nicknames. It’s been dubbed the Boomerang Generation because of its members’ propensity to move back home with their parents, perhaps due to financial hardships. It’s also been dubbed the Peter Pan Generation, which refers to a perceived immaturity or unwillingness to grow up exhibited in Millennials’ tendency to delay starting a career, getting married, and having children.
Now, before you think that everyone’s pegged young folks as slackers, various surveys and studies about Millennials have also shown that you’re an incredibly educated and optimistic group. But that education comes at a cost – as so many of you who are burdened with huge amounts of student loan debtknow all too well. Additionally, many Millennials were traumatized by the last recession, don’t like the stock market, and are leery of investing.
No matter if you agree with these Millennial characteristics or feel stereotyped by them, here are 5 decisions that you, or anyone who wants to achieve financial success, must make in order to grow rich:
Decision #1: Live Within Your Means
One of the most important decisions to make when you’re starting out is to live within your means, or never spend more than you earn. It sounds so logical and simple, right? But unfortunately, it’s incredibly easy to overspend when you make credit card charges that you can’t pay off in full every month.
Your life may not be as lavish as your parents’, your high-earning friends’, or your friends’ who live beyond their means. That’s OK. With hard work, smart spending, and consistent saving, you can achieve your financial goals and dreams. No one said we were entitled to have everything we want right out of the gate.
Living within your means comes down to aligning your spending with your values. So think about what you really want to do or have and make sure you’re allocating your money there, and never spending mindlessly.
Shifting into conscious spending and saving is a simple but powerful milestone that’s required to grow rich. I discuss the psychology of spending and how to set your priorities in Chapter One of my book, Money Girl’s Smart Moves to Grow Rich.
Decision #2: Leverage the Power of Time
If building wealth is one of your goals, the second decision you must make is to value your time and put it on your side. Here’s why that’s so important:
Let’s say you go out to lunch with coworkers every day and spend $15. That’s almost $4,000 per year that you could be funneling into a retirement account if you brought leftovers to work instead.
If you’re 25 years old and invest $4,000 a year in an Individual Retirement Arrangement (IRA) or a workplace 401(k), you’ll amass a surprisingly huge nest egg. With an average annual return of 7%, you’d have close to $1 million by the time you’re in your mid-60s.
See also: 8 Smart Ways to Spend Less Money and Save More, Part 1
Now I’m not saying that you should never go out to lunch or spend money on entertainment. My point is that you should never spend habitually or unconsciously without understanding the security and future financial freedom that you may be giving up if you invested that money instead.
Decision #3: Make Saving a Habit
When you’re just starting out, it can be difficult to start saving and investing on a regular basis. Few people feel like they have discretionary or extra money to set aside. But you must create the habit of saving (even small amounts) as early as possible, no matter how much it hurts.
Here’s a quote from Aristotle that sums it up, “We are what we repeatedly do. Excellence, then, is not an act, but a habit.”
I recommend that you save a minimum of 10% to 15% of your gross income starting with your very first paycheck. If you have a retirement plan at work, such as a 401(k) or 403(b), that’s an extremely valuable benefit that you should never pass up.
If you don’t have a workplace retirement plan, open up and contribute to an IRA instead. Discover some great options in Investment Tips: How and Where to Invest (the Easy Way).
Decision #4: Always Have a Financial Safety Net
When you have trouble getting ahead financially, one of the most common roots of that problem is not having a safety net, such as emergency savings.
For instance, if you have an unexpected car repair or lose your job, you may have no option but to finance your expenses on a credit card. Then the debt accrues interest and grows bigger every month, becoming even more difficult to pay off.
Instead, make a decision to save and always keep a minimum of 3 to 6 months’ worth of your living expenses in an FDIC-insured bank savings account. If you’re starting from zero, start with a small goal, like saving $100 first, and then building up to $500, $1,000, and so on.
See also: 3 Emergency Fund Mistakes to Avoid
When you have trouble getting ahead financially, one of the most common roots of that problem is not having a safety net, such as emergency savings.
Consider automating your emergency savings by having a small percentage of your paycheck directly deposited into a separate account. After a couple of paychecks, you won’t even notice that 2% or 3% is missing from your main account.
The peace of mind that a financial cushion gives you is amazing. So cut your spending and make temporary sacrifices in order to fund your emergency savings account as quickly as possible.
Decision #5: Get the Credit You Deserve
A study from Experian, one the nationwide credit bureaus, revealed that many Millennials have poor credit because they don’t pay their bills on time. If you’re habitually late paying bills, please realize that your payment history is the most important factor in calculating your credit scores.
Another study from the Consumer Federation of America showed that Millennials don’t understand how far-reaching or important credit is to their entire financial life. Only 18% know the types of businesses—including lenders, credit card issuers, insurers, utility companies, and cell phone carriers—that can use your credit to evaluate you as a potential customer.
See also: The Credit Score Survival Kit (a free video tutorial to build credit fast!)
Building good credit doesn’t happen by accident. It’s the result of having credit accounts, such as a credit card or car loan, and managing them responsibly over time. Take advantage of online bill pay through your bank or using an application like Quicken, to make sure your money management never slips through the cracks.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.