I know it’s a little bit of an odd title, but it occurred to me that, really, my peers need all the help in the finance department that they can get. I won’t kill the time waxing ranty about how their parents, the baby boomers, are at least partly responsible for their financial quagmire, and my opinions on student loans are no secret. I will also say that the first person who will bitch about the “entitled millennials” will get the smackdown of a lifetime; the only ‘entitlements’ they/we are asking for is the same thing that their own parents took for granted: employment, cheap tuition, and the ability to live on one’s own without breaking the bank. I don’t know when that became an entitlement, and if you call it that, then get the fuck off my blog.
But the bottom line is this: with crushing student loans, there needs to be some financial chicanery done in order to survive, and I’m not saying ‘ramen noodles every night’. Hell no.
Hang on tight, peers of mine, whether you’re Generation Y or millennial, a little older or a little younger, I will give you the tips they won’t teach you in school.
I am not a CPA in my own right. I am studying to take my EA exams, though.
I am not a CFP (certified financial planner) either.
I am, however, employed in the accounting field, and have long experience in being broke and trying to survive while broke. I’m still paying student loans. And I’m also really, really good on managing with little money. Not to mention I learned some very hard lessons by example and experience alike. And what I know, I am very happy to share, especially if I feel some good will come of it.
ALL the tips written here here is strictly based on my own experience, and is not to be taken or acted upon without consultation with a finance professional.
1. Your Retirement Matters Now.
I know, I know: how can you think about retirement when there’s student loans out the wazoo to pay? I can’t afford to put away the money! And why should I, anyway? I’m in my twenties now, so why bother?
WRONG WRONG WRONG WRONG!
The earlier you start putting money away for your retirement, the more likely it is that you’ll be able to retire in the first place. Social Security is only part of the picture, and because our Congress, which lacks the common sense Mother Nature gave a duck, is in session, there’s little guarantee you’ll have that to fall back on. Whatever money you begin to put away is money you won’t have to bust your hump for when you’re in your late sixties, tired out, worn out, and craving nothing more than rest. There’s no promise that your jobs will have a cushy benefits package, because a lot of the jobs given to folks our age nowadays don’t even mention a retirement plan.
Spouses can leave, pass away, or go broke. There’s no guarantee your kids will take care of you, if you have kids. If you operate on the assumption that the world, in general, will stay the same for another generation, then you are very likely going to be paying your college tuition and theirs at the time of your retirement. And whether or not you like it, you will not stay young forever. Your energy will not be at the level it is now. Believe me, I have a vast difference in my own energy levels from now and 5 years ago, and I’m not even 30 yet.
So, my friends, learn this lesson, harsh though it may be: assume that the only person taking care of you when you’re old is yourself, because chances are that will be the case.
And it really is not that much to start putting money away.
If you’re new to the idea of retirement plans, don’t want to get into the grist of a 401K just yet or don’t know what one entails, but you want to start squirreling some money away anyway, then you want to look into an IRA. You’ll see two types primarily, if you’re not self-employed: a Traditional IRA and a Roth IRA. Difference is in the way they are treated tax-wise: a traditional IRA is tax-deductible to contribute to, but you pay the taxes on the money when you take the distribution (withdraw) at your retirement age. With a Roth you will get to take the distribution tax-free, but that means you don’t get to claim the deduction on your contributions.
If you want a little help at tax time, especially if you’re trying to pay down your student loans, I’ll recommend a Traditional IRA. If you choose to roll it over to a Roth later on, you’d have to pay the tax on the money accumulated in there, but with a basic traditional, it is a deduction on your return, and whether it’s taxable or not, it’s money you won’t have to bust your hump for 30-40 years later.
Go to http://www.etrade.com – easiest to use, and very do-it-yourself, if you’re comfortable with that sort of thing – and set yourself up for an account there for your IRA of choice. It will likely take you a few days, because they need to verify your identity (standard procedure), and you’ll need about $100 on hand to fund the account. Give it another two days or so to verify your bank account and fund the opening deposit.
Then, grab your calendar and mark off your paydays.
Then, set up a small transfer to take place on each payday. You don’t have to do more than $50 if you can’t spare it. If all you can spare is $25, okay. Ideally, I recommend $100 per paycheck, but if you can’t manage it, you can’t manage it. It’s OK.
Supposing you get paid every two weeks, this is how it will add up:
$25 contributed x 26 = $650 saved through a year
$50 contributed x 26 = $1560 saved through a year.
And so on. If you get paid every two weeks, so 26 transfers per year – once per payday. It doesn’t seem like much, but again: money you won’t have to bust your hump for later down the line, and it’s a sum you can plug in on your tax return.
The maximum you can contribute to a basic, no-frills, non-SEP traditional or Roth IRA is $5,500 annually – at least that was the limitation last year. Not very much, in the grand scheme of things, but if you multiply that by 20 years, that’s $110,000 maximum by the time you’re ready to start thinking about retiring. I’m not counting interest income or investment income that will accumulate over time. Will you be able to contribute $5,500 per year? Not necessarily. However, again: it adds up. All of it adds up. As your loan balances reduce, your disposable income will increase, and you will be able to contribute more. So that $650 above? Multiply by 20 years, and it’s $13,000, if you contribute at the same rate. That’s money you won’t have to work for later on. Think about what that means. A year’s worth of electric bills? Several rent/mortgage payments taken care of? This is how you save: a little at a time.
Now, speaking of paydays…
2. Budget, budget, budget ahead.
I find that Excel does a great job of keeping you on track with this.
Your standard budget for the month is basically this:
Paycheck – necessary expenses = flex spending/saving money.
If you get paid biweekly, then you have the option of breaking out which paycheck you will use to pay what. Suppose you have, just for an example’s sake, an $800 net paycheck twice a month. You have rent due on the 1st, your student loans on the 13th, but your utilities all fall due after the 15th. And you have a very basic IRA, as outlined above. So, it’ll look like this:
Your paycheck on 1/1: $800 – student loans – IRA = whatever’s left.
Your paycheck on 1/15: $800 – rent – utilities – IRA = whatever’s left.
Why this model?
Because look at your calendar: You have rent due on the first day of the month. Likely you may get penalized for having it late. You don’t want to risk that, so you will cut the check for rent out of your 1/15 payday, so this way, there’s no way you’re late. Your utilities fall due after the 15th, so they need to be paid out of that check too.
So this means that first of the month, you pay your student loans – which are due before the 15th – and have the rest to stash, or cushion up for the expenses coming up in your next paycheck.
This is especially true if, like a lot of people, you’re living hand to mouth and your paycheck goes, mostly, on your bill payments. So when you get the ‘whatever’s left’ feature, you have to divvy that out VERY carefully.
Let me guesstimate some numbers for the rent, student loans – just for an example’s sake – to show you how that works.
On 1/1: $800 – $250 loan payment – $50 IRA contribution = $500 left.
On 1/15: $800 – $700 rent – $175 total utilities – $50 IRA contribution = $-125 in the hole.
So that $500 of flex money in the first check is NOT getting spent anytime soon. Because you need it to make up for the shortfall in your upcoming check. So you really have $375 left over. You have to feed yourself too, gas up the car (or buy the rail pass). And before you know it, that $375 is down to…well, whatever’s left.
This is the reality of life for the young working college grad, folks, but again, these are examples. Your actual earnings and expenses will vary. And for the most part, most folks graduating college don’t really get a lot past $800 net pay per check on their first jobs.
However, the moral of this particular story is to plan this ahead.
Start up Excel. Start a running balance column for your account and a start balance. Allocate a column to each of your usual expenses. The formula is always =[cell 1]+[cell 2]-[cell3] to calculate the balance, where [cell 2] is where you enter how much you make. You can chain up as many expenses ([cell 3 and the like]) as you want on that formula, but the game is to map this out for several paychecks. If your salary is fairly fixed, this is a great way to budget for and manage your major expenses and schedule the expenses around the due dates of your bills.
It will also give you a picture of where you are financially, and where most of your money is going.
Because my salary is fairly predictable, I am able to budget out for a whole year ahead of time. And believe me when I say, it really, really helps, because this way I know which expenses I want to curtail, and whether or not I can afford to do X, Y, or Z.
I will now talk about the one thing that, if I were to be honest, is not the way it should be, but someone, again, needs to say it:
3. There’s nothing wrong with moving back home. Financially, it actually works.
And truth be told, because of overweening student loans eating up one’s budget, there’s often little other choice. I graduated a private university in NY with a five-figure debt amount, and think myself lucky because my classmates are in debt piling into six figures, and jobs are nowhere near as plentiful as anyone would be led to believe. And for a long time, my budget was pretty damn similar to what was outlined above, except I paid significantly more as a monthly student loan payment. What I didn’t pay, however, was rent.
Yes, I still live with my mother. I’m definitely not the first person to stay at home after college, nor will I be the last I will probably continue to live with her well after my loans are paid off, because as I go along, it’s becoming my responsibility to look after the apartment. Mom isn’t getting younger, I already look after her when I can, and it’s a matter of time before I take over as both a caregiver for her and a caretaker for the apartment. In exchange, I live rent-free, in my own room. Which, considering the student loans and expenses of running my business, is a huge advantage. But I also have the responsibility of looking after the place.
Believe me when I say this wasn’t easy to come to terms with, or to make work. As an adult, as a working adult, I wholly expected to be earning enough to live alone at the time I got my first job, and it was very difficult accepting that that wasn’t going to happen. Perhaps it will later down the line, but until these loans are paid, independent living just won’t exist for me. The people who do earn enough to live alone in NYC and make their student loan payments are lucky as hell. I deeply resented having to live at home the first three years of it. I’m sure I’m not the only one. And I also have had enough of the roommate thing. If I was going to live with anyone, my mother was the safest and best option; not having to pay rent was the second best advantage. The first is that I was living with someone whom I felt safe with.
But in reality, it saved my budget, and it’s only now, at the start of 2015, 8 years after I moved back home, that I see just how it benefited me long-term. Regardless of how I feel about living with my mother at nearly 30, the majority of my generation really has very little choice to contrary. If college tuition is the price of a new car per year, if it’s impossible to afford college without student loans, and if employers are not paying the wages that would have one capable of paying rent and student loans at the same time and will laugh in your face if you don’t have a degree, it’s just mathematically not possible to live on your own without sinking even more into debt. All a budget is is adding and subtracting. If you check the costs of living and stack it against a net salary of someone who just graduated college, living alone, or even on your own with roommates, is a pipe dream.
So, my peers, if your parents live within commuting vicinity of your job and are offering you living space back home while you pay off your loans or until you get on your feet, I urge you, very strongly, to consider it. Especially if your loan balance is more than twice your W-2 wages per year. No matter how you may love living in NY with your roommates, if your parents’ house in NJ is within railroad or bus access, then the rent you pay for your NY room is money you can put away. Your tradeoff is getting up earlier to commute to work, and possibly curtailing your late nights around the transit schedule, or figuring out where to crash for the night. But think about what it means for your bank account, and for your financial future long-term. It just might be worth the tradeoff.
4. So what’s a necessary expense?
This one is variable, depending on whom you talk to. My brother will tell you that you don’t need to spend money on anything that’s not rent, basic bills, and only staple food, and everything else is frivolous. I disagree with him, because I find that healthcare, self-care, good food (key word good), music, and travel are necessary expenses as well. By travel I don’t mean work-related commute; I mean exploring at least one global destination per year. One of my friends may disagree with me on the travel bit. Yet another is a professional crafter, and without supplies, she cannot manage. Yet another is a semi-pro baker – her necessary expenses vary greatly from mine. Music is, as you know, something I can’t live without, but that is something people can and often do disagree upon.
The bottom line is this: isolate the things you need and then analyze very carefully what of the things you want will drive you crazy if you don’t have them for more than a certain period of time.
What you need, of course, is the basic survival payments: cell phone, Internet, electric, gas, heat/hot water (depending), transit, and food. I strongly recommend setting aside more money for food. Cheap food is rarely good, and good food is rarely cheap, as I learned – I survived college on ramen and Chinese food, and while it was good for my budget, my health was a wreck. Your health is the one thing that has no price tag, and this is something you must allow for. Food will play into it. So allow yourself to eat healthy.
Then, analyze what else you spend on.
Gym membership: when’s the last time you’ve gone? Do you go regularly? Try to go regularly? If not, then don’t bother with it.
Bars: I know, going out is a staple of your social life. But how much of your paycheck does it eat up? Can you limit to 2 drinks, one outing per paycheck?
Cabs: Personally, this is something you need to have an allotment for, especially if you work late nights, or find yourself out late, subways are a disaster, etc. It’s a ‘rainy day’ expense. But a ‘need’? No. More like a safeguard. And for the love of cheese, if you live in a city where you can call a cab, don’t do Uber. The stories I hear about their prices make me cringe.
Netflix: How regularly do you watch? Is this something you can do without? Can you get the videos/episodes somewhere else free? (channel websites)
Clothing: Review your wardrobe. If it’s not falling apart, reuse it. If it doesn’t fit, donate it. If you know how to mend it, mend it. But don’t buy unless you have to.
Buy off-brand, if you can. I don’t advocate this for technology and medicines, but nondescript brands and store brands are usually just as good as the advertised brand. At Rite Aid, compare their wet cleaning pads to the Swiffer brand; difference is about $2. Get every loyalty and reward program you can manage for everything; it adds up over time; as I discovered, even my infrequent K-Mart household shopping garnered enough points to reduce the costs of a recent purchase. If you have a job that requires you to travel, accumulating miles = free flights. Whatever coupons you can clip, clip them. Google up coupons for any medicine you are taking; you will be surprised at how many there are. Nearly every drug manufacturer has a company coupon you can use.
Once you see what you spend money on – again, that Excel spreadsheet – it’s easy to trim costs if needed.
5. Multiple Streams of Income
Realistically, unless you make enough money to start playing around with stock trading, this means working two jobs. Some of us already do that, others don’t.
But I very strongly encourage a side gig if you have the time or the energy for it. If you’re great at sales, consider a travel agent’s license or a realtor’s license and start a little something on the side of your day job. If you sew or knit, have an Etsy shop. Have something that brings you A Little Extra Money every month, does’t interfere with your day job, and doesn’t interfere with your day-to-day life. Edit a book. Photograph. Model. Write, ghostwrite, the list goes on.
However: if you’re making a significant amount with that business, then you need to think about 1. taxes and 2. maybe taking the business full time.
Which brings me now to, my favorite topic…
6. File. Your. Tax. Returns.
Never mind your credit rating (that’s the next bit). You absolutely must have your tax records up to date. I don’t give a shit for your political beliefs; as long as you live in this country, drive on its roads, take the ambulance services, or ever use public transit, filing your taxes is both your citizenship obligation and civic duty.
Trust me when I say, from years of witnessing what CPAs have to sort out, the IRS is the one agency you never, ever want to piss off. Trust me. I’ve borne witness to what happens when the IRS gets pissed off, and it is very far from pretty.
Reading topic of how it works, with a bit of history and info, and a basic “how I get my refund”: http://money.howstuffworks.com/personal-finance/personal-income-taxes/income-tax.htm
However: unless you file, you don’t know if you are entitled to a refund at all.
What no one will tell you, though, is just how much of your life is hinging on your tax records. Even if you’re just a college grad with one job and you’re barely putting any money aside, your tax records are basically your financial groundwork. If you pay off your loans and want to buy a house, first thing your broker asks for are your returns. No returns, no mortgage, because how else will you show them you’re making enough money to pay that house? I had my student loan payment reduced in the same fashion- by showing them my tax returns to let them know how much I really ended up making last year). If your returns are timely filed and all the tax has been paid in a timely fashion, you have nothing to worry about – because that is seen by major lenders as a sign that you take care of your fiscal obligations. It’s one of the first pieces of groundwork you can lay down.
6. Watch Your Credit Score.
I can nearly guarantee that few people my age are aware of their credit score, or lack thereof.
Once again, I really have to thank the HowStuffWorks site for a nice, common-sense explanation of how it works. Have a read.
Here are, however, some very basic tips with which to raise your score:
– Make timely payments. Even if you’re paying the minimum, make the payments, and make them on time. I cannot put enough of an emphasis on how important it is for you to be on time. There’s no lender who will think twice before dinging your credit and jacking up your interest if you’re late by so much as a DAY.
– Don’t max out. No matter how tempting it is to slap down a credit card for something that sounds awesome now, you have to pay it all back, and the interest rates can and will skyrocket if you’re close to or over the credit limit.
– Make your major obligations first. Since several laws have changed the classification of student loans in 2005, you will likely see that they are the first accounts to get notice on your credit report. They have the most impact, too. You absolutely must make payments on time, even if they’re piddly, even if they’re minor.
– Don’t close your old accounts. A factor of your credit is how long your accounts have been open. It doesn’t look good if you are rapidly opening and closing accounts, it’s seen as a red flag, says you can’t handle borrowing responsibly.
The basic game is showing that you are (a) responsible with your money and (b) can be trusted with borrowing. Even if you make little, you are still borrowing money every time you put down a credit card, and this is going to need to be paid back. So you need to show you are able to pay it back.
The real website to get your reports for free – beware of ads to contrary – is http://www.annualcreditreport.com. You can purchase your score for an extra $5-10, but the credit reports themselves are free. Monitoring services are fine, and I recommend them, but don’t pay anyone extra unless you have no other option.
The credit score you have is basically a groundwork for your life second to the tax returns. A lot of employers, very disturbingly, check your credit to determine hire eligibility – personally, this is complete BS, because if you do have debt, you need to make money to pay it, and the credit score check can weed out a LOT of very qualified employees simply because their number’s “out of range”. However, so do pretty much all the lenders. Need a business loan? Need a car? Trying to get a mortgage? Guess where they will all look, without fail: at your credit.
7. Hang On To Your Cash.
I had a talk with a friend of mine when I was put on leave of absence from my job. I won’t lie, I have revolving debt, a good bit of it, but for the most part, I’ve stayed on top of it nicely. She wondered why I wasn’t pushing to pay off one of my cards, which I could’ve done easily, and had one less payment to make on a monthly basis.
I can still do that, but I didn’t, and I won’t do it all at once anytime soon. And the explanation why is easy: if I were to do that, I wouldn’t be making the rest of my payments elsewhere, because that move would gut out my accounts.
I can pay off debt easily enough; I’m back at work and it’s tax season, so trust me, I won’t be hurting for cash. However: if I wouldn’t have gotten rehired, I would’ve been in deep trouble if I went the “pay off in bulk” route. If I didn’t have an income, I would’ve made the payoff, still have my other payments, and still be in debt and without money at the end of the day. So I am sticking to my outlined plan, where I don’t pay all at once, but I pay enough to beat the balances down. Provided my work remains steady, I’d be out of debt by mid-year at latest and have a cushion in my bank for a Rainy Day.
This is actually the reason why I always tell my friends, especially if they tell me they’re getting a fat refund check: do not spend it! You never know when you’re going to need the money. You never know what’ll happen in the next week, month, or year. If, luck forbid, you’re laid off, would you want a financial cushion in the bank? I’m sure of it. Treat yourself to something small, but stash the rest in a savings account, and keep it for a rainy day.
Using the same method of $25 at a time per paycheck, or even per month, start up a savings account. ING Direct seems to have a good interest rate. So start stashing some away. When you reach a thousand dollars in there, you can release a sigh of relief. A thousand dollars of savings is a good short-term survival expedient In Case Of Emergency. Not the best, not the biggest, but if something were to happen, you’d have something to fall back on.
Just remember, college grads and peers of mine: it does get easier. As the student loan debts shrink, as you tweak the payment amounts and learn the tips and tricks for keeping more of your money in your pocket, it gets a LOT easier to manage.
I strongly recommend visiting HowStuffWorks.com to read up on 401Ks and mortgages. The knowledge is useful to have. Even if you’d later cash out your 401K or never buy a house, you never know who will need your help in understanding either one.
Pay it forward – with knowledge, if nothing else. It’s tough survival, especially if you’re already stretched too thin, but it is the school of hard knocks and if you master it, you will master anything.