As Millennials, we know being financially-savvy and strategic is important. But there's a difference between knowing you need to deal with finances, and actually doing it. Often the problem isn't so much as not being able to, but rather not understanding how to -- whether because there are too many options available or because they seem to be foreign concepts.
Until recently, most 20-somethings have had their finances umbrellaed under their parent's coverage, and are only now having to navigate it themselves. And it isn't easy. In a recent study conducted by Wells Fargo, more than half of Millennials reported living paycheck to paycheck, with debt among the top of their financial concerns.
Important financial obligations can be broken down into three basic categories: debt, insurance and savings. Below is a breakdown of each, what they consist of, and their importance.
Debt & Loans
Most Millennials are dealing with student loan debt. Unfortunately, it can be easy to ignore them and assume they'll be easier to deal with later. Adopting this mindset is a huge mistake -- one you will regret.
There are two main methods you can use to pay off debt. The "Avalanche Method" is when you pay off balances with the highest interest rates first. Some people's instinct is to do the opposite, paying the lowest balances first, also known as the "Snowball Method." While this can help 20-somethings gain confidence in their ability to meet monthly payments, it typically ends up hurting in the long run.
Although the balances with the highest interest rates may seem too intimidating to deal with now, they are only going to worsen over time, ultimately increasing the amount of money you pay. You don't want to feel like you are making regular monthly payments yet never seeing the balance owed decrease.
At the very least, you need to get in "good standing" with the loan companies, otherwise your credit score will plummet, making it impossible to rent a car, let alone an apartment or house.
Health & Car Insurance
The truth is you never know when something unexpected might come up. If your health goes down hill, you don't want your bank account to go with it. Consider this: A broken bone can cost upwards of $8,000 to fix, and spending a few days in the hospital can cost anywhere around $30,000. There are plenty of companies out there targeted specifically towards Millennials, such as Oscar health insurance company, who have plans that include free doctors visits, generic drugs, phone consultations, an app, and free vaccinations for as little as $87 a month. Since prevention is the best form of treatment, you really don't want to wait to get proper health insurance.
If you're in a car accident that causes injuries or damages, you want to make sure you're compensated financially. You need to remember it is not just yourself you need to worry about, but everyone else on the road as well. You may think the chances of something happening are slim, and your money is better spent elsewhere for the time being, but statistically speaking, it is likely an accident will happen sooner or later. Imagine taking hundreds, if not thousands, of dollars in the car with you every time you drive and, if an accident happens, you immediately lose all of it.
Your premium, or monthly payment, gives you liability coverage, which protects you if you're at fault and is legally required in most states. There are also options for medical and property coverage.
The Zebra is a great resource which makes car insurance for Millennials simple; you can compare different companies, find the coverage plan which makes the most sense for you, and get all the quotes you need.
Savings & Retirement Plans
Of course, one of the best things anyone can do with their money is save it. But a personal savings account is not always best, especially for Millennials. Not only is it too easy to access the funds, but they often do not offer the benefits of growing interest rates and capital gains like retirement plans do.
When you're in your 20s, this seems like something that can wait, since you have a lot more semingly important finances to handle like, let's say, that accumulating pile of student loans. You can put off your retirement fund for as long as you want. Forever, if you so choose. But should you? Definitely not.
There are two basic retirement plans, a 401K and an IRA. A 401K is sponsored by your employer, with contributions deducted from your paychecks before taxes, also known as a "pre-tax contribution." In most cases, employers will match the amount contributed up to a certain percent; passing up on this opportunity is essentially passing up on free money. An IRA, or Individual Retirement Account, is not linked to your employer, meaning the contributions are made post-tax.
With a 401K you will benefit now because you won't have to pay taxes until you withdraw later, when you're retiring. Or, you could pay the taxes up front now through a Roth IRA, and not have to later in life. However, since there's no way of knowing what the tax rates will be in the future, this could work either for or against you.
Either way, don't pass up the opportunity to set up a retirement savings account now; the earlier you start, the better off you'll be.
Regardless of whether you are worried about debt, savings or insurance, when it comes to managing your finances, the worst mistake you can make is waiting, and assuming it is something you can deal with later. Know that, however stressful or overwhelming it may seem now, it will only get worse the longer you wait. Tackle it head on, and do what you can now.
Years from now, you'll wish you had started today.