Big Picture, Financial Planning, Millennials

11 Steps To Perfectly Manage Your Finances As A Millennial

“What would you do if you were me?” This is the top question I get asked from friends and family.

Here’s exactly what I would do if I was starting out as a millennial.

1. Get A Grasp Of Your Cash Flow

Managing your cash flow always has to be step #1. If you cannot live on less than you make, you are screwed financially.

Go over the last 3 months of spending and put a budget together with averages over those months. What do the numbers say? Do you have enough surplus left over? If not, then you have to find areas to cut down your spending. The only way to do this is by looking at the numbers.

2. Opt into your 401(k) to the match

There is not many free lunches out there, but your 401(k) is one of them. If you make $100k and they match 100% up to 3%, and 50% up to 5%. Then that means if you put in 5%, they match 4%. 4% of $100k = $4,000 of free money from your employer. This is a big deal. Take it.

3. Build a small emergency fund

I like to build $3,000 in an emergency fund first. Why you may ask? Because if you don’t and something happens you will go right back into debt. That feeling of going backwards can be really hard to handle. If you rent and lease you could probably do less than someone who has a family, owns a home and older car.

4. Pay off all high interest debt

What you consider high interest debt is important. For me, its above 6%. Any debt above 6%, I would aggressively pay off and one at a time with the highest interest debt first. Then roll that payment to the next debt until all are gone. You have to get aggressive with high interest debt so you stop throwing away money.

5. Build a 3-6 month emergency fund

Once all debt is gone, I would focus on building a strong cash reserve in a high yield savings account (HYSA). 6 months is a good framework, but for some with variable income, old house, family, etc. 12 could be better. And for others with low risk lifestyle, 3 could work well. You have to make it unique to your situation. Oh… and do not invest this. The goal of an emergency fund is liquidity and stability.

6. Max out your HSA

Your HSA is the most tax-efficient account out there. It reduces your taxable income today, investments grow tax free, and the funds can be used tax free on healthcare in the future. If you can, maxing this out and letting it get invested for the future can reap huge rewards. It also can be used tax free on long term care insurance in the future.

7. Max out your ROTH IRA

Getting tax-free dollars saved for retirement is never a bad option. ROTH IRA’s are a great account for this and will give you a ton of flexibility in the future.

8. Save for short term goals

If you are saving for a car, down payment, wedding, etc. this could move up the list as goals are always a top priority. If not super important, it falls farther down the list so you can best plan for your future. Use an HYSA for this!

9. Start a taxable investment account

This is the flexibility account. You can put as much as you want in, use it whenever you want, get favorable long term gains tax treatment, etc. Adding and building to this just gives you more options in the future. It’s why this is my favorite account.

10. Add more to your 401(k)

If you have done all of those and still have extra money, go add more to your 401(k). Getting more dollars stashed away for retirement is always a good move. Some would put this above 9 as you could get a deduction or can go ROTH, but it is less flexible. Definitely a preference thing.

11. Automate This All And Reverse Budget

Now that you understand where your monthly dollars should go, automate all of this. Automate your 401k, emergency fund, debt payments, ROTH IRA, etc. If above you found our cash flow is $10,000 a month and you on average spend $6,000, then you should automate this $4,000 out and spend what is left. This is known as reverse budgeting. It is what I do every month and it works super well!

As a recap I would:

  • Assess my cashflow/budget
  • Opt into your 401(k) to the match
  • Build a small EF
  • Pay off all high interest debt
  • Build a 3-6 month emergency fund
  • Max out your HSA
  • Max out your ROTH IRA
  • Save for short term goals
  • Start a taxable investment account
  • Add more to your 401(k)
  • Automate This All And Reverse Budget

Disclaimer: none of this is advice, it is just for informational purposes. Talk with your financial planner before implementing any of these strategies.