Many young Americans born in the 80s and 90s have had difficulty entering the workforce around the last recession, one of the biggest reasons being that they’re often straddled with debt. Student loans are a massive burden, as are credit cards and other types of loan, exacerbated both by the job market and easy access to online markets. Here are some tips to help millennials see the light at the end of the debt-free tunnel and get saving.
When you’re out of college and heading to a new job it can be tempting to either panic about or ignore your student loans by being overly thrifty or taking on huge rent/ car payments. Student loans can often be more than $30,000, and shouldn’t be taken lightly. But that is no reason to impose counterproductive austerity on yourself. Acquiring the basic knowledge about money handling means developing a sustainable budget and planning ahead to avoid emergency loans or selling possessions to make payments.
Managing Your Finances
Being young provides advantages as well as drawbacks. You have decades of potential monetary growth, as well as an ability to save early, take advantage of compound interest and get cheaper access to certain things such as life insurance.
The first step is to be aware of your property and net worth, including loans and interest rates. If you’re unemployed, check to see if you’re eligible for deference of your loans. Keep lines of communication open with the loan company. Start paying off loans with the highest interest rates or variable rates first, as they are prone to increase. If not, you can always refinance student loans.
Paying on Time
If you can, keep loan payments to between 8-10 percent of your salary, or at least don’t let them exceed your annual pay. Federal student loans give you 10 years to pay them off. The “income-based repayment” government program is available to those whose job pays too little to cover loan payments. It reduces your monthly payments for the period of low income. Those without a job after six months following graduating can ask for a deferment. However, both the interest and principal will have to be paid if you can’t finish all the payments within 20 years. For this reason, it’s wise to avoid extending loans beyond 10 years of repayments. Paying as much as you can each month keeps your interest charges as low as possible.
To accomplish this, a 50-30-20 budget is a good place to start. This simple budgeting model splits your income so that 50% is devoted to necessities such as housing, food and payments on student loans, 30% on entertainment and other discretionary spending and 20% is set aside for savings. Your savings can go to both retirement and an emergency fund to help with unemployment, unexpected medical fees and so on. Doing this can help you avoid getting into a spiral of interest with a credit card.
Building Your Credit Score
Building credit score starts with meeting payments on time. A strong credit score will help you buying a new house, car or acquiring another large loan. Check if your employer has a 401(k) savings plan, and if so, enroll and make sure to plan your contributions. In this uncertain job market, it’s especially important to deduct a regular amount from your income for emergencies. Nationwide Super and other superannuation funds offer benefits for young savers.
Spending on Others
It can be especially difficult to keep others in mind when budgeting. Try to forestall buying pets or taking them with you when you move out. If you must manage a pet, do so in explicit financial agreement with parents or friends as unexpected veterinary costs can be considerable. Life insurance is important for your family and loved ones, to shield them from the responsibilities of debt.
The job market is similar to studying in one fundamental respect: your momentum will carry you forward onto more difficult tasks and help you persevere in the face of hardship. Set yourself some basic, short-term financial goals (in pursuit of longer-term, more serious ones like buying a house) and you will find your financial competency increases. If you can nail a weekly, fortnightly or monthly budget there will be little standing between you and your career goals. This translates generally into your work life as well: going the extra mile without being asked, increasing productivity as a personal challenge rather than as a specific obligation will demonstrate your value to your current and future employers and help you climb.
Don’t let pessimism or resentment control your destiny: start planning today!
Benjamin Coates is a personal finance consultant sharing his knowledge and tips around the web. He is a Father of a 9-year-old daughter and Step-Father to a 21-year-old son.