Millennials and money: Why personal development is useless if your finances aren't in order
I recently came across an interesting article (via the Quit! podcast) that discussed how an overwhelming majority of millennials (I know, that damn m-word) want to buy a house in the near future. Meh… boring news, right? Well it is at the surface, until you unpack the rest of the story. Specifically, this snippet:
The reason I bring this article up is not to lecture/educate you on the dynamics of home ownership/purchasing – how on Earth would I even know about that in the first place? You can read the article yourself by clicking this link. I bring this up because it leads nicely into an important topic: preparing for your future… financially.
Making ends meet
The main focus of this blog is useful personal development advice and daily actions that you can do to make you the best person you can be in the future. However, as much as I like to encourage positive behavior and mindset changes, you can’t deny the one obvious truth of it all: you need to have the money to put the bread on the table and a roof over your head before thinking about all this extra stuff. Abraham Maslow talks about this in his hierarchy of needs where he classifies financial security as more important than the need to fulfill one’s potential (self-actualization). In other words, there’s no point dreaming about all those productivity hacks, mindfulness practices, and personal development tricks if you’re barely able to keep your checking (and savings) account in the positive.
The joys of being young
Being young can be lots of fun. If you’re lucky, you have relatively few worries, plenty of social activity, real sexual swagger, videogames to enjoy, parents to handle most of your urgent expenses (like rent and tuition fees), and more of such extravaganza. If you’re even luckier, you might have a part-time job to bring in some extra cash next to your studies.
And this is where too few people pay enough attention.
Assuming that you have a relatively normal and stable life with parents to take care of those major expenses mentioned earlier, you should have almost zero expenses. Ok, you spend money on social activities, groceries, a cell phone subscription, and maybe a gym subscription if you’re the athletic type, but these are relatively minimal compared to the costs of financing a mortgage, credit card, various types of insurance, or even sustaining a family. All this is to say that when you’re young (let’s just say a student around 25 or younger), your financial responsibilities are extremely, extremely minimal in the greater scheme of things.
If you then do have a part-time job on the side, this money is essentially pure profit. Once again, this is where not enough millennials (sorry, I understand that many people detest the use of this word, but it saves a lot of typing because it’s very succinct) pay attention. For the love of God people, save this money!
My words probably aren’t very convincing, so let me use those of a man distinctly wiser than me to drive the point home. In his 2011 Ted Talk, the economist Shlomo Benartzi discussed the concept of “Save More Tomorrow” to help discipline us. If you don’t have time to listen to the talk (which you probably do), the basic idea of it is to perceive saving as a reduction of a monetary gain instead of as the cost of reducing your spending habits.
In normal English, it means that from any future gains in income, – like getting a new part-time job, a pay-raise, or just your monthly paycheck – you should immediately put x% of it to your savings instead of cutting back now on current expenses to get to that same target amount of saving. The crucial difference between this concept and the usual understanding of saving is based on the fact that people powerfully dislike losses (insert link), so it’s extremely important to reframe the concept of saving from “cutting back and losing out on current pleasures” into “a reduction in a (future) gain while still maintaining today’s pleasures.”
To sum it up: people feel strong psychological pain when you tell them to stop buying that $6 Mocha Macchiato at the Starbucks every day so that they can save properly; but have a far easier time putting away that same amount of money from their paycheck at the start of the month and continuing their Starbucks-indulged life as usual.
Another benefit of being young is that you can gleefully and powerfully take advantage of this fantastic concept called compound interest. To avoid boring you with the technical details, I refer you to this 2-minute video that explains it nice and simply. Nevertheless, the lesson behind it is that (young) people often nonchalantly disregard how saving as little as $10/month can eventually explode into a phenomenal amount of money over a long period of time (think 10, 20, or 30 years). Granted, the true beauty of it comes when assuming a reasonable interest rate or rate of return like 5-ish% or more, but the lesson still stands: it doesn’t take a mind-bending amount of money to be able to save for a financially-secure future.
Speaking of rates of return, this brings us to investing. Given that interest rates for savings' accounts are depressingly low these days, investing seems to be a decent alternative to just lumping the cash in a savings’ account. The thing is, the complicated nature of investing can be pretty intimidating, so it’s no surprise that many people are scared off by it (the Great Recession also, understandably, scared people away from anything related to financial markets). However, any Americans reading this are lucky: you have services like Wealthfront and Betterment, which are companies that basically do all the complicated investment madness for you.
If you don’t live in the States, I suggest calling up your bank, scheduling an appointment with one of their investment employees, and explaining that you want to start investing and saving money for the future. They usually ask you how comfortable you are making losses, what monthly amount of money you want to set aside, what your financial situation is, what your goals are, and all of that stuff. They’re the experts, so just have a conversation and see what they say. Simply tell them that you don’t know a thing about investing but would like them to do it for you because you want to looking to build a secure future for yourself. These meetings usually only take around an hour, so don’t give me some lame excuse that you don’t have the time. If this is important enough to you, you’ll find a way to make the time.
Accounting: tracking the numbers
In closing, I also suggest you start tracking your monthly expenses. It’s hard to save money if you don’t know the who, what, where, and how of your money on a monthly basis. It’s as simple as dedicating an afternoon at end of the month to pull up an Excel sheet, grab a calculator, and register where all your money went each month. Obviously, you should check the history on your online banking account to figure all this out.
Otherwise, there are probably a hundred zillion apps dedicated to helping people with this. If you prefer using an app, just do a quick Google search to find one! Good luck!
See you, Space Cowboy.