While this topic isn't always considered glamorous, and with many millennials ignoring the facts about finances
and winging it, if you want to be truly financially at peace, the
following are three tips I've seen work in my own life and can work in
yours:
1. Not having enough life insurance/disability income insurance
Everyone
will die at some point, and we all know that when that happens it is
entirely unpredictable. Moreover, not planning for this is
irresponsible, even if you don't have children or a spouse. There are
things like funeral expenses, debts, medical bills and more that will
all need to be settled at your death.
Saying,
"I'll get life insurance later" is a sure way to make sure that by the
time you do apply, it will be more expensive than if you buy it now
while you're young. There's even a serious risk that you may not be able
to obtain enough coverage or even no coverage at all. Your health
status can change overnight, and there are many conditions that make you
uninsurable.
An equally serious topic is long-term (3 months or
more) disability insurance. There are multiple studies that show
anywhere from 20% to 33% of adults in their 20s will experience a
disability lasting anywhere from two to five years that will keep them
from working full time and restrict them from being able to engage in at
least two activities of daily living by themselves.
Both these
types of insurances are easily obtained by meeting with a financial
advisor. I recommend meeting with an advisor that is either a broker or
who works for a mutual insurance company with a large book of business
and many happy clients.
People who sell these products have the
proper licenses and training to help you make sound decisions about what
types of financial products to buy, and will generally help you make a
better decision about how much insurance you need than if you simply did
an internet search by yourself.
There's a lot of garbage
information out there from financial entertainers (who are usually
unlicensed, inexperienced or both) and others who have even fewer
credentials. Most of these people only have a background in real estate
(I'm not knocking that, it's just not financial planning.) and hate the
fact that people who work in the financial services make money from
commissions or fees, and let their bias cloud their advice, which is
hypocritical, given real estate agents and brokers make their money the
same way.
2. Not starting retirement planning now
While
you may think that there is plenty of time to begin saving for
retirement, the fact is that the sooner you begin, the longer you'll
have to build a strong portfolio. This should be the central focus of
your finances in your twenties, but it shouldn't be a secondary thought,
either.
You might say, "Hey, I've got a 401(k) at work. I'm
contributing." However, it's likely not more than 6% of your gross
income, and it's also probably a pre-tax donation (meaning you'll have
to pay taxes on it in retirement). Your employer probably doesn't match
more than 3% either. That puts you at 9% pre-tax money (granted, 3% is
definitely free money for you). Most financial advisors recommend
putting at least 10% of your income toward retirement, and more if you're single. (My financial advisor has me and my wife working toward a goal of 20% monthly).
3. Not saving/living paycheck to paycheck
This
is perhaps the largest, yet most egregious error, we can make with our
finances. At least 10% should be going straight into your savings
account and not be touched except in the event of job loss or an
emergency.
Recently, the Washington Post published an article that nearly half of Americans can't afford a $400 unexpected experienced.
I suspect this is largely because of the consumer-minded culture that
has developed in our country (and the west in general) of keeping up
with the Joneses. It causes us to incur stifling debt, and regularly
spending more than we bring into our bank accounts.
This
kind of cognitive dissonance is disturbing and financially dangerous,
especially in the long-term, bigger picture, but can be overcome on a
household basis.
The two best things to overcome this financial illness are to 1) have an automatic savings plan and 2) create multiple streams of income.
Doing this will help you overcome financial bumps (as they will
happen), giving you a reserve, helping you have a backup plan,
preventing you from incurring more debt, and ultimately making you the
master of your finances.
Bonus Tip
Track all of
your expenses. If you are already doing the things above (and even if
you're not), you may wonder where the rest of your money is going. Even
more important than budgeting is tracking every penny that goes out of
your bank account, your PayPal, your wallet, change jar, or any other
form of spending that you have. Knowing what you spend and where you're spending itwill bring you peace of mind and ultimately stop you from continuing to make poor spending decisions.
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