How to Ensure Financial Security in the Future–in 12 Steps

This article originally appeared on The Financially Independent Millennial and was republished with permission.

Are you looking to ensure financial security? Depending on where you fall on the Millennial spectrum, you may be just starting in the professional world, starting a family, entering middle management, or even working your way out of debt. No matter where you are, you’ll want to make smart financial choices now to help assure long-term financial success. The practices, habits, and skills you develop now will make a huge difference in how you deal with the inevitable ups and downs of finances throughout your life.

Get Comfortable with Financial Security Goals

Before ever digging into dollars and cents, the first step in assuring financial security – short-term and long-term – is to step back and carefully consider your goals. These could include buying a house and retiring at a certain age to buy a new TV and make sure you have time for a daily walk or run. Once you are clear on the things you want in life, you can start to build a budget around them. You’ll likely modify it, now and throughout life, but you’ll know where you’re going.

Commit to Budgeting 

Start by understanding the goal of budgeting. Many people look at it as a way to restrict spending. In truth, a budget is simply a plan that will guide you to spend in line with your goals. 

Follow these steps:

• Add up all monthly net household income. This will tell you how much you have to spend. 
• List ongoing monthly expenses in four categories: fixed costs that stay the same every month (such as a mortgage or rent payment); variable expenses that change each month but are “must-buy” items (such as food, gas, and medicine); savings (it’s a mandatory “bill”); and spending money. For expenses that come up less often than monthly – such as insurance – it’s a good idea to take the yearly cost and divide it by 12 so you can enter a monthly cost.
• Include a line item in the budget for any credit card debt. 
• Account for a splurge. Many people like to include a line item in the budget (spending money category) for “splurge expenses.”
• Subtract expenses from income. If the resulting number is negative, you must face the facts and find a way to cut expenses or increase income.

Choose Your Credit Cards Wisely

To help make the best decision, start by deciding what you need the credit card for. Is it for occasional discretionary expenditures? Will you be traveling (post-COVID-19)? If so, domestically or internationally? Do you fly a particular airline? Are you seeking rental car insurance, travel insurance, or product warranties that come with some cards? These thoughts can guide you in your search.

In general, it’s a good idea to avoid cards with annual fees. While cards that offer rewards often come with annual fees, it’s possible to find excellent rewards cards with no fees. Plus, a common issue with annual-fee cards is using those benefits that come with that card. If you are committed to using and flexible enough to use the extra airline points that come with the annual-fee card, for instance, then maybe it is worth it. But if you’re earning rewards and not using them, paying an annual fee is akin to throwing money away.

Most adults do benefit from one card that they can manage responsibly, but that’s all. Multiple cards are not necessary. Do choose a card you plan on keeping for a very long time. This is because accounts that are open the longest (with a positive payment history) are more valuable in credit score determination. If you don’t want to use the card at some later point in time, think twice about closing the account. If you need to, you could put it in a safety deposit box–versus close the account.

Care for Your Credit Profile 

Established credit history can impact everything from getting a future loan (such as a mortgage) to renting an apartment. How to build and maintain that history starts by understanding credit reports and scores. Consumers with high credit scores will typically have access to more credit and at better rates than consumers with lower credit scores.

Get a Free Credit Reports

Because the credit reporting agencies use information from credit reports to calculate credit scores, it is essential to review credit reports for accuracy. Consumers can access reports from each of the three agencies, once a year at no charge. If any report shows any inaccuracy, correct it by following the directions on each agency’s website. 

To build or improve your credit scores, follow these straightforward, essential guidelines.

• Use credit. The credit bureaus need payment history to evaluate how borrowers will do in the future.
• Put the debit card away. Debit cards can help avoid overspending, as you cannot spend more than you have in your bank account. But they do not factor into credit scores. 
• Do not charge more than what you can pay in full and on time each month.
• Pay ALL bills (not only credit card bills) on time. It’s the most important factor in credit score calculation, responsible for 35% of scores.
• Minimize the amount of your available credit that you use each month. This factor, called utilization, can be very influential in the calculation of credit scores.
• Pay down debt. Per above, minimizing utilization will generally improve credit scores. For most people, the way to do this is to get rid of unsecured debt that they carry month to month. 

Develop a Habit–of Saving 

The key here is to save something, however small, from every bit of income you receive. A good baseline is to save 10% of net income–more if possible, less if necessary–from each check. Devote part of that to an emergency fund. Ultimately, you’ll want to have enough in the emergency fund to cover six to nine months of basic living expenses. But don’t let that amount daunt you. Start small and gradually build, recognizing that even a few hundred dollars saved will go a long way toward covering an unexpected car repair, medical bill, or rental deposit. 

It’s critical to start building an emergency fund as early as possible in life. In one survey, 69% of Millennials strongly or somewhat agreed that it would be problematic to pay an unexpected $500 bill. In an environment like todays, that opens the door to major financial crises.

Make Adjustments If Living at Home 

In recent years, many Millennials have moved back to their parents’ home. While it can be a big money-saver, if you’re in this situation–or considering it–realize that some adjustments may be in order. Both parents and kids may need to help each other out more than ever. Some general considerations to include in discussions follow.

Set House Rules

Adult children should still have responsibilities. For instance, they should be in charge of their laundry and meals and help with housework and yard work. Parents also must understand that adult children of any age need a certain degree of privacy and are treated as adults. 

Set Expectations for Work

In particular, younger Millennials may not have luck landing a job in their chosen fields right away. But they still need to find a way to pay for some expenses and realize that they are adding to their parents’ expenses. Thanks to technology, job searches, interviews, and hiring are still happening within many companies. But many Millennials are finding they need to take different jobs than they thought they would or experience a delay in starting work.

Create a Budget with Parents’ Input

Monthly expenses might include student loan payments, car payments, and credit card payments. Variable expenses will consist of groceries, gas money, and clothing. The budget will help parents and adult children figure out how much the younger adults need to bring in each month, what is realistic, and how much they can save to one day move out. 

Collect Rent

The budget will help parents determine what they can reasonably charge for rent. Asking kids to pitch in for housing serves several purposes. It keeps them keenly aware of real-world expenses that they will incur when they move out. It ensures that they maintain at least some income stream. And it helps parents offset additional expenses (think utilities) that they incur with another person in the home. Some parents choose to put collected rent payments into a savings account for a young Millennial child to use to furnish their eventual new home or use it as a down payment on a home. 

Pay Student Loan Debt 

The U.S. Department of Education has extended loan payment forbearance, zero percent interest accrual, tax-free employer contribution benefits, and its pause on collections. That may be great news for many Millennials, but anyone holding student loan debt should understand that while payments may get temporarily stopped, the loan’s full amount will still need to get paid on time. Even in bankruptcy, student loan debt cannot get discharged; it must get paid.

Some Millennials may want to look into loan consolidation. It may offer a lower fixed interest rate and lower the monthly payment and extend the repayment period. Loan consolidation may be an option for someone who’s genuinely cash-strapped, but remember that it’s essential to pay off student loan debt as quickly as possible. 

Teachers or public servants may qualify for loan forgiveness. Some people qualify for income-based repayment plans. Other professions have programs that help repay student loans with monthly assistance, one-time payoffs, or matching funds. Ask your employer’s human resources professional for guidance. 

No matter what or when, contact your lender if you believe you will be unable to make a student loan debt payment. Lenders are usually very open to figuring out a payment plan. 

Understand Your Debt-to-Income Ratio

A debt-to-income ratio compares your total monthly debt payments with monthly gross income (income before taxes and other deductions). In other words, it’s the percent of your gross income that goes to paying debt each month. 

Why is it important? It’s a primary way lenders measure a consumer’s ability to manage any money they plan to borrow, whether for a mortgage, vehicle, or other. A lower ratio makes a borrower more attractive to a lender. A high debt-to-income ratio can indicate too much debt for how much income you earn. Typically, a 43% debt-to-income ratio is the highest a borrower can have and still qualify for a mortgage. However, lenders usually prefer ratios of no higher than 36%.

To figure your debt-to-income ratio, add up the amount of all monthly debt payments. Divide this total by your gross monthly income. For example, if you pay $2,000 a month for a mortgage, $150 for a vehicle loan, and $300 for other debt payments, total monthly debt payments would total $2,450. If your gross monthly income is $5,000, then your debt-to-income ratio would be 49%.

Eliminate or Avoid Any Credit Card Debt

Some debt can be considered “healthy” or “productive.” It could include (some degree of) student loans, and sometimes, debt used to grow a business. Most other types of debt are unhealthy or unproductive. These include credit card debt, personal loan debt, payday loans, and other bills for non-lasting purchases. 

If you can pay your debt down on your own, within your budget (check out the avalanche or snowball method), do so. You also can contact creditors to ask about payment plans or other assistance. 

A personal loan can effectively consolidate and pay off high-interest debt, as it generally offers a lower rate than a credit card account. Strict payment schedules help eliminate debt according to plan. Or, a balance transfer – transferring the balance to a low-interest, or zero-interest, credit card – can be helpful for some people who have accounts with high interest, but only when you pay off the balance before the promotional rate expires.

If you’ve found yourself in a situation where you’ve suffered real financial hardship and can not make even minimum payments, debt settlement may be an option. Debt settlement companies regulated by the Federal Trade Commission can help lower principal balances due through professional negotiation with creditors.

Obtain and Maintain Adequate Insurance

Insurance to protect your home and family can make or break your financial future. It includes homeowners’ or renters’ insurance, health insurance, and if you have dependents, possibly life insurance. Also, put in place appropriate legal documents, including a will, trust, and advance directives.

Once you have policies in place, it’s a good idea to do a rate check every year or two. You can compare quotes online and have brokers follow up with you at a time that is convenient for you. Also, evaluate if your coverage needs have grown. Do you need a homeowner’s policy rider for valuables that you have acquired or inherited? Is your life insurance adequate for your current family size? 

Review policies to ensure you are getting any discounts for which you are eligible, such as for safe driving, home security systems, and joint policies. Check your car insurance deductible. Depending on your car’s age and value, it could be time to raise the deductible. 

Older Millennials may want to consider purchasing long-term care insurance coverage. It can cover certain expenses that medical insurance or Medicare do not cover. Do some research, find a financial planner or healthcare consultant, and determine if this is right for you. What may factor into your decision is knowing prices increase with age.

Invest in Retirement

Millennials may find it hard to relate to retirement goals. However, they can relate to having options to do what they want when they want.

To make that happen, there’s no magic bullet. It’s all about saving and starting early. You’ll have a lot more money the sooner you start saving, thanks to compounding interest. Save $500 a month starting at age 30, and you’ll have nearly $452,000 at age 65, assuming a 4% annual return. Save $1,000 a month over the same time, and you’ll have $904,000. If the annual return is 6%, expect nearly $1.4 million.

Use your budget to help make savings a habit. You also can set up self-billing. Many financial institutions let you arrange automatic withdrawal from a checking account to a savings account. Or, check with your employer for automatic deposit into a savings account.

And if you work for a company with a retirement savings plan, take full advantage – particularly if the plan offers matching funds. In general, saving at least 10% of your income for retirement is a good goal, although many experts suggest 20-25%. 

Conclusion

Understanding these concepts will up your financial literacy rate exponentially. Putting them into practice will get you on the road to financial security, tremendously up your chances for a financial future, and lower stress over your lifetime.

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