You start typing in the log-in information to check your bank account and an eerie chill sweeps through the room. Is it the ghost of spending past? The spirit of overdraft-fees future? Your pulse quickens, the hairs on the back of your neck stand up, and your brain can't seem to decide if it's time for fight or flight.
When it comes to your finances, it's always better to choose fight.
Fear is a common reaction to dealing with money, primarily because so many people are uncertain about their real money situations, and because they haven't yet mastered the fundamentals of personal finance. So as we approach the day American culture dedicates to all things scary, I'm going to help some of you conquer the fear of finances.
1. Understand Your Finances
First things first: I'll assume you know exactly how big your paycheck is. Those big deposit numbers live on the non-scary side of the bank statement. But take the time to sit down and figure out exactly how much you have in your checking and savings accounts now, as well as in any retirement accounts you may have. Determine how much of each paycheck you're tracking into your 401(k), IRA or any other account. Factor in your student loan or consumer debt.
Then, examine all your expenses. Chart out everything, from rent to lattes. Once you understand your cash flow, set up a basic budget to properly allocate your money from each paycheck to bills, living expenses and savings.
2. Make a Plan to Pay Down Debt
Paying down debt has all the charm of going toe-to-toe in a dark ally with Freddy Krueger, but by making a solid plan you can stick to consistently, you can get out of the financial hole and escape from the Nightmare on Bill Street.
The average millennial today graduates college with more than $35,000 instudent loan debt, and some have far more. Plenty of them won't make that much in annual salary in their first few years of work, so it's easy to see why debt that large feels impossible to handle.
It's not -- if you're willing to get serious, which begins with accepting the idea that you'll have to pay more than the monthly minimums on your student loans and credit card debt. How much more depends on your own situation, and there are plenty of tools out there to help you figure out where you stand and take control. For example, ReadyForZero helps users confront their debt with personalized plans to prioritize how to pay off debt and provide reminders about payments.
3. Save for Retirement, and for Fun
Millennials constantly hear how important it is to save for retirement. Pensions are a thing of the past, And Social Security is doomed to face hefty cuts. But compound interest is a young investor's biggest asset. All these points and others add up to an excellent argument for setting up that company 401(k) you've been avoiding.
But it's also important to save some money for fun. Putting that "entertainment" line into your budget plan will keep you from getting too discouraged while you're paying off debt, and also prevent you from overspending after weeks of depriving yourself of a good time.
It's also important get into the habit of saving when you're young, broke and in debt.
Even if you can only afford to set aside $5 out of each paycheck, creating the habit will serve you well later, when you can set aside $100 or $1000 every payday.
4. Learn the Basic Terminology
The boomer brain might freeze up at the sight of acronyms like YOLO, BTW, SMH and LOL, but a millennial's tends to shut down when confronted with shorthand like IRA, 401(k), ROI, APR and APY.
But IMHO, if you can master one set of lingo, you can master the other, and this one is worth learning: Having a grasp of the vocabulary of finance makes it easier to communicate with professionals who can help you with your money. And the more educated you become, the smaller the fear-factor involved with handling your bank account and investments. Here's a short cheat sheet.
- Compound Interest - Compound interest is proof of the proverb money begets money. With compound interest, your money will earn interest on the interest already accumulated.
- ROI – Return on Investment; what you make compared to what you put in.
- APR – Annual Percentage Rate; the interest rate you're paying on debt.
- APY- Annual Percentage Yield; the true interest rate you get paid (or pay out) factoring in compounding.
- 401(k) – A tax-deferred way to save for the future that takes money directly from your paycheck and invests it. Employers frequently match a percentage of your contribution.
- IRA – Individual Retirement Account. A private retirement savings account; contributions are tax deductible in the year you make them. (So, lower taxes now.)
- Roth IRA or Roth 401(K) – Contributions to these accounts aren't tax deductible, but qualified withdrawals after you retire are tax free. (So, lower taxes later.)
- Net worth - The amount in your name once you've subtracted your liabilities from your assets.
5. Live Within Your Means (or Find a Side Hustle)
There are two ways to increase your savings and decrease your financial woes. Live below your means or make more money. (I recommend both.)
Historically, Americans have had a difficult time living below their means. The "keeping up with the Joneses" mentality can quickly create a vicious cycle of debt. However, some people commit to maxing out 401(k) contributions and paying themselves first by automatically routing a percentage of their paycheck into savings. After years of living frugally, and a commitment to continuing to do so, a rare few even retire decades before their peers.
For those with debt or a desire to earn more than what's coming in from their 9-to-5 job, the other option is to figure out how to make more money. By creating a small business, or a side hustle, you can put extra money towards paying down debt, savings or investing.
6. When All Else Fails, Make Sure You Have an Emergency Fund
If you're reluctant to learn financial jargon, or you're not interested in saving 20 percent of your paycheck, at least take some of the fear out of your financial situation by creating an emergency fund. A fund with three to six months of living expenses can help finance the truly scary moments in life.
Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She also writes her own blog, Broke Millennial. Visit her there, or follow her on Twitter, @BrokeMillennial.