What’s A Millennial To Do? We Don’t All Need A Comprehensive Financial Plan? Here Are 4 Steps To Simple Security.

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There is a lot of focus among financial advisors (myself included) on why ‘you’ need a comprehensive financial plan. However, there are many different ‘yous’ out there. YOU may not be the intended audience for these financial advisors. Everyone can benefit from a little planning. And, if you are just starting out… there may not be any benefit to an 80 page plan document. You might be better off focusing on some basics.   If you fall into either of these categories, you likely don’t need a financial plan:
  • You’re under the age of 30, single or married, don't have kids, and are already saving. 
  • You're under the age of 30, single, don’t have kids, and can't save.
The point is, if you are young and have minimal financial obligations, a financial plan won’t benefit you much. Don’t worry, the day will come when you hit a major life milestone and need one. Until then, it is enough to follow these 4 steps to simple financial security.   

1. Develop The Habit Of Saving

The first step to building wealth is a simple one. You must Spend < Earn and save the difference. You’ll only benefit from a financial plan later on in life if you master this concept.  I recommend saving a percentage of your income instead of a set amount. This is especially beneficial for younger folks who aren’t established in their careers or who have variable income. My golden rule is to save 20% of every paycheck, but this may not be possible when you’re starting out. My advice? Save what you can. If 5% is all you can do, start there. Then, gradually increase your savings rate by 1% every six months until you’re at the 20% mark. This slow approach tricks you into saving more without feeling the sting of cutting your spending all at once.  If you can’t save at all – or want to save more – find a budgeting app to help you take control of your finances. Some popular ones are You Need A Budget, Charlie, and Mint  

2. Create An Emergency Fund 

Nothing derails your finances more quickly than an unexpected bill. Prepare for the unexpected by creating an emergency fund. This stash of cash will cushion you from any surprises that come your way (which they inevitably will). How much you need in your emergency fund is up to you. You typically have fewer obligations when you’re younger, so you can get by on a smaller fund. As you age, life will grow more complex and you’ll need to add to it.  This table shows how much money you should have in your emergency fund based on your age.
Phase Of Life Size Of Emergency Fund
Young adult (18-35) 3 months of expenses
Midlife (35-55) 6-12 months of expenses
Nearing retirement (55-65) 12-24 months of expenses
Retirement and beyond (65+) 24 months of expenses
Every human is different, but the table above is a good guide. If you are 50 and single living in a rent-controlled apartment, then maybe you can get by with only 3 months set aside; if you are 25, married, with 2 kids, perhaps 12 months is a better target. In addition, you can always save more if these limits are too low for you.  

3. Pay Off Debt

Once you have your emergency fund built, throw any “extra” savings toward high-interest debt. This includes credit card bills, personal loans, and anything else racking up 10% or more in interest.  High-interest debt destroys financial security because it locks you in the paycheck to paycheck cycle. It’s simple math. If you earn 8% in the stock market, but you pay 15% in credit card interest, you’re still losing financial ground.  There are many ways to tackle debt, but two popular methods are the debt snowball and debt avalanche methods. The debt snowball method keeps you motivated as you pay off debts with the smallest balances first. The debt avalanche method saves you the most interest as you pay off debts with the highest interest rate first, regardless of your balance.  My advice is to use whichever method you can stick to. Tackling this debt now, while you’re young, means you’ll have more money to buy the things you really want in life later on (i.e. a house, college funds for your children, international travel, and more).   

4. Don’t Skip Insurance

The law requires everyone to have these three basic insurances:
  • Health insurance
  • Car insurance (if you have a car)
  • Homeowners’ or renters’ insurance
Review your deductibles for these policies, and make sure you have enough in your emergency fund to cover them. If you have any high deductibles, your emergency fund may need to be larger than recommended.  For added security, I recommend looking into disability, life, and long-term care insurance. These aren’t required, but they protect your family (and your income) in the event something happens to you.   

The Bottom Line

The only constant in life is change. You might not need a comprehensive financial plan right now. And, the more big financial decisions you have to make and the more trade-offs you have to consider (i.e., if I buy this car, then I have $300 / month less to save for retirement) the more important planning will become. You can consider creating the big plan if you:
  • Receive a large windfall, 
  • Plan to start (or expand) your family
  • Are thinking of a major career change
  • Consider starting a business
  • Want to fund your kids’ college (or have other major expected expense)
  • Experience a major life event like marriage or divorce
Personal finance is overwhelming for most people, but it doesn’t have to be. Simplify the process by following these 4 steps for security. As you work through these steps, you’ll see your happiness dividend grow as you gain peace of mind and control over your future. Want to dive deeper into my simple money management philosophy? Check out my book Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend