‘Broke Millennial’ (2017) is a sensible personal financial handbook meant to assist cash-strapped individuals in their 20s and 30s in planning for the future. Complete with easy-to-use yet powerful advice, this book will help you quit barely getting by and begin to prosper both personally and financially.
This book’s author, Erin Lowry, is based in New York and is known for her practical counsel, is often interviewed on popular news channels in the United States.
What will we learn in this book:
When you’re a broke 22-year-old coming out of college or a thirty-year-old just trying to make ends meet in a big, expensive city, money may be a terrifying issue. As paying for your expenses is difficult enough in these times, how can we save for an emergency fund, leave aside a nest egg large enough to take us into retirement?
The path from financial zero to financial hero, like all major endeavours in life, begins with a single step. This may be as simple as automatically saving 5% of your income each month or switching to internet banking to take advantage of a better interest rate.
Erin Lowry illustrates in this book how even the most broke millennial can achieve financial fulfilment in their lives.
Don’t fear finance:
Many individuals in their 20s and early 30s are held back by their fear, confusion, and stress about money. This is a pretty regular occurrence among millennia’s.
Getting a grasp on your finances might be the difference between a fulfilled life and a frustrated existence. If you don’t handle your money effectively, you can find yourself working to pay the rent but unable to have the life you truly want. It may even mean foregoing every thrilling adventure on your bucket list, or splurging on them now, only to find yourself surviving paycheck to paycheck for the remainder of your life.
Having a grip on your finances is a serious matter. It’s no surprise that financial concern can be crushing. But it’s not that difficult when you know how to enhance your relationship with money without using complicated calculations. It just takes a series of modest moves that add up to one major shift.
Find the hindrances:
Money management isn’t difficult. After all, sticking to a budget and saving for a rainy day is a rather simple concept. So, why is it so difficult to follow?
Because obsessed activity isn’t reasonable, there’s nearly always a deeper issue at work. So, the only way to alter your habits is to discover why you overindulge in those habits.
Your relationship with money began when you were a youngster. To modify your obsessive behaviour, you must return to your youth, when the habits that hold you back were originally set.
It all started to come together when you realised how your parents felt about money. Perhaps they were upfront about the family’s finances, or maybe they viewed money as a taboo and rarely discussed it. Possibly you felt insecure of your family’s affluence. Whatever your upbringing was like, there’s a strong chance you can trace your present money issues back to those formative years.
Identifying these impediments is the first step towards financial independence. To begin your road to Financial Freedom, we need to answer to ourselves honestly certain questions:
- What is your first encounter of money, and how does it make you feel?
- Where did you receive the money you spent as a child?
- What types of items did you purchase?
- How did your parents discuss money?
- What are your current financial worries?
Now go over your responses and think about what they indicate about your money mind-set. If you worry about money getting exhausted or being in debt forever, then your state of mind is most likely caused by fear and anxiety over money affairs.
The author presents some specific actions to remove the aforementioned impediments, and these steps are considerably easier to put into action.
Budgeting:
There is no one-size-fits-all strategy to establishing financial management. Therefore, how you organise your monthly spending is determined by your goals.
According to the author, there are two primary techniques to budgeting: one is cash diet and the other is tracking every last penny.
Let us begin with the cash diet. This strategy, as the name implies, is shifting as many of your money-related transactions as possible from plastic to cash. But it may seem to us that in the digital era, why would you pick this old-school technique? According to research, when you pay with cash rather than a card, you spend less. Second, it’s a little less expensive. When you pay cash, you avoid credit card fees, interest payments, and that awful monthly bill. However, in the present era of UPI and digital transactions, we may not be completely in line with this second portion, but the first argument remains relevant. When we pay with cash rather than a card or a digital transfer of money, we tend to spend less.
Making the switch to cash-only might be challenging, but it is not impossible. Begin by breaking down your monthly budget into weekly amounts. This allows you to keep track of your spending and eliminates the need to put a month’s worth of cash into your cupboard.
The second approach of budgeting is to keep note of every single rupee we spend. The aim is to record every single transaction on a spread sheet, with columns for the date, the item purchased, and the total amount – all the way down to the last paisa. It may appear exaggerated, but it’s an excellent alternative if you’re the type of person who ponders where all of your money went at the end of the month.
Keeping track of your costs in this manner helps you to uncover previously unknown trends. As a result, you will be able better manage your money.
Budgeting allocations:
In general, your money is spent on one of three things: fixed expenditures such as rent, variable expenditures on everyday needs, and financial goals such as saving for a house. In a perfect scenario, you would allocate 50% of your net income to the first group, 30% to the second, and 20% to the third.
If you’re a millennial living in a big city, this percentage allocation may seem a little insane. This is because, in a major city, even before you include utilities, loan repayments, or metro train tickets, your rent usually consumes half of your salary. That is not to say that budgeting by percentages is useless. It just means that you must progress gently towards the ideal goal.
Realistic budgeting percentages will assist you in meeting long-term financial objectives while remaining on top of monthly obligations. Consider these ideal percentages as a target for when you earn enough to make them attainable. You may alter them to your own scenario and re-evaluate them when things change.
However, keep in mind that your percentages must be fair. In other words, you should not devote 40% of your budget to fixed expenditures, 55% to flexible spending, and 5% to financial objectives that are long-term. If this is what your situation demands, then try to keep that as a temporary allocation. When you get your next salary hike, keep your fixed expenses and flexible spending at their current levels and save the extra money for your financial goals. This will change the budgeting percentages and better align them with the ideal, and over time, you will reach the above discussed ideal percentages.
Credit cards are good if managed efficiently:
Credit cards are a convenient method to spend your money. You not only get disoriented about your expenditures, but at the end of each month you are left with a mountain of bills and hefty interest charges.
That’s really solid argument to avoid using credit cards entirely. But the author says that it is not the end of the road for Credit cards though.
While being cash-only might help you keep a grasp on your finances and avoid unexpected costs, using a credit card helps you develop your credit score, which will come in useful if you ever want to borrow money to purchase a house or for any other means.
The simplest method to take use of credit cards without exposing yourself to potential risks is to follow one simple rule: never spend more than you are capable of paying off in full each month, and always pay the whole balance.
A credit card is similar to a one-month loan in theory. The credit card provider issues you a piece of plastic that allows you to make purchases up to a predetermined monthly limit. You purchase what you need, and the credit card company issues you a bill at the end of the month.
However, the bill you receive has two numbers. The first number is the entire amount owed. The second number represents the minimum amount owed. This is the minimum amount you can pay without failing, and it implies that the remainder of your debt will be carried over to the next month.
You have two options at this moment. Pay the entire balance and you’re free – the credit card company can’t charge you if you don’t owe anything. But if you only pay the minimal amount required, then they will charge you interest on the remaining amount owed. This interest cost can be 20% per annum or more, and it frequently includes specific terms that allow the credit card issuer to raise the rates to higher levels if you miss the payment deadline.
This is a well-planned trap that entices millions of credit card users to spend more than they can afford. The end consequence is a destroyed credit score and escalating bills that get more difficult to pay off with each passing month.
How to avoid the Debt trap:
Rather than waiting until the end of the month to see whether there’s anything left over from your salary, save a portion of it right away once your salary is credited.
This isn’t too much of a stretch if you’re a well-employed, mid-career forty-something. However, if you’re a financially strapped millennial who considers themselves lucky merely to break even, paying yourself first is difficult. Nonetheless, there is one strong reason why you should do it anyhow.
Life is unpredictably unanticipated, and you have no idea what will happen next. This is why it’s critical to prepare for the worst, which is precisely what you’re doing by saving money.
When you hit a terrible patch and everything starts to go down, you have two choices. You may either utilise your accumulated funds or a credit card to pay for that unforeseen expenditure.
The first alternative is unpleasant; after all, no one likes to utilise their emergency money. However, the second choice is even more detrimental. If you use your credit card to meet an emergency, you’ll be paying debt interest rather than saving for the future. This exposes you even farther the next occasion when something goes wrong.
The simplest strategy to pay yourself first and escape this debt trap is to start small. Instead of buying a couple of coffees every week (Rs. 50 per week, or Rs. 200 per month), put that money into a savings account. It’s not much, but that’s the purpose. The new habit will persist if you adjust to these minor and simple alterations.
You may begin making larger shifts once you’ve learned to live without this lesser amount (that is being saved) each month. Increase your monthly savings to Rs. 500, Rs. 1000, or even Rs. 1500. You may simplify things even further by having your bank set up an automated transfer to an RD account or to a Liquid fund. By doing this, you need not have to worry about how to direct this money month-on-month.
How much should be the Emergency Fund:
Whether it’s an education loan, personal loan, or a combination of the two, being in debt nearly guarantees that you’ll be slammed with an unforeseen payment at some time. And if you are unprepared for one financial catastrophe, you will be much more vulnerable to the next.
That’s why it’s critical to maintain an emergency fund to get you through until your next payday. It means you may avoid credit card debt and return to saving as soon as the tough conditions improve.
However, how much you need save to overcome this poor luck is dependent on your financial condition. According to conventional financial expertise, your emergency fund should cover six months of your living costs.
If you are debt-free or have manageable debt, you should be able to follow this advice and save enough to cover six months of basic living expenses. Simply sum up your monthly expenses for necessities like rent, bills, and groceries and multiply by six to reach the goal you want to attain.
Furthermore, if you are self-employed, you’ll need to save enough money to cover nine months of living costs. This is due to the fact that you are working with variable revenue. That’s already difficult even in the best of circumstances, so it makes sense to supplement your emergency reserves by additional few months of living costs.
In an ideal world, your emergency fund should consist of cash in a bank account or in a fixed deposit, earning at least the inflation rate. This emergency money should not be invested in any other financial instruments such as bonds, mutual funds, or stocks. That’s because having an emergency fund provides you with more than just a cash buffer; it also provides you with peace of mental state. When you’re worried out about other things during an emergency, the last thing you want to do is go about selling stocks in your demat account to get the funds you need.
Conclusion:
The above discussed are some of the easy tactics that, when combined, will help you get control of your finances and influence your financial life.
Many millennia’s find money stressful, and if you don’t have a grasp on your finances, you’re unlikely to save for the future, which means you’ll fall right into debt. You’ll be off to a fantastic start if you learn to budget by percentages (as stated previously in this article) and use your credit card properly. Have an emergency fund to help you get through difficult times, and you’ll be well on your way to financial independence.
