While it is perfectly okay to be impulsive when it comes to certain things, there are some aspects in your life that you should never just leave up to chance. Financial security is one of those things. Nobody is saying that you can’t indulge yourself every once in a while by buying that thing you really wanted, but the point is that you should have a plan even when doing that. After all, it’s not like you can just spend the money you need for groceries on a brand new coat. Read this to understand the importance of financial planning.
- Over the past year, dozens of financial professionals sat down with Business Insider to discuss millennials and their money.
- They’ve offered advice and inspiration on everything from setting goals to tackling student-loan debt to investing.
- Here are 21 of their best insights to help you make a plan for your money.
- This article is part of a series focused on millennial financial empowerment called Master your Money.
Start with what you want to achieve
“Let your life lead your money — that’s the first thing. What is it that you aspire to do? What do you value? What are your goals? Let’s start there. Then the money is not necessarily a second. It’s a complement; it’s a partner.”
— Preston Cherry, certified financial planner and founder of Concurrent Financial Planning
Leave some room for the unexpected
“When I see people with a financial plan, one of the things I tell them is to expect the unexpected.
“As long as you’re walking on this earth, you’re going to have an unexpected expense. I call them ‘the known unknown,’ and those are expenses that you know are going to happen, but you don’t know when.”
— Tania Brown, certified financial planner with SaverLife:
Automate your money to make progress a no-brainer
“What I like to have clients do is automate their transfers to whatever the goals are, things that they’re trying to achieve, and have those in separate accounts so that they can clearly see their progress. And it’s all just sort of set up, and it’s happening for them. So they make the decision once, and then it triggers on its own.”
— Anna N’Jie-Konte, certified financial planner and founder of Dare to Dream Financial Planning
A budget might seem intimidating, but you can’t control where your money goes without one.
Keep your goals top of mind
“The main point of financial planning is to use your money as a tool for life. As far as the budget goes, understanding what you actually want to do in your life is very important to build that plan.”
— Eric Roberge, certified financial planner and founder of Beyond Your Hammock
Find out where your money is going already
“I would say that the first step — I’m always surprised at how many people either discount this or put this off or just don’t know — is really being honest about how you’re spending your money. You have to know how much is coming in versus how much is going out on a monthly basis.
“It might sound simple, but to me that’s the very essence of what it means to start thinking about a budget. That term doesn’t have to be so scary, but if you don’t take that step back and evaluate this, you’re never going to be able to move forward.”
— Kelly Lannan, the vice president of Fidelity Investment’s Young Investors for Personal Investing
Add savings into that list
“Start tracking how much you save each year and aim to save 10% to 15% of your income as an ‘investment’ in yourself. You’ll be amazed how quickly it will add up.”
— Kristi Rodriguez, vice president of thought leadership for Nationwide Financial
Consider giving your credit cards a break
“I always suggest trying a cash diet, where maybe you take a week or a couple of weeks where you don’t use a credit card and start using cash only.
“That way we’re just a little bit more mindful about how we spend. I know we use credit cards for everything today, but this way it makes us really be more thoughtful.”
— Carrie Schwab-Pomerantz, certified financial planner and board chair and president of the Charles Schwab Foundation
Find your support system
“A budget is essential, but it can be even more powerful when you have that support system of people who share the same goals. That’s what we’ve seen to be extremely effective and powerful.”
— Sunny Israni, chartered financial analyst and founder and CEO of Clasp
Debt can feel like a heavy burden. But with a plan, you can begin to tackle it systematically.
Build a personal balance sheet
“To quote my grandmother, ‘Facts are stubborn things.’ And so I think that the mistake that many people make is embarrassment, shame, bury their head in the sand.
“The best thing that anyone with any kind of debt can do is build a personal balance sheet. It doesn’t have to be fancy. It can just be pencil to paper on a legal pad with your debts on one side, and your assets on another.
“And human capital is an asset, too. So, if you have a salary, if you have money coming in, certainly list that. But those facts are stubborn things, and you need to know exactly what you’re facing, what your payments are, and have an idea of how you’re going to approach it.”
— Alison Hutchinson, senior vice president at Brown Brothers Harriman
List every loan and its terms
“The biggest advice is to get organized around your student loans. Write them all down, and see what you have to tackle.
“It always seems like a bigger task at first than it really is. And once you get organized, you can kind of see the big picture a lot clearer, so you know who your loans are with, are they subsidized, are they unsubsidized, are they private loans, are they federal loans, and getting an understanding around that. And then just going and looking at your options.”
— Carmen Perez, personal-finance blogger at Make Real Cents
Lean on your partner
“Irrespective of whether you decide to take on your partner’s debt or not, that debt is going to affect your relationship. Because it will either limit your partner’s ability to do certain things or it’ll limit your ability as a team to be able to go out and do future things together.
“So what I recommend to couples is to tackle debt as a team, even if you’re not taking over that person’s debt, or paying, or contributing to the payment of that debt. The best part about being in a relationship is you have a partner to help you navigate all that.”
— Aditi Shekar, founder and CEO of Zeta
Check up on your credit
“Review your credit reports regularly. They provide a complete record of your debt-related financial relationships, can be used as a resource for working with your creditors on payment planning, and are a critical tool in managing your debt through difficult financial situations.
“Keeping your debts as low as possible will put you in a better financial position when the economy emerges from this crisis.”
— Rod Griffin, senior director of consumer education and advocacy at Experian
Investing can be right for anyone, not just the wealthy or finance-minded.
Leave your emotions out of it
“Active investing is a skill that can be learned and developed over time. For those that do it successfully, it is not an emotional exercise. In fact, successful active investors put measures in place to protect themselves from emotional decision making. If one lacks either the will, skill, or time, passive investing is likely a better strategy.”
— Wilson Muscadin, a financial coach and founder of The Money Speakeasy
Don’t be afraid to start small
“You don’t want to be silly about how you invest and incur costs that are perhaps not necessary, but I don’t think there’s any amount that’s too small.
“I’d rather you do something than nothing, especially with a 401(k) when your employer will match whatever you put in. That’s basically a 100% guaranteed return. You don’t get a lot of free lunches, as we say in finance. That might be one of the few, and you’re giving up on an incredible opportunity if you don’t put any money away at all.”
— Scott Pedvis, financial advisor at Wells Fargo
Follow your plan and readjust when you need to
“It’s very important to stick to your game plan, to understand what you’re going to be using the money for, and really know that there are going to be points where the market is not doing so great.
“But if you have a long-term game plan that you want to stay in with a risk associated with your investment portfolio, it’s best to stay the course. And if you can’t stomach the risk the portfolio you’re in might be subject to, then reevaluate and determine whether it makes sense to scale that risk down.”
— Joseph Edmondson, certified financial planner at Equitable Advisors
Ignore the day-to-day market movements
“One of the big things you want to know is to take comfort in the context.
“You don’t want to focus on the 30 to 45 worst days we have seen in 10 years and let it make you forget about the good times that we had for 10 straight years. You want to have that context and know that long-term investors almost always win.”
— Kevin Matthews, a financial advisor and founder of Building Bread
Managing your money is an ongoing task, and you’re better off striving for consistency than perfection.
Take a long-term view
“We’re living through extraordinary times. While each of us is learning to persevere through this moment, don’t anchor your vision of the future to the current environment.”
— Sandi Bragar, certified financial planner and partner and managing director in planning, strategy, and research at Aspiriant
Identify what you can control
“What I find people do is they focus on a thing that they cannot control and ignore the things they can.
“For instance, if someone loses their job, they had no control over the job loss, but you have 100% control over calling your creditors and letting them know you may not be able to pay the bills. You have 100% control of going in your budget and cutting out unnecessary items, like cable.”
— Tania Brown
Stop comparing your situation to others
“My biggest piece of advice, and this is hard, OK, I’m not saying it’s easy: People have to stop comparing yourselves to others, especially over social media.
“You have to define your own goals, because we all know what makes us happy. You have to start to align your money to your values, to the things that make you happy. That can be at least an important first step in trying to not compare yourself too much to others.”
— Kelly Lannan
Don’t wait until tomorrow or next month to get back on track
“When you’re looking at your spending for the month, if you go over on a category and then you say, ‘OK, well, I’ll just start over next month,’ I always tell people that’s not the way to go about it.
“It’s the same with nutrition or health goals. It’s not like, ‘OK, I’ll just start over next month’ or ‘I’ll start over next year,’ but it’s ‘OK, what can I do for the rest of the day to make this better?’ Or ‘What can I do tomorrow to make this situation better?’ So maybe it’s ‘OK, if I overspent on this category, is there another category that I can cut back on for the rest of the week or month?'”
— Katie Oelker, financial coach
Aim to be good with money, not perfect
“Being good with money doesn’t mean you’re perfect with money. None of us are. I think that’s one of the things that we have to tell people to come to grips with: You will do things that you’ll look back and wonder why. But no one’s perfect with money.”
— Rod Griffin
Tax preparation is stressful enough. But, throw an international move into the mix, and the process can become overwhelming. You already know that the IRS tax code reads like an ancient Roman text – equal parts confusing and terrifying. But, after years of trying to comprehend these laws, fate has led you to the Great White North. However, don’t attempt to learn its new tax codes while boxes lay unpacked in your apartment. For this year at least, use a DIY tax preparation service to file your return. Canadian Tax Laws Differ From Those in America You’ve probably heard it
- There’s a rule of thumb that Americans should spend no more than 30% of their income on housing costs.
- I’ve followed this rule since renting my first apartment in New York City, and stuck to it when I moved to Los Angeles and ever since.
- I’ve had to make some concessions along the way, like living with multiple roommates and taking the “worst” bedroom for a lower price.
- By keeping my long-term fixed housing costs to less than 30% of my take-home pay, I can be way more flexible with the rest of my budget.
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It’s been just over five years since I went looking for my first post-college apartment in New York City.
I knew rent could be a wallet-buster in NYC, but I didn’t want to ask my parents for help even though I was earning a low hourly rate as an intern. It was time to flex my frugality muscle.
I had some cash set aside from graduation gifts and decided part of it would go toward a security deposit and part would become my emergency fund. That meant monthly rent and utilities would come from my paychecks (as it does for most people). Rent in college was dirt cheap, so I had no idea how much I should be spending in the real world.
After some Googling, I found a rule of thumb recommended by financial experts and upheld by the US government: Aim to spend no more than 30% of your gross income on housing.
This concept was developed in the 1930s when the government began measuring housing affordability. It was originally lower, but by 1981, 30% became the standard. Americans who spend more than 30% of their pretax income on housing costs, including insurance and property taxes, are considered “burdened.” The calculation is based on the cost of other goods and services, like groceries, healthcare, and education.
Mortgage lenders can be even stricter – many don’t like to see a potential homeowner spend more than 28% of their income on housing.
I did some back-of-the-envelope math using my take-home pay instead of my gross income because I wanted to account for taxes. The 30% benchmark seemed to fit well with the rest of my budget. I’d have enough to cover my other expenses, like food, transportation, and some entertainment, plus stash a little bit in savings.
Right then I committed to the 30% rule, and I’ve lived by it ever since.
How I followed the 30% rule in expensive cities
Apartment hunting sounds fun in theory. In practice it can be tedious and frustrating, especially if you’re on a strict budget. But a good enough apartment always crops up eventually, even if it doesn’t tick every box on your wish list.
After about a year and a half living in New York, I moved to Los Angeles. I jumped from one increasingly expensive city to another.
To stick to the 30% rule, I had to make some concessions. In both places I lived with at least two other roommates and always took the worst room, which translated to the cheapest rent. In New York City, that meant a windowless bedroom in a railroad-style apartment in one of the outer boroughs. In my first apartment in Los Angeles, I took the most inconvenient parking spot and the only bedroom without an en suite bathroom (this is nothing to complain about, I know).
Rent isn’t the only housing expense, though. Internet has typically cost an extra $30 or so each month, but water and power can be more unpredictable. These costs are hard to control when you’re living with roommates, since you can’t police their energy usage or shower time. In fact, I’ve had minor crises in the past – a $500-plus electric bill just about floored me.
In these cases, I tapped my emergency fund to pick up the slack, which I’m convinced I have been able to maintain precisely because I’ve been so strict about keeping my fixed housing costs low.
Keeping my housing costs low has opened up room for savings
Each time I’ve moved apartments – a total of three times since that first New York City apartment – I’ve been at a higher income level. I do a new calculation every time to see what 30% of my post-tax income is, and won’t sign a lease unless what I’m agreeing to pay is below that amount.
Housing is not a very liquid expenditure. You can’t cut back on a dime because most leasing agreements last around 12 months. But you can quickly cut back how much you spend on shopping or lunch. I realized how important it is to be mindful of how much I spend on housing, since it’s usually a long-term commitment.
By controlling my housing costs, I’m able to be way more flexible with the rest of my budget. It’s worth noting that I didn’t have student loans to repay and have always avoided credit-card debt, so my expenses outside of housing were already pretty flexible.
As my income has gone up, I’ve put the money toward other categories of my budget, like upgrading my gym membership, traveling more comfortably and conveniently, and saving more money.
I’m particularly focused on funneling as much money as I can into my 401(k) so that it has decades to grow before I retire. I also want to make sure I’m prepared for unexpected costs that arise now. Instead of moving into a nicer apartment in a nicer neighborhood each time I get a pay raise – therefore eating up my newfound cash with housing costs – I bump up my 401(k) deferral rate and add to my emergency fund.
The 30% rule won’t work for everyone
Like any other personal-finance rule of thumb, the 30% rule is more of a guideline than a mandate. You might have less choice than I did about exactly which city or neighborhood you live in and how many roommates you have, or you might prefer to spend more budget on your house and less on food and travel.
For me, the 30% rule provided a good foundation for crafting a spending plan. Keeping my fixed, long-term costs low means I can be nimble with everything else.
Tanza Loudenback, CFP®, is the personal-finance correspondent at Business Insider. She writes most frequently about saving money, planning for retirement, taxes, debt management, and strategies for building wealth. Have a money question for Tanza? Fill out this anonymous form.