Like the prospect of cleaning up a messy room, taking those first steps toward financial independence can feel overwhelming. In fact, 53% of millennials are not sure where to start when it comes to making financial decisions. Retirement Director Ben Rizzuto shares three simple ideas to help younger people clean up their financial rooms through budgeting, controlling spending and making a written plan.
Well-being is realized by small steps but is no small thing.” – Zeno
Ben Rizzuto: 53% of millennials are not sure where to start when it comes to understanding or making financial decisions.
That stat is just from one survey, but it certainly highlights that millennials need help. And as you might think, not knowing where to start now can lead to things getting put off and problems snowballing.
On today’s episode of Plan Talk, I want to discuss a few ideas to help younger folks think about their finances and some possible ways to make better financial decisions.
We have all faced issues that, at first, seem insurmountable.
When I was a kid, I must admit that my room was consistently a mess. I distinctly remember that at certain times there was simply a path from the door to my room to my bed. On both sides of that path one would find dirty clothes, shoes, maybe a dirty clothes hamper (of course empty) and all the other stuff one might find in a kid’s bedroom. My parents would always harp on me to clean my room, but even if I did, it was always the bare minimum.
Looking back, I think part of the issue was that I was faced with a task where I didn’t know where to start. When everywhere you look there is something to clean up, things can get overwhelming and the overwhelmed mind can’t find any order in the chaos... and the pattern continues.
To a kid, your room can seem like a pretty big place, and if you’ve never really gone through the process, this can be a pretty daunting process. So, what do we do? We give kids a list and say start at the top and work your way down. Eventually the room gets cleaned and hopefully a system is created for how it should be done.
The question is this: Are the 53% of millennials we mentioned at first just like 11-year-old me staring at a project that has so many areas of focus, so many things that need to be done, that they are almost paralyzed?
Today I want to provide three simple ideas to help people make those financial decisions and clean up their financial rooms.
So where should we start?
The first place to start with any financial plan, however simple or complex, is with a budget. How much money do you have coming in? How much money is there going out? We’ve put together an easy budget checklist that you can use to see these numbers in black and white. It can be found on the Janus Henderson website in our Connect with Your Clients section.
Figuring out how much income you have coming in will be easy if you have a salary which is directly deposited into your account. But if you bartend or work for tips, this is where you’ll need to make an approximation. I used to work in a restaurant, and I know some nights are good and some nights aren’t so lucrative. One night you might walk out with $100 another night it could be $500. So, you’ll need to think about how much cash you make on average per month.
Next, we need to look at your expenses. And here I would encourage you to be brutally honest with yourself. Don’t just guess. Download your spending history from your bank and really at look what you’re spending your money on. Also look at all those apps like Venmo, Uber, Lyft, PayPal, etc., etc. With all of them you can see your spending history.
Remember with this step we are just getting an idea of what you are spending your money on. Nothing is changing, we haven’t even started to pick up dirty socks yet, but this is an all-important step. If after doing this you find that you spend an inordinate amount on Uber, that’s fine. No judgement here, but if we are going to make changes or if we have a financial decision facing us, we need to understand where those areas exist.
When looking at expenses it’s important to understand the difference between fixed and variable expenses. Fixed expenses like rent and your internet bill are usually not going to change month over month, so it’s going to be difficult to make quick changes to those in order to have more money at the end of the month. Variable expenses like entertainment, going out to eat, Ubers and taxis, and groceries are areas where you can more immediately make changes.
Either way, once you’ve gone through the budgeting process you should have a pretty good idea of your income, your expenses and how much is left at the end of the month.
Of course, everyone wants that number to be bigger… we always want more money left over to do the things we want, but there is no way to understand that and figure out what is possible and what needs to be done when faced with a financial decision without creating a budget.
We just talked about expenses within the context of a budget but another place you might start is with expenses that you just know are too high. Let’s be honest – there are some areas where you consistently tell yourself “I need spend a little less in this area.” Maybe it’s your love of trying new restaurants, or shopping, or the fact that you live in a city, don’t have a car and take Ubers and taxis everywhere you go.
Now you might not know which category of expense this is without going through the budgeting process, but let’s say you do. Like I said, there are just some things where you know, “I need to cut back.”
So how do we cut down and make sure this change has lasting effects? We’ve all said to ourselves in the past, “I need to spend less on something.” We make a quick drastic change; the expense decreases but then after some time it returns to its previous level. Think of this like a crash diet. Sure, I can lose a few pounds and fit into my new jeans if I don’t eat for a few days, but this change isn’t going to create a habit and it probably isn’t do to last into the long term, and in a couple weeks those jeans are going to feel a little too tight.
This is where systems and automation can be helpful since they create the guardrails and they set the parameters for our daily behaviors.
Let’s say you spend $500 on ridesharing each month and feel that is an area where you can save some money. Instead of $500, you want to spend only $250 per month. To implement this, link your Uber and Lyft apps to a refillable debit card that only has $250 on it. Once you hit that amount, you will need to find another way to get around. Maybe it’s the bus, subway or carpooling, so it’s important to think about this beforehand. Don’t think about it after you’ve hailed an Uber on a cold night out with friends.
You could have similar pre-loaded debit cards for other types of expenses if you like. Whether it’s a dinner out with friends card or your happy hour drinks card, set an amount on each for the entire month and stick to it. By setting up these parameters, you are better able to create spending behaviors that will last for the long term.
One thing to be aware of with this idea is if you do it for several forms of spending, it could add some complexity as you may have several cards in your wallet or purse which you may have to juggle, so it’s important to make sure this system is practical. If it isn’t, then the likelihood that it will last into the future decreases.
Make a Plan … and Write It Out
One final idea that may be a starting point for financial decisions is a plan. Take some time to sit down and truly think about what you want to do over the next one, five and/or 10 years. This might include personal and financial goals such as taking a trip, buying a house, paying off student loans, building an emergency fund, developing your skills in other areas … and while some of these may be personal, you’ll find that finances come into play with all of them.
Not only should you think about your goals and timeframe for when you’d like to accomplish them, but also the costs or dollar amounts associated with them.
The main thing you should do with this plan is write it out. It turns out that people who “vividly describe their goals in written form or picture their goals are anywhere from 1.2 to 1.4 times more likely to successfully accomplish their goals than people who don’t.”1
The reason is because of a phenomenon known as “encoding.” This is a biological process by which the things we perceive travel to our brain’s hippocampus where they’re analyzed. From there, decisions are made about what gets stored in our long-term memory and, in turn, what gets discarded. Writing improves that encoding process. In other words, when you write it down it has a much greater chance of being remembered.1
This is of course a good thing when it comes to financial planning. Not only does writing these goals out help you remember them, but it’s going to help you feel more in control and thus more confident. In fact, a study showed that 63% of people with a written financial plan say they feel financially stable, while only 28% of those without a plan feel the same level of comfort.2
Writing out your goals makes them more real. And after you’ve made them real by writing them out, put them on your fridge or next to your computer. Share them with your friends or family; this helps to make you more accountable to make sure they are reached. Plus, they might be able to help.
These Steps All Work in Concert
By this time, you may be saying, “Wait … these all go together.” And you’re right: all of these starting points lead to the others. But just like that messy bedroom, you need to start somewhere. For 11-year-old me, I may have started by picking up my GI Joes, but I eventually got to my dirty clothes. It didn’t matter where I started – all those areas were part of the same room. The same goes for you and your financial decisions. Whether it’s a budget, specific expenses or a plan, they are all part of your financial life.
The point that I want to leave you with is this: Just make sure you start. Make sure you do something and once you start, don’t stop. That is how habits are created, whether they be personal or financial. Creating a budget or picking up some dirty cloths may seem like an insignificant part of the confusing whole that is our lives. But these individual steps help us start, and we can’t get to where we want to go without first starting.
You’ve been listening to Plan talk from Janus Henderson Investors. Our goal at Janus Henderson is to help you connect with your clients through increased knowledge around investment and retirement issues.
This podcast and others are available on iTunes, Spotify and the Janus Henderson Investor website.
Thanks for listening, I’m Ben Rizzuto. Until next time….
1Forbes, “Neuroscience Explains Why You Need To Write Down Your Goals If You Actually Want To Achieve Them,” April 15, 2018.
2Schwab.com, “5 Ways Financial Planning Can Help,” August 19, 2020.
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Marching to a Million: The Millennial Journey to Retirement
Resources to help engage clients' children and prepare the next
generation for retirement.