Broke Millennial

Introduction

Money can be a daunting topic for many young adults, especially those in their 20s and early 30s who are just starting their careers or trying to make ends meet in expensive cities. The idea of saving for emergencies, let alone retirement, can seem impossible when you're barely covering your monthly expenses. However, personal finance advisor Erin Lowry's book "Broke Millennial" offers hope and practical advice for those looking to take control of their financial lives.

In this comprehensive guide, Lowry demonstrates that even the most financially challenged millennials can achieve financial success through a series of small, manageable steps. From understanding your relationship with money to creating a budget that works for you, this book covers all the essentials of personal finance in a relatable and accessible way.

Understanding Your Relationship with Money

One of the first and most crucial steps in improving your financial situation is understanding your relationship with money. Many of our financial habits and attitudes are formed during childhood, influenced by our parents' or caregivers' approach to money management.

To gain insight into your money mindset, Lowry suggests answering a series of questions:

1. What's your earliest memory involving money, and how does it make you feel?
2. How did you obtain money as a child (e.g., allowance, part-time jobs)?
3. What kinds of things did you spend money on growing up?
4. How did your parents or caregivers discuss money?
5. What are your current financial concerns?

By reflecting on these questions, you can identify patterns and attitudes that may be holding you back financially. For example, if you grew up in a household where money was always tight, you might have developed a scarcity mindset that makes it difficult to save or invest. Alternatively, if your parents never discussed money, you might feel uncomfortable or ill-equipped to manage your finances as an adult.

Recognizing these underlying factors can help you address and overcome them, paving the way for better financial decisions in the future.

Budgeting Approaches: Finding What Works for You

Lowry emphasizes that there's no one-size-fits-all approach to budgeting. Different methods work better for different people, depending on their personality, spending habits, and financial goals. She presents two main budgeting approaches:

The Cash Diet

This method involves switching as many of your financial transactions as possible from credit or debit cards to cash. The benefits of this approach include:

1. Research shows people tend to spend less when using physical cash.
2. It eliminates credit card charges and interest payments.

To implement the cash diet:

1. Divide your monthly budget into weekly installments.
2. Keep a small buffer (e.g., $100) for unexpected expenses.
3. Gradually transition more of your spending to cash-only.

Track Every Penny

This detailed approach involves recording every single transaction in a spreadsheet, including:

1. Date of purchase
2. Item purchased
3. Total cost

While it may seem extreme, this method can be eye-opening for those who struggle to understand where their money goes each month. By meticulously tracking expenses, you can identify spending patterns and areas where you can cut back or redirect funds.

For example, Lowry shares a story of a friend who discovered she was spending nearly $100 per month on bottled water from Starbucks. By investing $10 in a reusable water bottle, she freed up $90 monthly for other purposes.

Budgeting by Percentages

Lowry introduces the concept of budgeting by percentages as a flexible framework for managing your money. In an ideal scenario, your income would be divided as follows:

1. 50% for fixed costs (rent, utilities, loan payments)
2. 20% for financial goals (savings, investments)
3. 30% for flexible spending (food, entertainment, etc.)

However, she acknowledges that these percentages may not be realistic for many millennials, especially those living in expensive cities. Instead, she suggests using these percentages as a long-term goal and adjusting them to fit your current situation.

For example, Lowry presents a fictional case study of Dwight, a young professional in New York City:

• Monthly net income: $2,650
• Fixed costs: $1,600 (60% of net income)
• Savings: $200 (7.5% of net income)
• Flexible spending: $850 (32.5% of net income)

While Dwight's current percentages don't align with the ideal, he can work towards improving them over time. As his income increases, he can maintain his current fixed expenses and flexible spending levels while allocating more money towards savings and financial goals.

Maximizing Your Savings with Online Banks

Many people don't realize that the money in their savings account isn't just sitting idle. Banks use these deposits to make loans to other customers, generating significant profits. In return, they offer interest to account holders in the form of an annual percentage yield (APY).

Unfortunately, traditional brick-and-mortar banks often offer dismally low APYs, sometimes as little as 0.01%. This means you'd earn just one penny per year for every $100 in your account. Meanwhile, these same banks charge much higher interest rates on loans they provide.

Lowry suggests switching to an online bank to maximize your savings potential. Online banks typically offer much higher APYs because they have lower operating costs. Without physical branches to maintain, they can pass these savings on to customers in the form of better interest rates.

To find a suitable online bank:

1. Search for "highest-interest savings account" online.
2. Research the bank's fees and customer reviews before making a switch.
3. Compare APYs to ensure you're getting the best possible rate.

By moving your savings to an online bank with a higher APY, you can make your money work harder for you without any additional effort on your part.

Using Credit Cards Responsibly

Credit cards often get a bad rap, and for good reason – they can lead to overspending and crushing debt if misused. However, Lowry argues that credit cards can be a valuable financial tool when used responsibly. The key is to follow one simple rule: never charge more than you can afford to pay off in full each month.

Benefits of using credit cards responsibly include:

1. Building a good credit score, which is crucial for future borrowing needs (e.g., mortgages)
2. Earning rewards or cashback on purchases you'd make anyway
3. Fraud protection and purchase insurance

To use credit cards wisely:

1. Treat your credit card like a debit card, only spending money you actually have.
2. Pay the full balance every month, not just the minimum due.
3. Avoid carrying a balance, which leads to high-interest charges.
4. Set up automatic payments to ensure you never miss a due date.

By following these guidelines, you can enjoy the benefits of credit cards without falling into the debt trap that ensnares many users.

The Importance of Saving: Pay Yourself First

One of the most critical pieces of financial advice Lowry emphasizes is the concept of "paying yourself first." This means prioritizing savings by setting aside a portion of your income before spending on anything else.

While this can be challenging for cash-strapped millennials, it's a crucial habit to develop. Having savings provides a financial buffer against unexpected expenses and helps prevent you from falling into debt when emergencies arise.

To start paying yourself first:

1. Begin with small, manageable amounts (e.g., $10 per paycheck).
2. Gradually increase the amount you save as you adjust to the new habit.
3. Automate the process by setting up direct deposits or automatic transfers to your savings account.

By consistently saving, even in small amounts, you're building a financial safety net that can protect you from future hardships and set you on the path to long-term financial stability.

Building an Emergency Fund

An emergency fund is a crucial component of financial stability, providing a cushion against unexpected expenses or income loss. The size of your emergency fund should be based on your current financial situation:

1. For those with significant debt or underemployment:

   • Aim for a minimum of $1,000
   • Add $500 for each dependent (including pets)

2. For those who are debt-free or have manageable debt:

   • Save enough to cover six months of basic living expenses

3. For freelancers or self-employed individuals:

   • Aim for nine months of living expenses due to income volatility

To calculate your emergency fund target, add up your monthly essential expenses (rent, utilities, groceries, etc.) and multiply by the appropriate number of months based on your situation.

Lowry recommends keeping your emergency fund in a high-yield savings account with an APY of at least 1%. This ensures your money is easily accessible while still earning some interest.

Having an emergency fund not only provides financial security but also peace of mind. It allows you to handle unexpected expenses without resorting to high-interest credit card debt or loans, keeping you on track with your long-term financial goals.

Navigating Social Situations and Money

Money can often create awkward situations in social settings, particularly when dining out with friends. Lowry offers advice on how to handle these scenarios without compromising your financial goals or friendships.

For example, if you're on a tight budget but agree to eat out with friends:

1. Order carefully, choosing less expensive menu items and limiting drinks.
2. When the bill arrives, don't be afraid to speak up if others suggest splitting it evenly.
3. Offer to calculate individual shares based on what each person ordered.
4. Be prepared to stand your ground, even if it means being perceived as frugal.

By being assertive and honest about your financial situation, you can maintain your social life without derailing your budget.

Conclusion: Small Steps Towards Financial Freedom

"Broke Millennial" offers a comprehensive guide to taking control of your finances, tailored specifically to the challenges faced by young adults in today's economy. Lowry's approach emphasizes that financial success doesn't require drastic measures or a complete lifestyle overhaul. Instead, it's about making a series of small, manageable changes that compound over time to create significant results.

Key takeaways from the book include:

1. Understand your relationship with money by examining your childhood experiences and current attitudes.
2. Find a budgeting method that works for you, whether it's the cash diet or tracking every penny.
3. Use percentage-based budgeting as a flexible framework for managing your money.
4. Maximize your savings by switching to online banks with higher interest rates.
5. Use credit cards responsibly to build credit and earn rewards without falling into debt.
6. Prioritize saving by paying yourself first, even if you start with small amounts.
7. Build an emergency fund to protect yourself from unexpected financial shocks.
8. Navigate social situations involving money with confidence and honesty.

By implementing these strategies and developing healthy financial habits, even the most financially challenged millennials can work towards a more stable and prosperous future. Remember, the journey to financial freedom starts with a single step – whether that's automatically saving $10 from each paycheck or moving your banking online for better interest rates.

Lowry's advice serves as a roadmap for young adults looking to take control of their finances, offering practical solutions to common money problems and empowering readers to make informed financial decisions. With patience, persistence, and the right strategies, anyone can transform their financial life and build a solid foundation for long-term success.