5 Finance tips for a millennial lifestyle

Prelude by CaptainFI: I was recently contacted by Oli who is the face behind Minted Millennials, a millennial personal finance blog. We ended up having a great time chatting about all things personal finance and investing. It turns out Oli is a high performance sporting coach with over 15 years of industry experience, as well as a self proclaimed finance and investing nerd too! As someone who regularly consults with a performance coach myself, we got on like a house on FI/RE! We ended up realising we should share some of these great ideas, so read on to check out Oli’s 5 biggest finance tips for millennials.

Finance tips for a millennials by Minted Millennials

Life is tough, this is often the case for Millennials. Housing prices are getting out of control, salaries are not keeping up with inflation and you have the recent pandemic in there just for good measure.  A lot of Millennials are struggling financially. So this post focuses on finance tips Millennials need to know to control their money and build their wealth.

minted millennial
Calling all Millennials – read this

Inflation

Inflation is one of the first finance tips Millennials need to know and understand. It has a huge impact on how the world operates around us and is responsible for affecting global economies.

First we need to know what inflation is before we can understand how it affects us. Inflation is the increase in the price of goods and services over time. It also includes the relative devaluation of your purchasing power.

The rate at which the price increases is called the inflation rate. Typically the inflation rate is around 2% per year. The most common cause for this is built-in inflation. Prices rise so people expect to be paid more to afford these items. In order to maintain profit margins companies then charge more.

 As you can tell it is a vicious cycle, and the consumers get left behind as pay rises rarely match the inflation rate. Any Millennial should ask their grandparents how much milk cost back in “their day” to see its true effect.

So now we know what inflation is, we need to understand how it affects us as Millennials. Also how we can best manage its impact on our lives and money.

Your money if left in cash or a savings account is losing its value every year. Cash is devalued at the inflation rate (2%) meanwhile your savings will be devalued by about 1% annually (2% minus 1% average savings account interest rate).

This means that the money in your savings account will have less purchasing power unless you do something about it.  So while people think keeping money in savings is risk free. It is in actual fact guaranteeing that you lose out annually.

A quick side note here, this applies at all times when savings account interest rates are under 4%. Anything over this and then your savings will actually be beating the inflation rate. This isn’t likely to happen for a while, but keep it in mind.

In order to have our money protected from inflation we need to look at ways to invest it. Doing so will give it the potential to outperform the inflation rate of 2%. There are many options here, but the simplest method relies on compounding.

Compounding

Compounding Interest is another finance tip millennials need to know. It was perfectly explained by none other than Albert Einstein as “The 8th Wonder of the World. He who understands it, earns it: He who doesn’t pays it.”

minted millennial
Compounding slowly grows your wealth

I don’t know about your credentials, but I certainly am not qualified to argue with one of the Worlds greatest minds.

You can either make compounding interest work for you, or against you. Compounding interest is the interest received or paid on your interest. 

Compounding interest works against you on credit card repayments. If you are unable to pay off your debt in full at the end of the statement period, they will charge you interest. This interest is then added to the amount of money you are required to pay off. If this is not paid off, then you will be charged interest on the amount you owe and the additional interest.

A common place you will find compounding interest working for you is in your savings account. Let’s say you have $1,000 in savings. You receive 2% interest compounded annually, this would pay you $20 in interest. 

This means after year 1 you will now have $1,020. At the end of year 2 you will then receive an additional $20.4, putting your total at $1,040.4. With that additional $0.40 of interest occurring due to compounding. It is the 2% interest you receive on the interest already received from the previous year.

While this may not seem like much currently compounding interest works its magic best over the long run. I am talking 30-40years plus. It is where you see the curve on the graph start to almost go vertical!

As Millennials we can often be a bit impatient and want our money now. That is why it can be tempting to take money out of savings accounts. Unfortunately this means we lose the power of compounding.

That is why we are fortunate to have a tax advantaged investment option called Superannuation. Another benefit is we can’t touch the money for close to 45years. Plenty of time for compounding to work in our favour if we help it out.

As we mentioned before, inflation is currently devaluing our money in savings accounts. So we need to look at alternative options to have compounding interest work in our favour. This is why people turn to investing to build their wealth.

Investing

So we now understand how inflation and compounding interest affect us, let’s look into using another finance tip, investing as a way to beat inflation.

Investing is often incorrectly thought of as gambling by millennials, this is often the answer given by people that don’t understand what investing is.  An investment is where you allocate resources now for some form of future benefit. It is regarded as one the best ways to build wealth and is a finance tip you definitely need to know.

There are multiple types of assets you can invest in, but for this post we are only going to discuss investing in equity of companies, through buying shares.

Investing carries a level of risk, and depending on what type of investment you select the amount of risk will vary. Generally speaking though if an investment carries a higher level of risk you should expect a higher level of return. 

Whereas an investment with a lower level of risk would expect a lower level of return. For example investing your money into a bank term deposit carries extremely low risk. The risk here being if the bank goes under. Because the risk is quite low, the return on your investment is likely to be low. In fact the current 1 year average return for term deposits is 2.75%.

Investing in the stock market carries more risk and as such it is fair for you to expect a higher return on your money than what you could get keeping it in a bank.

There are multiple different ways to invest in the stock market. But the simplest and best performing strategy has been to passively invest in the S&P 500 regularly. The S&P 500 is a group of the top 500 public American companies. It has had a 10% average annual return since inception in the early 1920’s.

The reason this has been the best strategy is that 92% of professional fund managers underperform the S&P 500 over a 15year period. Not to mention they charge you for their underperformance. The level of risk also decreases by investing in 500 companies, rather than just 1.

As a millennial we might have a few things working against us, but we still have time on our side, and we should use that time to help our investments grow. The strongest asset in investing is the time you spend invested in the market.

So I like to look at investing as me fighting or beating inflation so my hard earned money doesn’t devalue with me doing nothing about it. Investing in the S&P 500 presents a relatively low risk, very low cost option for me to protect my money against inflation, and actually beat it significantly.

Superannuation

Super is the perfect vehicle to witness compounding work its magic over time. Yet it often isn’t given anywhere near the attention it deserves. It is another finance tip millennials should be aware of.

Superannuation is a great way to take advantage of tax relief and forced compounding. If you are employed you will literally have 9.5% of your salary put in your super fund by your employer.

Here are some of the things millennials should know about their super, and how to use it to their advantage.

  • If you have worked for more than 1 employer, check you only have 1 super fund. Make sure you don’t have multiple funds! Each fund will charge you admin fees and so you could be losing Thousands.
  • When starting work with an employer make sure you don’t just select the super fund they give you. This could lose you Hundreds of Thousands! Take the additional time to research your fund and fill out the paperwork to make sure they pay into your chosen fund.
  • Take advantage of the Government Super Co-Contribution scheme when you can. Essentially if you earn under $38,564 and make $1,000 after tax contribution to your superannuation the Government will match it with $500. This is a great strategy for Uni students or graduates to boost their super with some free money. These funds alone compounded over 45years+ could be worth over $100,000.
  • Salary Sacrifice is a great way to help minimize your tax liability. You should look into using this option to not only pay less in taxes, but have more money going into your super. The obvious downside here is that there will be slightly less in your take home pay, but a lot more of it is kept by you and not the Taxman.

Lifestyle Creep

We all love our avocado on toast with a latte on the weekend for some brunch with mates. But could this really be holding us back financially? The answer depends on whether we have budgeted for this spending and if it fits with our lifestyle. 

minted millennial
Smashed Avo please!

Another finance tip is lifestyle creep, this can either help or hinder your wealth creation.Lifestyle creep is a common occurrence, and can also be known as keeping up with the Joneses. It is when you earn more money and subsequently spend more money. 

Maybe you get a bigger house, a faster car or flashier clothes, but your savings rate stays the same and you are no better off than before.It is important to be aware of lifestyle creep so you can put plans in place to prevent it happening, or at least have systems in place so your saving/investment rate is substantial.

Budgeting is a great way to figure out where you are spending your money, and whether there are any areas you can tighten up to prevent excessive spending.

You don’t have to be super frugal, and a great budgeting method is the 50/30/20 rule. It states that 50% of your money should go towards needs, these are things like shelter, water & food and transportation. 30% of your money should go towards saving/investing. 20% to your wants, things like holidays, shopping, alcohol, avocado & lattes etc..

If you utilise a system like this, then it doesn’t matter how much or how little you earn, you will always be protected from lifestyle creep. I know how tempting it is when you get a huge pay rise to go and blast the money on the latest thing you want. But if you can master this system, you will set yourself up with a great financial foundation for the rest of your life.

So I strongly urge all millennials to take a look at your spending and see how it compares to the 50/30/20 rule, and whether you are protected from lifestyle creep. If not I challenge you to get to that 50/30/20 ratio!

Summary

I hope you enjoyed reading about these 5 finance tips that millennials should know and take advantage of to build wealth. Were you aware of these before, are you going to implement any now? Let us know in the comments below!

Closing remarks from Captain FI: I hope you enjoyed these tips and were able to take away some valuable lessons. For me, it was a great reminder about the dangers of inflation and the requirement to invest, and how compounding, particularly when its tax sheltered through your superannuation retirement account, can be an incredibly powerful tool to build wealth. Finally, it was also a great reminder about the dangers of lifestyle inflation, and why living deliberately is the most powerful wealth building strategy of all. Oli provided sensible budgeting and investing ideas, which I think will probably resonate with most millennials a bit more than my ‘hardcore’ strategy, and ultimately will be more sustainable for most people.

Minted Millennials
Oli from Minted Millennials

About Oli: I love helping people achieve their best, whether it’s in sport, business or life. I have been in High Performance Sport for over 15 years and have a Bachelors Degree in Business and Finance. Both of these are my passions and I love being able to help others in those areas. My goal is to help empower Millennials to take control of their finances and be confident investing, in order to build their long term wealth. I hope to do this through resources on my Blog, Instagram and YouTube Channel

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