The Uncubed Personal Finance Guide (For Normal People)
Everything you need to know about spending, saving, and investing
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The millennial generation has redefined how young people manage their money. Having witnessed the near-collapse of the global financial system in 2008, the 84 million Americans born between 1981 and 2005 tend to be far more cautious with their money than earlier generations – they save better, contribute more to their 401(k)s, and prioritize having zero debt.
Now is the time to get financially literate – by 2025, the millennial generation is expected to generate 46% of all U.S. income.
As you know, we’re not financial advisors, nor are we qualified to give investment advice, but we did talk to several experts in the financial industry to put together a complete guide to everything you need to know about your finances.
And if you are in the market for an investing solution, Wealthfront provides an easy, low-cost way to invest your money.
You’ve got to spend money to make money… If only the old (and sadly inaccurate) adage could apply to buying that big-screen TV. In this section we’re going to tackle all your questions about keeping a budget, checking accounts, credit cards, and the best software for helping you manage your money.
Almost 40% of millennials report that they worry about their financial future at least once a week, according to a study by Fidelity.
But with proper budgeting, it’s possible to live comfortably, and relatively free from financial anxieties. Of course, proper budgeting involves more than just cutting back on Uber rides and bar tabs.
Here’s the simple essence of budgeting – take all of your income sources for the year, add them up, and divide by twelve. Then calculate your monthly expenses – car payments, rent, food, utilities, and entertainment. Hopefully your income is a bigger number.
Source: 2015 Millennial Money Mindset Report from Chime.
If you have trouble managing money, budget ratios are a great way to get started. Keep in mind these numbers are likely to vary depending on where you live and your lifestyle, but if you think of this as a rough guide it should help:
- 30 to 40% of your monthly income should go to housing expenses – that’s the cost of rent or mortgage, utilities, property taxes, home or renter’s insurance, and small repairs.
- 15% to 20% of your monthly income should go to general living expenses – that’s your basic groceries, cellphone bill, laundry, clothes, and the like.
- 10 to 15% of your monthly income should go to paying off debt – that’s credit card payments, student loan repayments, and store credit card payments.
- 10 to 15% of your monthly income should go to savings. That’s right – ideally, you’re socking away at least one-tenth of every paycheck into an interest-bearing account.
- 5 to 10% of your monthly income should go to entertainment – that’s a night (or two) on the town, your Netflix subscription, dinners out, or movie tickets.
If you miss your budget goals for a month, don’t go too hard on yourself – it happens to everyone. But if you put your financial goals in writing, you’ll find it’s much easier to stick to them.
Because millennials are the first generation to grow up with the ability to conduct most of their banking needs with only an ATM card and their smartphone, the term “checking account” is something of a misnomer.
Online payment methods such as PayPal and Venmo have significantly reduced the need for many younger customers to even have a checking account, and that means banks are often doing all they can to lure in millennial customers. By cutting out the need for paper statements or a check book, many people are able to keep a truly free checking account.
But be sure to read the fine print – according to the Associated Press, only 38% of non-interest bearing checking accounts are actually free. Just because your checking account contains the word “free” doesn’t mean it comes without a cost.
Many basic checking accounts require users to maintain a minimum balance or pay monthly service fees. Unfortunately some free checking accounts also come with a limited number of transactions, so be sure to make sure the number of ATM transactions isn’t going to cost you extra every month.
Why do you need a checking account at all?
High-interest checking accounts are excellent if you’re able to maintain over $2,500 in your account. If you’re low-income, you may qualify for a lifeline checking account, which requires only $25 to open an account.
Why do you need a checking account at all? Unfortunately it’s not easy to get paid otherwise – if you want to cash a check, you might be forced to use a check-cashing establishments that often charge heavy fees.
According to a survey by mobile bank Chime, almost 70% of millennials would prefer to use a debit card rather than a credit card for their purchases.
And while the desire to avoid overextending your credit – often tied to exorbitantly high interest rates – can be a smart decision, there are, in fact, times when using a credit card is a good idea.
Many credit cards offer significantly better fraud protection and extended warranties than the typical debit card. Credit card rewards programs can actually add up to big savings, though it’s best to do the math before signing up. Many rewards cards carry an annual fee that will negate any savings you think you’re receiving.
And most essential – responsibly using a credit card is a highly effective means of improving your credit score – 15% of your FICO Score is based on the length of your credit history and 35% on your payment history.
If you have bad credit, don’t try to apply for a card with an excellent rewards program or incredibly low interest rates. Avoid simply applying for cards that are heavily advertised or that arrive in the mail as if by magic. Being rejected for a credit card can negatively affect your credit score, so it’s best to apply sparingly.
It’s best to avoid store credit cards – although they typically offer steep discounts on initial purchases, simply having your credit checked every time you apply for one can adversely affect your credit.
As a rule, it’s best to use only 25% of your total credit limit.
Merely making the minimum payment on your credit card is never a viable option, and maxing out your card limits can often trigger penalty APR (annual percentage rate of interest). As a rule, it’s best to use only 25% of your total credit limit. See our section on credit card debt for more information.
software and apps
There are a wealth of mobile apps and desktop software that can help make managing your money significantly easier.
The iOS and Android app Wally promises a 360 degree view of your money, helping users better understand their expenses and set goals for savings.
Mint is the biggest player in the game, offering a slew of services to help you manage your money, visualize your spending, and set a realistic budget.
You Need a Budget is a personal budgeting platform available on iOS, Android, and desktop. YNAB also offers a slew of classes in budgeting, retirement, and more. The app also boasts a very large, very active community who shares information, tools, and tricks.
Have trouble saving? Then let someone (or something) else do it for you. Digit checks your bank account every few days – if you can afford it, the app withdraws a few dollars and deposits it to a savings account.
If your problem is overspending, check out Level Money. The app allows you to set a daily budget and detects how close you are to your daily, weekly, and monthly spending limits.
Millennials actually have some of the lowest debt among any other generation, though it may surprise you to learn that’s not always such a good thing. In this section we’ll tackle the dreaded credit score, student loans, credit card debt, as well as home and car financing.
Think of your credit rating as a kind of permanent record. The mistakes you make now can come back to haunt you in five or ten years. On the other hand, with good behavior and wise spending it’s possible to redeem the errors of the past.
Scores range from 300 to 850 – simply put, the higher your score, the easier it is to get a low-interest loan. Anything above 660 is generally considered good. But it’s not just loans – your credit score is pulled by cable companies, cellphone providers, utility companies, landlords, and even some potential employers. (Keep in mind, under the Fair Credit Reporting Act, employers must always ask before checking your credit history.)
Why is the average millennial credit score more than 80 points lower than baby boomers?
Three major credit bureaus are responsible for assembling your credit history – Equifax, TransUnion, and Experian. Banks and financial institutions send customer data to the bureaus; the bureaus collect information about bankruptcies and tax liens.
According to FICO, your score is weighted as follows:
- 35% Payment History – have you paid past credit accounts on time?
- 30% Amounts Owed – if a high percentage of your available credit is being used, your FICO score will go down
- 15% Length of Credit History – typically a longer credit history means a better FICO score
- 10% New Credit – FICO’s data suggests opening several credit accounts in a short time means you’re a bigger financial risk
- 10% Credit Mix – how diversified is your debt?
Source: Understanding the FICO Score Ranges infographic by Experian.com.
Millennials are better at paying on time, and they often carry significantly less debt load than other generations. So why is the average millennial credit score more than 80 points lower than baby boomers? Ironically it may be because millennials tend to be debt-averse.
You are entitled to receive a free report from each credit bureau once a year. As identity theft and other forms of online fraud increase, it becomes more and more essential that you regularly check your credit report. If you see suspicious information, you should contact the credit agency immediately.
If you want to know why student loan debt has become a potential ticking time bomb for the economy, you only have to look at the numbers.
According to the Consumer Financial Protection Bureau, more than 40 million people in the United States owe a whopping $1.2 trillion in student loans – that’s an average balance of $29,000. Even more troublingly, almost 8 million borrowers are in default, meaning 270 days and longer in delinquency.
And the consequences for student loan defaults can be dire – aside from punishing your credit rating, it’s possible for agencies to garnish wages without a court order, intercept your tax refunds, and prevent you from receiving any future federal student aid.
But even if you’re struggling to make your student loan payments, defaulting almost never needs to be an option.
If you have a federal loan, you can apply to refinance your loan in the event of economic distress via the U.S. Department of Education. Deferments allow you to temporarily suspend payment on student loans without accruing additional interest. Forbearance also allows you to suspend payment, however all loans accrue interest during the suspension.
Take advantage of the student loan interest deduction on your federal taxes, up to $2,500 every year.
There are several effective techniques for paying off student loan debt faster than the typical terms. Paying more than the monthly minimum is perhaps the simplest and most effective means, but there are other options. Take advantage of the student loan interest deduction on your federal taxes, up to $2,500 every year. And online lenders such as CommonBond, SoFi, and Earnest can help you consolidate and refinance your private loans, often at significant savings.
credit card debt
We’re going to tell you something you already know – simply paying the monthly minimum on your credit card doesn’t work.
Let’s say you have a credit card with a $1,500 balance and 18% APR. If you pay a minimum $37 per month, it will take you more than 13 years to pay off your debt, with interest costs outstripping the actual balance. Simply paying $5 or $10 more than the monthly minimum can have a huge impact on your long-term costs.
Paying off credit card debt can often feel like a long, thankless slog, but the long term rewards are numerous.
Not only that, but high outstanding balances and making only the minimum payment can seriously hurt your credit rating.
Avoid using your credit card to pay for groceries, utilities, or any other everyday items, and whenever possible do not use your credit card for a cash advance – interest begins accruing as soon as you withdraw the funds, and there’s typically an automatic fee of 2 to 5%.
Secured credit cards are an excellent means of improving your credit if you’re unable to get an actual credit card. A security deposit acts as collateral against a line of credit; paying off your balance each month can help repair your credit. Be careful when selecting a secured credit card, however, as some can come with steep fees and incredibly high interest rates.
Paying off credit card debt can often feel like a long, thankless slog, but the long term rewards are numerous. That said, don’t let debt repayment keep you from increasing your emergency and retirement savings at the same time.
home and auto financing
Many millennials consider purchasing an apartment or home a pipe dream
Millennials are joining the ranks of home-owners, but they’re not doing it like their parents did. As rents rise, the generation isn’t waiting to get married before they buy a home, and typically they’re not planning to hold on to it forever – flipping out never looked so good.
Unfortunately student loan debts have proved an obstacle to home ownership, and with new regulations set by the U.S. Federal Housing Authority in the wake of the subprime mortgage crisis, many millennials consider purchasing an apartment or home a pipe dream.
However, many financial institutions have set up programs for first-time buyers requiring smaller down payments and easing financial prerequisites. The FHA also offers loans with very low down payments to first time home buyers.
Source: National survey by Carrington Mortgage Services, LLC and OnePoll.
Keep in mind that the costs of home ownership don’t end once you’ve paid your monthly mortgage bill. Property taxes, maintenance, and insurance can represent steep costs.
Car ownership is a simpler matter than buying a home, offering three options – buying new, buying used (or “preowned” in ad-speak), and leasing. While the average three-year lease will save you money over buying a new car at a 4%+ interest rate, keep in mind that you won’t actually own that car at the end of a lease period – instead a new lease-or-purchase period begins. One advantage of leasing, however, is that purchasers typically avoid paying the cost of repairs.
Your “career” is being redefined every day. According to a 2012 PayScale study, the median number of years for a millennial employee at a company is just two years. And when job hopping is the new normal, the financial implications can be huge. We’re going to walk you through the world of stock options and vesting.
The allure of stock options is great. Look no further than Google’s famous “thousand millionaires”, the number of employees that became millionaires from their Google stock and options holdings. But they’re complicated, so let’s dive in.
Stock options are the right to buy shares of stock. The stock options agreement lays out terms on which you’ll buy that stock down the road, including the price you have to pay per share.
Why do companies issue options instead of shares? That answer is complex, but it mostly comes down to tax and the government’s investment rules. So most of the time, people get stock options.
The healthiest way to think about startup stock options is to not count on them paying off at all…
At its simplest level, if the company grows and becomes more valuable, then each share becomes more valuable. If the share price is greater than what you’re required to pay per share, then you’re looking at a profit.
To get a basic handle on options, you’ll need to understand these definitions.
Exercise Price – Also called the Strike Price, this is the price you’ll have to pay per share when you elect to convert those options to actual shares (called exercising).
Vesting – This is the process of earning your options over time. Vesting periods are typically 4-6 years. A four year vesting period means that you’re earning one-fourth of your options for every year you work at the company; if you leave after two years, you’ll have earned half of your options.
Dilution – Figuring out what your options would translate to in terms of ownership of the company is a function of basic division. The number of options you have are the numerator. The total number of options and shares issued are the denominator. Divide the two and that percentage is what you own. As the company issues more stock – in conjunction with a capital raise, let’s say – the denominator grows. This makes the percentage get smaller. That concept is called dilution. Knowing what your fully-diluted ownership percentage would be after exercising your options is the best estimate you’ll have for knowing how much you own.
How should options factor into your overall personal finance picture?
The healthiest way to think about startup stock options is to not count on them paying off at all, but considering them to be a potentially nice bonus down the line. Certainly for startups, the outcome is too uncertain to depend on them actually translating into cash.
If you want to learn more about the mechanics of stock compensation Wealthfront offers an excellent guide.
saving and investing
It’s all too easy to live paycheck to paycheck, telling yourself that you’re going to start saving money the second you get that raise. And the prospect of investing your money is often daunting, seemingly requiring far too much time and expertise. We’re going to convince you otherwise with primers on savings, money market accounts, CDs, 401(k)s, and IRAs.
savings, money markets, and CDs
With interest rates at historic lows, the incentive for keeping a savings account is often difficult to understand. That may be why more than 22% of millennials don’t even have a savings account, according to a survey from GoBankingRates.
Even if a savings account pays 1% interest, that’s minimally higher than our current .7% inflation rate. While it’s always smart to have easy access to emergency funds, using a savings account as an investment strategy just isn’t a great idea. Interest-bearing checking and investment accounts can pay up to five times more interest than some savings accounts, so shop around before committing to a bank.
Source: 2015 Millennial Money Mindset Report from Chime.
At first you’ll want to use this savings to build up an emergency fund of 3-6 months of expenses in an ultra safe, FDIC-insured savings account. After that, you can start to invest savings in a diversified portfolio of stocks, bonds, and other asset classes.
Money market accounts (MMAs) are also interest-bearing bank deposits, although checks and debit cards can often be used with the funds.
They’re not to be confused with money market funds, a type of mutual fund. These deposits typically produce higher yields than MMAs and savings accounts. However the funds are not protected by the FDIC, and it’s possible to lose most of your assets if the market value of your portfolio drops.
Certificates of deposit (CDs) are a bank deposit with a fixed time length (anywhere from one month to five years) and fixed interest rates. If you need to withdraw your funds before the CD “matures”, you’ll be forced to pay stiff penalties, often negating your savings.
401(k)s and IRAs
The cartoonist Kin Hubbard once joked that “the safest way to double your money is to fold it over and put it in your pocket”. That might be true. But the next best way might just be the 401(k).
It’s only been around since 1980, but this is now the primary vehicle used by Americans to save money for retirement. And for millennials, that’s particularly important – over half of them believe that Social Security will be bankrupt by the time they retire, per a T. Rowe Price study.
401(k) plans allow you to save directly from your gross pay instead of from the after-tax amount that shows up in your paycheck.
The power of regular 401(k) investing is staggering.
If your effective tax rate is 25%, contributing $100 to a 401(k) will allow you to invest an extra $25 instead of the $75 ($100 minus $25 in taxes) that you would have invested in a normal taxable account. That’s basically a 33% increase right up front.
Free money? Not quite: you’ll pay taxes when you withdraw your funds at retirement age – but it’s a huge advantage to be able to let it grow tax-free in the mean time. If you take it out before age 59 1/2, you’ll pay a 10% tax penalty on that amount.
If you’re lucky enough to have an employee matching program, then you’re really in business. Companies will match employee contributions up to a point (usually up to 5-7% of salary). Free money? Pretty close. Sometimes these come with a vesting program so that you have to work for a certain period after the company contributes in order to actually own that amount.
The power of regular 401(k) investing is staggering. We’ll set up a simple example.
In each case, we’ll assume the salary when saving starts is $40,000, 10% of salary is saved annually, and that there’s an average raise of 5% per year until retirement. We’ll assume a 7% annual return on the 401(k) portfolio and that 65 is the retirement age.
- If the starting point is age 40, the total at age 65 is $423,000.
- If the starting age is 30, $1.1M is amassed by retirement.
- If the starting age is 25, $1.6 million is accumulated.
All of this assumes that there’s no employer match. If the employer also contributes 5% throughout the savings period, the total for the saver starting at age 25 goes up to a full $2.5 million.
Be careful of the fees in your 401(k) plan, however. The biggest companies can often negotiate the best deals and the best plans, leading to the lowest fees for you as an investor. If you work for a smaller company and your plan’s fees are more than 0.50%, you may want to open your own investment accounts. Contribute to your 401(k) to get the maximum matching amount (it’s free money, after all) and then put the rest of your investing in an IRA or taxable investment account at a low-cost provider like Wealthfront. Note that if you contribute to a company plan like a 401(k) you may not be able to deduct IRA contributions on your taxes.
IRAs have some similar characteristics to 401(k) plans, in terms of tax advantages, but are set up directly with an investment firm, instead of through an employer.
Freelancers have a few choices, including IRAs and also something called a “Solo 401(k)”, which allows sole proprietors to participate in 401(k) benefits, similar to how they would if working for a bigger company.
Here we’ll take a look at where to put what you save.
The old saw “don’t put all your eggs in one basket” is thought to have originated in the 1600s or earlier (interestingly, it’s often misattributed to Miguel Cervantes and his book Don Quixote – it did appear in a translation, but it was not in the original Spanish-language text).
So the logic behind diversification is nothing new.
The basic concept is that our investments shouldn’t all be in one “basket”. That way if one category is in the tank, it doesn’t take our whole portfolio down with it. The trade off, naturally, is that the impact will be muted if that category does really well.
Any one of us can invest in all kinds of things: stocks, bonds, real estate, government debt, and even gold. And there are layers of diversification. Simply for the stocks category, we can invest in U.S. stocks or Asian stocks – each inherently exposed to whatever geopolitical or economic risk factors are unique to that part of the world. Then we can invest in small company stocks or large company stocks; big companies are thought to be more stable and less susceptible to economic shock, and small companies can have higher growth potential.
Millennials are buying their first mutual fund at age 23 on average, compared to 26 for Gen Xers and into the 30s for boomers.
The tools for how to do it have evolved greatly over time, though. Which may be one reason that millennials are buying their first mutual fund at age 23 on average, compared to 26 for Gen Xers and into the 30s for boomers (per a study by the Investment Company Institute).
One route to diversification is to hire a financial advisor. In fact, diversification is one of the chief values of paying someone to manage your money.
Alternatively, you can put tech to work for you. Services provided by firms like Wealthfront are designed to help build and manage your portfolio for you, using an automated approach that saves you substantial fees over traditional managers.
… or the simple way to save $30,000.
Finally, let’s take a quick look at fees, or the simple way to save $30,000.
Investment management fees are small – at least in terms of percentages. But they are humongous in terms of impact.
A Wealthfront study has found that 65% of investors are paying too much for high-fee investment products, expensive advisors, and/or unnecessary transaction costs.
The U.S. Securities and Exchange Commission has issued this helpful tidbit (via their Office of Investor Education and Advocacy).
They set up a simple example to illustrate the impact of fees. It’s based on someone investing $100,000 over 20 years at just a 4% return (it’s pretty conservative).
The difference between a 0.25% annual fee and 1.0% annual fee is a full $30,000 in just 20 years.
This is where tech comes in. Newer platforms, like Wealthfront, leverage software to handle a lot of the investment management work and decisions for you. This can mean lower fees – and more to show for your investment discipline down the road.
Ultimately, it’s important to remember that money is just a tool – use it well and you can build a better life. And while the world of finance can seem daunting, you shouldn’t let fear or anxiety keep you from making the most of your hard-earned dollars.