Everyone needs a spot to stash their cash. But young adults have more to gain—and more to learn—from good financial hygiene than anyone else. Starting to manage your money strategically doesn’t have to be complicated, and it doesn’t have to take long. All you need are a few basics.
Start by dividing your money into three buckets, based on when you might need it: short, medium, and long-term. These will help you spend, save, and stash your cash wisely. The longer the time horizon, the more risk you can take with that money, because you have more time to make up for any losses. Then, you can use a few simple tools to help keep things organized. Here’s how it works:
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SPEND: SHORT-TERM
(<1 year)
This is the money you’ll definitely need in the next few months. It’s mostly for basic living expenses, like rent, gas, and Chipotle. If you can, try to keep at least two or three months of expenses on hand, in a regular old checking account. Any leftovers can fill the other buckets.
To level up, get a credit card instead of a debit card. There are tons of options, and sites like NerdWallet and The Points Guy can help you to find the right one. But don’t get fancy. Just pick one with a low annual fee, appealing welcome offer, and rewards you’ll actually use. I use the Capital One Venture card because it offers all three of these.
Then, use it like a debit card. Buy everything with it. Pay it off in full each month. Don’t get yourself into trouble and rack up a bunch of debt. But this simple technique can benefit you in several ways: First, you’ll start building your credit, which is vital for making big purchases down the road (like a car, loan for grad school, or house). Second, it smooths out your spending. Just like a business, it’s good to have more predictable payments and options to pay later. And third, you’ll get some added purchase protection and earn some sweet perks. Redeeming rewards miles is one of the easiest ways—and best reasons—to travel more often!
“Redeeming rewards miles is one of the easiest ways—and best reasons—to travel more often!”
Bonus tip: It’s helpful to start a small rainy-day fund, so when something unexpected happens, you’re covered. There are many apps to automate this, but my favorite is Digit. Give it a try.
SAVE: MEDIUM-RANGE
(2-5 years)
This is the money you might need in the next several years. You can divide it into two parts: an emergency fund, which you can dip into if in case you lose your job or something else unfortunate happens. Most experts recommend saving 3-6 months of living expenses. The other part is savings for major expenses (like a wedding, a house, a car, or grad school). If you want to get fancy, you could separate these into two buckets into different accounts, but it’s not critical. To level up, set up an automatic deposit from your checking account for $25-75 each month and watch the balance grow steadily.
Because you’re going to be saving this money for a while (hopefully), you’ll want to put it somewhere that will keep up with inflation and grow a little on its own. Historically, inflation’s about 2% annually in the U.S. While that doesn’t sound like much, it’s important because your purchasing power will actually decrease over time -- even though you still have the same amount of cash. The safest and easiest way to fix this issue is a high-yield savings account. It’s a relatively new invention, but many online banks already offer them, like Betterment, Wealthfront, and Ally. I use the Betterment Safety Net tool for this, which has no minimum balance. This way, your money will be protected against inflation and still easily accessible if you need it.
STASH: LONG-TERM
(5+ years)
Now it gets fun! This is the money you probably won’t need for at least five years. Although it seems far off, you’ll want to start saving for retirement now to take advantage of the power of compound interest. Consider this: If you’re 25 years old now and start saving $100 per month, at a 7% rate of return (totally doable), you’ll have stashed nearly $250,000 by the time you retire! Even if you invest just $100 in stocks today, you’d have earned nearly $1,500 in 40 years. As Albert Einstein said, “compound interest is the eighth wonder of the world.” And while there’s some tricky math involved, the best way to benefit from compound interest is to start early and stash now.
For new investors, you’ll want to avoid trying to pick individual stocks. It’s too risky, and you’re not clever enough to outsmart the market (because nobody is!). To level up, the best place to start is usually ETFs. These “Exchange Traded Funds” are essentially baskets of many different stocks, which decreases your overall risk. Since changes in the stock market are inevitable, you’ll need to decide how comfortable you are with risk. Then pick your funds accordingly. Here are three popular ETFs for young investors.
You can buy these using any online brokerage. Like many millennials, my favorite is Robinhood, because it’s free and makes buying stocks as easy as online shopping. They also have curated lists to browse, like “100 Most Popular” and “Most Popular Under $25.” Remember, you’re stashing your cash for the long-term, so resist the temptation to mess with your portfolio unnecessarily. Instead, pick ETFs that match your risk appetite, set up a monthly deposit to your investment account, and then leave it alone!
“Making it more complicated doesn’t guarantee better results.”
Sure, you could get a lot more complicated than this. But a simple, three-bucket approach is all you need to get started without much hassle. Making it more complicated doesn’t guarantee better results, either. No matter what, you’ll be much more satisfied by advancing your career, focusing on your family, and building healthy habits outside work than constantly reshuffling your cash. Just remember: Spend, Save, and Stash. And most importantly, start now!
For more from Greg, check out his upcoming book, The Entrepreneur in You →
Disclaimer: The above references an opinion and is for informational purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice.
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