Why Is Financial Literacy Important? A Guide for Millennials
Millennials are typically classified as those coming of age in the early 2000s. Many of us grew up in the thick of the Great Recession and are still feeling reverberations from that tough time.
Millennials are typically characterized by having large amounts of student loan debt, stagnant wages, and an aversion to credit — three extremely good reasons why we need to educate ourselves on finance.
I want to share a couple of financial literacy lessons I learned and how they’ve changed my life for the better. As a millennial myself, my financial education taught me simple concepts that help me manage money every day.
The Power of Interest
For years, I borrowed student loans for school without batting an eyelash. Even my $81,000 total didn’t bother me too much because I’d pay it back “eventually.”
It wasn’t until I actually calculated the interest that I realized how much I would pay over time.
At worst, I was paying over $300 per month in interest alone, and it killed me.
That was the kick in the pants I needed to take action on my student loans.
On the flip side, interest can be a very powerful tool to help build wealth. Compound interest, or interest that accrues on interest, can help millennials build a hefty nest egg if they start saving for retirement now. Millennials can do that through an employer-sponsored 401(k) or through other investment vehicles.
Tracking Income and Expenses
Learning about personal finance motivated me to start tracking my income and expenses. I was shocked to find how much I spent on $5 coffees and eating out. I love having those things, but no one needs them every day. Once I realized I needed to spend less than I earned and I actually saw the numbers in black and white, I started to make changes in my habits.
I began to calculate how much of my income was being spent on certain items. Instead of looking at things at their current price, I thought in terms of, “That’s an hour of work” or “I’d have to work a full day to pay for that.” That kind of thinking changed everything for me.
In addition, I started to calculate how much of my income was going toward rent. Typically, you want your rent to be 30 percent or less of your income. When I lived in NYC, my rent was 50 percent of my income. Because of that, I made changes elsewhere in my budget.
Once I started tracking everything and thinking of how much things cost in regards to the value of my time and work, everything started to change.
Millennials have a lot of competing priorities from paying off student loans to saving for retirement, making a down payment for a condo, or even spending on a wedding or a car. Learning how to manage your money can help you accomplish those things with the least amount of stress.
You Can Learn, Too
If you’re a millennial looking to become financially literate, start by doing a few things:
- Track your income and expenses.
- Know how much you owe (student loans, credit cards, etc.).
- Calculate interest on your debt.
- Begin investing through a 401(k) at your job. If your job doesn’t offer one, consider investing through a Traditional or Roth IRA.
- Once you’ve started, keep track of your retirement savings with tools like Blooom.
- Read financial blogs, articles, books, etc.
Why Is Financial Literacy Important? The Bottom Line
There isn’t much time to waste. The sooner you learn to manage money, the happier you’ll be.
Financial education helped me go from paying only the minimum on my student loans to now putting several thousand dollars a month toward debt. Imagine what changes you can make in your life simply by being aware.