Many millennials have found themselves in a precarious financial situation. According to a recent Clever Real Estate report, 1 in 4 millennials have more debt than savings.
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The report found that 73% of millennials have some form of non-mortgage debt, with 38% owing $10,000 or more. And about the same percentage (39%) have fewer than $10,000 saved — up from 25% a year ago — with 8% of millennials having nothing saved.
Having more debt than savings is less than ideal. Millennials in this position will likely have to incur more debt in the case of an unexpected expense, making it harder and harder to dig themselves out of the debt hole they’ve fallen into. Fortunately, there are steps millennials can take to pay down debt and increase savings to get themselves into better financial standing.
Track Your Spending
Know where your money is going so you can see where you can cut back and funnel some of those dollars toward saving and debt repayment.
“Keep track of where you’re spending your money for a few months,” said Pratik Patel, head of U.S. wealth planning for BMO U.S. Wealth Management. “You may be surprised to see how much you spend on miscellaneous items. Even small changes like bringing lunch to work instead of going out can save you a lot of money over time.”
If there are no expenses you can easily cut, you may need to downgrade your lifestyle.
“You may need to rethink your housing, car, entertainment, etc., if it’s not aligning with your financial goals,” said Erika Kullberg, personal finance expert and founder of Erika.com.
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Focus On Building an Emergency Fund
Having a financial safety net in place should be a priority, even above debt repayment.
“To avoid falling deeper into debt, you need an emergency fund,” Kullberg said. “Start with at least $1,000, but work to increase that to at least three months of your basic expenses.”
Come Up With a Plan To Pay Down Your Debt
Once you have an emergency fund in place, it’s time to get serious about paying down any non-mortgage debt.
“Make a list of all your debts, including balances owed and interest rates,” Kullberg said. “Decide whether you want to pay off smaller debts first to simplify your finances, or whether you want to pay down the debts with the highest interest rates first, to minimize interest costs. When you pay off a debt, take the money that used to go towards that payment and apply it to the next debt.”
Don’t Use Your Credit Cards
Even though you may get “perks” for using credit cards, these don’t outweigh the interest you need to pay on any debt.
“Credit cards are often one of the biggest offenders for debt,” Patel said. “As millennials start chipping away at their debt, they should be careful about how they are using credit cards in day-to-day spending. Unless you’re planning to use your credit cards for specific purchases, leave them at home so you won’t be tempted to use them. When you pay with cash, you can’t spend what you don’t have.”
This means you should plan ahead for major purchases.
“Instead of using a credit card, gradually save up the money you’ll need before you make a big purchase,” Patel said.
Pay Your Bills on Time
Late fees add to your debt burden, and they can easily be avoided.
“If the bill is only a day late, most creditors will tack on charges,” Patel said. “Not only is that expensive, but late payments can lower your credit score. Plan to put your check in the mail or set up recurring payments at least 10 days before it’s due to make sure your payment is on time.”
Make More Than the Minimum Credit Card Payment
You’ll never get out of debt if you only make the minimum payments.
“Paying only the minimum amount on your credit card balance each month will extend your payments and significantly increase the amount you ultimately pay out,” Patel said. “Making the highest payment you can afford each month will help you get out of debt faster.”
Automatically Contribute To Your Savings
While you’re paying down debt, you may not be able to contribute a lot to savings, but remember that every little bit counts.
“The key to developing savings is to just get started, no matter how much you start with,” Patel said. “Set a specific amount to be auto transferred from your checking to savings account on pay day so you save without thinking about it.”
Try the 50/30/20 Rule
There are numerous budgeting rules out there, but one of the most tried and true is the 50/30/20 budget.
“Spend 50% of your income on life essentials (food, rent, bills), 30% on discretionary spending (takeout, clothes, entertainment) and the last 20% toward your savings,” Patel said. “If 20% isn’t a realistic target today, start with any small amount and then bump it up as you pay down your debt.”
You can also try the 70/20/10 model, which may be more realistic for millennial budgets.
“Try allocating the highest percentage of your available funds towards living expenses and necessities, and then allocate the next highest percentage towards debt elimination and the smallest amount towards savings,” said Michelle Smoley, director of personal and college finance at Bright Horizons College Coach. “The purpose of using these models is to change financial behavior and hold yourself accountable in meeting specific goals.”
Increase Your Earnings
When you earn more, you’re more able to save money and pay down debt.
“Consider side hustles based on your preferences and hobbies to build another income stream,” said Ketti Rose, founder and CEO of Wealthy Femme. “Every additional dollar earned can go to debt repayment or savings. Negotiate raises or job-hop strategically for higher pay — stagnant roles often leave millennials underpaid.”
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This article originally appeared on GOBankingRates.com: An Alarming Number of Millennials Have More Debt Than Savings: How To Turn This Around
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