Massive inflation, a workforce still hobbled by the pandemic, stagnating wages, a widening wealth gap, and the prospect of having to pay student loans again come September — things are a little shaky right now for anyone but the super-rich. If you’re just entering or exiting college, the financial reality may feel downright frightening. Maybe even, “I might as well drop all my savings on red in Vegas”-level frightening (I could win… it can happen right…RIGHT?!).
We get all that. But before you dig yourself into an even deeper hole by betting it all away, know that there are in fact time-tested financial strategies out there that can help you survive and even thrive. Yes, even in this economy. They aren’t sexy, cool, or even particularly fun, but they are necessary if you want to get closer to living that life you envisioned for yourself before you entered the real world and realized how much everything costs.
To help you better manage your dollars and figure out smart and sensible ways to navigate our economic realities, we reached out to financial expert, Sharon Epperson. Epperson is a Senior Personal Finance Correspondent at CNBC and the creator of Money 101, an 8-week newsletter that teaches you all the basics of financial literacy. We hit her up about everything from budgeting, to dealing with student loans, wage bargaining, strategizing to become a homeowner, and whether or not you should listen to your parents and finally look into what a Roth IRA actually is.
Let’s dive in!
What hope is there in the face of what feels like a system stacked against the interests of a younger generation and their pursuit of what has classically been defined as the “American Dream,” but is now pretty basically defined as job security, home security, et cetera?
In short, we know the cards are stacked up against us. What can we do about it?
That’s so interesting. I think many people, as they’re starting out in their careers, believe that the cards are stacked against them, whether they are living in 1993, when I was starting my career, or whether they’re in 2022. I think the reality is that the cards are rarely stacked in anyone’s favor. And I say that as a woman of color because that’s my perspective. So, I’ve never thought that the cards, as a woman of color, are stacked in my favor, even though I’m a college graduate, I have a master’s degree, and I went to Ivy League schools, but that doesn’t necessarily mean that now every door is going to be open. What it requires people to do as they’re starting out is to make sure that their clear on what their goals are.
What do they want to achieve professionally? What do they want to achieve financially? What values do they hold dear that they are not willing to budge on as they make sure that these goals become reality? I think that that needs to be the focus first and foremost, to really think about what you want your life to be and what you want your financial life to be. And then from there, work on how you can get there.
I think in terms of making sure that the cards aren’t stacked against you so much, is that you have to really research and make sure you understand as well as you can, the ways that you can achieve what you want to do financially. As you’re starting out in your career, as you’re trying to make sure that you can afford rent, that you can afford the transportation costs, that you can afford everything that goes into living your adult life, what are you doing to make sure that if there’s a curveball and something else changes, how are you going to be able to then pivot to something else?
What kind of cushion are you going to have to fall back on if that happens? That’s why I think it’s so important to think about what you’re spending and take a hard look at what you’re spending. Many people can’t figure out, have no idea, and could never give you a number on how much money they spend every month to live their life. That’s essential. As essential as it is to get a job, it’s essential to know where that money’s going. So, knowing that, knowing what your net worth is. You know what your worth is because you know what your goals are, you know what you want to achieve, and you know what values you hold dear, that are going to make sure that inform your choices, in terms of what you’re doing professionally.
But then, you also need to kind of know, very practically, where do you stand? How much debt do you have? How much money do you have coming in? What are your assets? What are your liabilities? What is your net worth? People get scared with the amount of debt they may have, whether it’s student loan debt, credit card debt, or they have a property, they have some type of mortgage or something. They’re like, “I don’t have net worth, it’s negative.” But you got to know what the number is, whether it’s positive or negative, and know how to turn it around to the positive number you want it to be. So, I think that’s one of the key places to start, in terms of knowing where you stand financially, and then knowing where you want to go and how to get there.
I do wonder though when you talk about the life or the financial life that you want and how to get there, does that mean college is our only option? Should people be putting more time and stock into trade schools? Are there any other paths aside from the typical/traditional path?
The entrepreneurial spirit has always been there in many, many people, and the difficulty has been being able to find access to capital to take advantage of it. And that’s still an issue for many people, particularly for people of color. But I think that it’s important to look at various ways to have an income. So, that can be getting a traditional job, that can be in starting your own, that can be in investing, and trying to see the growth that you can from your investments.
There are many ways to do it, and I think it’s really important to pursue all of them.
We briefly touched on student loans and I was wondering what tools or strategies are there out there to help people lessen the load and impact that taking student loans can have, the way that it kind of anchors progresses. If you take student loans, does that automatically mean you’re less likely to be a homeowner?
So, statistics will show that having student loan debt definitely impacts when people purchase a home and if they purchase a home. Taking out student loans does not preclude you from achieving any of the financial goals that you have if you’re able to figure out a way to pay those loans back while trying to achieve those goals. So, again, it starts out at the earliest stages. Are you taking out student loans that reflect what the possible return on that investment will be in terms of the job that you could get when you get out of school? Are you coming up with a plan while you have these loans, if there’s anything that you can start to pay back a little bit along the way, even while you’re getting your education? And then, when you graduate and you have student loans, how are you thinking about what is your strategy for being able to pay them back?
Are you looking at the various ways to do this, whether it’s an income-driven repayment plan, whether it is working out some type of perhaps even personal loan that you’re getting from parents, or family members to help you pay down some of the debt, and then you pay them back. There are various scenarios that people work on, but I think the idea that there’s ‘no way I’m ever going to get a house, I have student loan debt.’ No, get a great job or make a great job that would provide income for you to be able to pay back your student loans and pursue whatever your goals are.
I think that ties a little bit into budgeting, which is something that you mentioned earlier. So, I wonder, how do people start to begin to budget sensibly? What kind of tools, and strategies should we be using? What should we look at to make sure that we do know where our money is going, and why having that kind of visual is so important to be better at budgeting?
I’m so glad you brought up visual because I want to go back super old school. I absolutely think that you need to know where every dollar’s going, where every dime is going of your money over the course of a month. Just try to track it and see where it’s going. Because I think, again, a lot of folks don’t know where it is going and you’re paying with PayPal, Venmo, Digital, Apple Pay, not the same way that you necessarily would get a receipt way back when.
So, there are different ways to track this. You can use an app that might help you with your budgeting, like Mint, or there are many different… I’m not even going to suggest one over the other because there are so many budgeting apps that are out there that can possibly help you. But writing it down, even if it’s on your own spreadsheet, maybe it is still pen and paper, to see exactly where that money is going, I think is super, super helpful.
Just take a month to do that so that you know where your money’s going. I think that’s where you start to just see where it’s going now and where should it be going? The budget strategy that I like to use is called the 60% Solution. There’s another rule, some say 50/30/20 … That’s not my favorite because living in New York, it’s got to be 60% once I tell you where that money’s going.
60% of your gross income goes to committed expenses and taxes. So, taxes take out a big chunk if you live in the New York area. Committed expenses are your housing, any bills that you have to pay every month, your student loan bills, when those start again, and your credit card bills that you have to pay. Anything you have to pay every single month goes into that pie.
Then the other 40% is broken down this way, 20% goes to long-term savings. So, that could be a retirement plan. That could be some type of investment that you want to make with money that you don’t need for at least five to 10 years because this 20% is money that you should be investing, not money that should be just sitting there in a savings account. Another 10% though, should be just sitting in a savings account. This is your short-term savings. This is that rainy day’s fund, the ‘you can take it and shove it fund,’ whatever you want to call it. But something happens and you need that money, that is where that money goes. So, 10% of your money goes there.
And then 10% is to do whatever you want with. That’s your fun money. That’s your discretion money. Do whatever you want, your vacations, your ways of just making yourself feel great, doing whatever you want to do. That’s where that money comes from. Now, trying to stick to the 60% solution has not been easy for me over the many years that I’ve been trying to do it, but it gives me a goal. It gives me a goal of where to go. And sometimes I’m not saving 20% for the long-term. I need to get a new car, or something’s broken in my house, but that gives me goals.
I think having that strategy or finding another one that you think you could adhere to at least for some period of time is really, really important. And when I stray, at least I know where to go back to.
I was looking at some statistics and I found that 50% of older millennials aren’t homeowners until the age of 35. That follows a decreasing trend from as high as 70% in the 1940s. And I imagine that gap will keep growing for the younger millennials and the Zoomer generation. So, aside from budgeting, what are some real strategies people can start in their late teens, or early 20s if they hope to be a homeowner one day?
One thing I did, I think, and this again, is if you have a job and you’re getting a regular paycheck, but you can do this if you’re freelancing, working on your own, have your own business and you can create these accounts, but if you have a job and you’re getting your regular paycheck and you’re having it direct deposited, understand that it doesn’t just have to go to your checking account.
When we talk about people living paycheck-to-paycheck, it’s because all the money that they’re getting is going into this checking account. Many employers will allow you to put your money into multiple accounts. So, not even just checking and savings, it could be checking and three different accounts and those accounts have different goals.
When I was saving to buy my house and I was around the same age of the people that are the statistics that you’re talking about, when my husband and I bought our first home, what you need to do is create that house fund so that the money from your paycheck goes straight into that fund early on. You may have an idea of the type of home you want. Understand what type of down payment you’re going to need to make that happen. Also, as you’re building the money to have that down payment, that could also be like your mortgage payment. So, you’re paying rent now perhaps, or maybe you’re living at home, but you are going to eventually have to be paying a monthly mortgage. Start paying that mortgage now.
How do you do that? You create an account to have the amount of money that is perhaps above the rent that you’re paying now, or if you’re able to live from home, the whole mortgage payment, put that every month in a special account, that’s your house account. That’s your house fund. Before you’ve even decided really where you’d like to live or exactly the type of house, but you have an idea of what the housing prices are going to be like. So, that is kind of the discipline and the strategy that it takes to eventually buy a home.
I get asked a lot now, with rising interest rates and the way that the markets are going and the housing market’s going, “Should I buy a house?” That’s not how you think about it. Do you have the money for a down payment? Do you know that you could make the monthly mortgage payment? Until you’ve tried it, you don’t know. So, try it and see if you can handle it. And then you’ll know if you’re ready to buy a house. Not just because mortgage rates are at a certain place, not just because the house that you think you want is going for well over asking, you’re afraid you won’t get it when you’re ready to have it. No. You need to be ready for you financially to be able to afford that home. And there’s no way for you to know for sure unless you do a trial run.
You mentioned the idea of living paycheck-to-paycheck briefly. So, I wonder, is there any number, when you’re talking about these different accounts, these different funds that you should have for yourself, is there any amount that’s too small? Because sometimes your bills and your rent do leave you with a very small amount of leftover income, or of the money that you made from that paycheck. So, I just wonder, if you’re not making that much money, is this something you can still be doing? Is this something that everybody can do at every income level?
You definitely should still be doing this. I remember right before I bought my house, a financial advisor telling me that… I just felt so stretched. I was like, “The cash flow, there’s nothing flowing here. There’s no flow.” And he said, “Everyone’s stretched to buy their first home. Everyone has to stretch.” That was not exactly the best advice because I stretched and I had no furniture for over a year. One of my friends came over and said it looked like I lived in a gymnasium. I didn’t have a humongous house. I just had no money for furniture. I was just trying to pay the mortgage.
So, I think if I had to do it again, I would’ve thought about not just how much it costs for the mortgage, but how much it costs for furnishing the home or making sure the lawn looked right, and what I wanted to take on myself. So, no, there’s no amount that’s too small when it comes to what you have to save. What has to change is the mindset. Not that you are giving up on your goals, but you may have to change them from what you originally thought.
I always wanted to have a house like the one I grew up in, right? Or maybe better than the one I grew up in, but that takes time because the house that I remember growing up in was not the first house my parents had, was not the first house that my mom or dad lived in, or first apartment. It takes time to get there. I think that kind of understanding, it’s hard because you also do see other people that don’t necessarily take the time, don’t have the discipline. And it appears, and I use that word, “appears,” that they’re able to do all of this. And how are they able to do all of this? Because it appears that they can, but you don’t know what’s under that hood. You don’t know what their financial life really looks like.
What would you say to young people who want to be homeowners, but still live in a city? Is that a hopeless idea that we should abandon, or is that something that you can make work?
To become a homeowner in the city, in a major city, in an expensive city? Can you do that? That’s what you’re asking?
No, I don’t want to say that, because that’s not true. But again, you may have to change and adapt to what you can afford in that city. So, if you want a lot of space, you may not get that in the city for the amount of money that you have. But if you’re willing to have a limited amount of space, but live close to your job, or close to your friends, or close to where you want to socialize, or for whatever reason that you want to be in the city, then it’s worth it.
You have to look at what the cost is for you to give that up, and not just the financial cost, but what is the social cost? What is your mental health cost? Are you the type of person that likes to commute? If you’re not, then you need to be in a city or close to where you need to go, but know that it may not be the space that you wanted or the exact type of home that you wanted.
Because of the inflation that we’re all experiencing. What should we be doing right now with our money to maximize our livelihoods? How do you balance the strain of inflation with wages that aren’t increasing fast enough?
First thing, do you have any subscriptions that you have, do you look at your credit card bill with a fine-tooth comb every time you see it? And if you don’t, because who wants to, start, so that you can see where the money is going. And you may find that in 2020, in April or March, or the summer, you signed up for all this stuff because you’re like, “I can’t go out. I’m going to do this, I’ll get this delivered. Then I’ll sign up for this streaming service, and I’ll do this one.”
And now, the weather’s nice, people are going out more and you don’t have time for any of those things. So, why are you still paying for them? Find out what you can cut. That’s the first thing. So, that’s one thing that you can cut out right away. I told this to a colleague last week, he cut $60 a month from his budget, just right off the top.
Then the next thing you need to do, I don’t buy anything that’s not on sale or with a coupon. That includes, and I’m not ashamed of this, if I have to get the last drink at 6:45 for the Friday night that I’m out with my friends, I’ll go there at 6:45, my drink will have already been poured at half price. And you can come at 7:30 if you’d like. Or a blouse, or everything, anything. The way that I do this when I’m doing the basic essentials, like shopping for groceries, I look at the unit price. I don’t just look at the sale price, because sometimes the sale price may seem like it’s more but if I look at the unit price, which is how much it is for each ounce, it might be less.
If you do online grocery shopping, it’s so much easier to do that. Coupons, whether it’s Honey, RetailMeNot, or anything. My kids know, don’t come to me and say you want anything if you don’t have a coupon code with it. These are things that are basic, that you should be doing all the time. But now, they make a huge difference. I was watching a story on NBC Nightly News and a woman was talking about having lost her job, dealing with inflation, rising prices, groceries, and having to have less fresh vegetables and taking out meat some days out of the week for her son.
And I thought, “That may be where you have to go, but there may be some other, those seemingly little things, that could make a difference. Like is that canned good really cheaper?” Maybe you don’t have time to go to a farmer’s market. Or maybe you don’t have time to go somewhere and look for less expensive, fresh produce or something. And maybe it could be healthier to cut some meat out of your diet some days. But you have to figure out what you’re willing to give up and see what concessions you can make so that you don’t have to give up the things that are really, really important to you.
We don’t know how long this inflationary period is going to last, but we do know it’s going to probably be painful, but we can make it less painful by doing some of these simple things.
The other thing I would say, I’m sure many people who you reach that are entrepreneurial and have the passions and their job is fine, but they really love X. Figuring out how to monetize that passion is so powerful. Again, takes a little bit of extra time to go online and look up a seminar or go to a workshop. It can be free. It’s not something you have to pay for, but figuring out another income stream is my point, is another key way to deal with this inflationary period. So, your wages from your traditional job may not rise as fast as the prices are going up for things you have to pay for. How do you deal with that? You need more money. You may need more income. You may need another job, a side hustle.
How early should we really be thinking about things like CD accounts and Roth IRAs? I feel like you’re going to tell me “yesterday.”
My son was 16. He had a summer job and he wanted to spend a lot of it on various types of very expensive sneakers. And some of that money, again, even at 16, the 60% Solution, you have gross income. Let’s work it out. He had to save some of it. And the long-term money, the money he saved long-term, he put in a Roth IRA at 16 years old and I had to be there too, and all of that. You have to do it with a parent, but yes, you should start a Roth IRA immediately, immediately. If you’re listening and you’re eligible to do so, you qualify based on your income to contribute to a Roth IRA, which is probably most people that you’re reaching, you should absolutely do it.
There are several reasons why I think it’s the best thing ever in terms of long-term savings. One is, that it is for long-term savings. It is for long-term savings. It is for long-term savings! That said, any contribution that you put into a Roth IRA is yours to take out anytime you want. So, if you don’t have an emergency fund and you have one place that you’re saving, that might be the best place to put it. You don’t want to touch that money, but if you have to, you could take it out. But it also provides you the discipline of having your money somewhere that is designed to grow long-term.
So, within that Roth IRA, maybe the majority of it is invested in the stock market, but some of it, you just leave sitting in cash so that if you do need to take it out, it’s yours to take out whenever you want to, as long as you’ve held the account for five years. The other reason why I love it is that the money that’s in a Roth IRA, as it grows, and when it does become those long-term savings that you then want to take out after every penny that’s in that Roth IRA is your money. It doesn’t go to Uncle Sam, because that money is money that is after-tax, so you don’t have the same tax hit that you’d have on a regular IRA. So, it’s that after-tax money that you’ve already put in, paid taxes on it already, you don’t have to pay taxes when you take the money out. So, that’s a beautiful, beautiful thing.
As that money grows, it’s also growing tax-free. So, there are a lot of great ways to do that. And some people may think, “Okay, I can put up to $6,000 a year in a Roth IRA, does this lady not understand that I don’t have $6,000 at the end of the year to put anywhere?” Fine. Put $60 in a Roth IRA. I mean, just start somewhere and eventually work it up, work up to as much as you can put in based on that, again, 60% solution of trying to put 20% of your income into something that’s longer-term, Roth IRA would be a great place to put that.
What are some smart ways we can increase our financial literacy? How do we address our lack of knowledge, and what tools out there are available for people?
So, I’m going to start, I have to, CNBC’s Invest In You. So, you see a stock ticker on TV, a person is talking to this economist and this person, and some of it, I get, some of it, I don’t really get. Are they really talking to me? Invest in You is talking directly to you. It is about asking, how do you manage your money? How do you grow your money? How do you protect your money? And it’s all about your money. So, that is a great resource. If you Google CNBC Invest in You, and then whatever topic we’re talking about, whether it’s student loans or budgeting. I think that will be a great place to go to get some information.
And quite frankly, you have to read, you have to research it, and find out what you want to know more about, be familiar with the terminology and know what a Roth IRA is, know what a Roth 401k is and if that’s offered at your job. Understand the different options that you have for paying back student loans well before you’re told, “Okay, now, no, I’m serious this time. I’m really serious. You’re going to have to start paying them back.” Eventually, that message will come out. You want to be ready.
If there’s some way that you actually had extra money after you’ve done the savings I’m talking about and all that, because you don’t have to pay back your federal student loans, but you say, “I’m still going to pay something back, just a little something.” If you’re doing that right now, you are brilliant, because every single dollar that you put toward that is going to your principal, because you don’t have to pay interest on Federal student loans right now. So, those people that are still paying down their student loan debt are going to be so much further ahead.
And it’s such a small percentage of people who are doing this. And I know the relief is needed desperately by many people, but some may be taking that extra vacation because they now don’t have to pay their student loan debt. And I’m not saying this is the majority. And I know, I don’t want people to get angry and say, “Why are you saying this?”
I’m saying it because if you have even a little bit, not what you normally would have to pay, but maybe a portion of that, and you are still paying back something, all of it is going to reduce your principal. And that is so, so important to make sure that your overall debt is not going to prohibit you from doing the other major things that you want to do, like we were talking about earlier, like buying a home.
It’s no secret that there’s a lot of wage inequality across gender, racial, and ethnic lines. When taking a new job, do women and people of color need to factor that into bargaining? What are the best ways to ensure we’re entering the job market on an even playing field? Should we be bold?
Strong, smart, bold. Bold, bold, bold. If you don’t ask, you don’t get. You absolutely have to be bold, but you can’t be bold unless you come with the goods. So, know your worth. Understand why you deserve to be paid what you’re asking to be paid, and make sure that you are going to be able to deliver on what’s expected of you when you get that pay. So, I think it’s really important to ask, really important to negotiate and negotiate hard. I mean, this is a time when some companies, many companies thankfully, are stepping up and saying, “We need to do better.” Okay. Prove it. Pay me more, give me a job and a title that I deserve because I am worth it. And I am going to deliver beyond your expectations. So, you should be actually paying me more, but I’ll be okay with this.
I think it’s very important to go in aggressively. I say that, and I also say though, you have to be prepared. So, in your preparation, you need to be able to know backward and forward that you can do that job, without a doubt. And if you don’t know how to do it right now, you’re going to figure it out and you’re going to make sure that you do it to the best of your ability. You also have to know that if you go in hard for this job, at your current job or the new job, and asking for more money, if they say no, what will you do then? If they say no, as in, “No, you can’t have this job,” or “No, you’re not going to get this promotion.” What’s plan B? Always think about the ‘what if’ before an employer or potential employer gives you the ‘this is what it’s going to be.’
And I think the final thing is, when you do actually make that happen, protect it. Protect it. Don’t just spend it. Don’t put it, again, all under the mattress, but protect it. So, how were you living with the money that you had that was 20% less before you got the 20, 25% raise? Which you’re just dancing about, which you should, congratulations.
But if you were able to kind of make it work a little bit before and you don’t have tremendously more expenses, then you need to be saving that. You need to be managing that, protecting that, investing in things that are going to be long term, whether that’s in the markets, whether that’s in making sure now that you have proper insurance for things, all of those things are important. So, yes, if you are going for a new job, be bold.