A Millennial’s Guide to Financial Planning

Managing your money closely can be scary, and it often feels easier to simply save what you can and not spend too much time thinking about your financial situation.

While retirement and other financial priorities may sound like long-term concerns, the decisions you make in your 20s and 30s will have lasting effects on your finances. Developing good habits now can help you start making progress toward your financial goals.

Fortunately, if you’re a millennial, you still have plenty of time to adjust your money habits before you start thinking about retiring.

Why Is Financial Planning Important for Millennials?

Every generation experiences its own challenges, and millennials are no different. When it comes to finances, many millennials are dealing with debt, bad spending habits, and little to no retirement savings.

Paying off Debts

Millions of millennials have been forced to put off both financial and personal goals in order to pay off debts. Effective financial planning can help you overcome these obstacles and reach your targets sooner rather than later.

Improving Spending Habits

Increasing your income can certainly make it easier to balance your budget. But in the short-term, it’s usually more practical to spend less. Building better spending habits will enable you to avoid setbacks and achieve your financial goals more quickly.

Saving for Retirement

More than half of all working-age Americans have no retirement savings at all. You might think you can afford to put off investing for retirement, but it’s important to start focusing on long-term financial goals as soon as possible — the longer you wait, the more difficult it will become to effectively save for retirement.

While taking a close look at your finances may sound intimidating, you’ll feel a lot better once you have a clear plan for the future. Here are our money tips to help you tackle these concerns head-on.

Read more: 7 Financial Resolutions for the New Year

What to Expect in the Future

One of the main reasons millennials are generally unprepared for their financial futures is that personal finance has changed dramatically in the last few decades.

Earlier generations often worked at the same company for a long period of time and received a substantial pension after retiring. Furthermore, they enjoyed significant benefits through Social Security that supplemented their pensions and retirement savings.

Economic Uncertainty

From 1960 to 2010 the US gross domestic product, or GDP, which represents the value in dollars of all goods and services produced in the country, increased by an average of nearly 7% per year. This led to overall strong returns on the stocks and other investments many relied on for their retirement.

Unfortunately, you shouldn’t count on those incredible returns in the future.

Before the coronavirus pandemic hit, US GDP was already expected to slow to 2% or less over the next few years. Updated forecasts will have to take into account business losses and increased unemployment from the pandemic shutdown.

In any case, millennials can’t count on the economic growth that occurred while baby boomers were investing for retirement. While growth could return to previous levels, you should be prepared for far more modest returns.

Unpredictable Job Security

Many baby boomers spent their entire careers with the same company, but the average millennial changes companies at least once every few years. Additionally, advancements in technology are constantly transforming business practices in virtually every industry.

With that in mind, a side hustle can help diversify your earnings and provide a backup source of income if you find yourself without work for a long period of time. And as hard as it may be, you should also build up a substantial emergency fund in order to cover unexpected lapses in income.

Changes to Social Security

Social Security has been a key aspect of retirement for most Americans since its inception in 1935. Funded by a tax on earnings, the program needs a steady supply of employed Americans to remain solvent.

As baby boomers approach retirement age, the ratio of working Americans (those paying into Social Security) to retired Americans (those drawing from Social Security) has consistently decreased. This has required changes to the program to keep it from running out of money.

While you could once retire with full Social Security benefits at 65, the minimum age for full benefits is now 67. You can still retire and start drawing Social Security at 62, but the amount you’ll get is significantly smaller.

It’s likely Social Security benefits will be further reduced by the time most millennials retire. The program may be bolstered by increased taxes, but cuts will still need to be made.

Social Security was always meant to supplement, rather than replace, retirement savings, and you should not expect it to fund your retirement decades from now.

Start Preparing for the Future Now

These are undeniably serious challenges, but you can begin putting yourself in a better position right now. Just learning about your options is an important step toward better financial awareness.

If you’re not sure where to start, these ideas will help you gain some momentum.

Saving for Retirement

More than half of all working-age Americans have no retirement savings at all. You might think you can afford to put off saving for retirement, but it’s important to start focusing on long-term financial goals as soon as possible — the longer you wait, the more difficult it will become to save for a comfortable retirement.

401(k)s and IRAs

Both individual retirement accounts (IRAs) and employer-sponsored savings plans (401(k)s) provide tax advantages to maximize your return on investment. Each has its advantages and disadvantages.

Each kind of account has a maximum annual contribution — there’s a limit to how much you can put into your account each year. If your employer offers both traditional (pre-tax) and Roth (after-tax) 401(k)s, you can take advantage of both and double your contribution limit.

Similarly, you can open both a traditional (pre-tax) and Roth (after-tax) IRA if you want to contribute more than the limit for a single account.

Compared to conventional brokerage accounts, an IRA or 401(k) could add thousands or tens of thousands of dollars to the value of your portfolio over the length of your career.

401(k) Accounts

401(k) accounts are among the most popular options for retirement planning. Unlike IRAs, 401(k)s are sponsored by employers. Many businesses match employee contributions in order to incentivize retirement savings.

Participating in your employer’s 401(k) plan is optional. If you choose to take part, you decide how much you want to contribute each pay period, and that amount is deducted from your paycheck.

Your 401(k) contribution is a pre-tax deduction, meaning it’s subtracted from your pay before your payroll taxes are calculated. You won’t have to pay taxes on your 401(k) until you retire and start taking the money back out.

This can save you money if you’re in a lower tax bracket after retirement. Of course, if your funds have been invested wisely and increased in value, you’ll be paying taxes on the larger amount.

Because you’re deferring taxes on your 401(k) contribution (and therefore depriving the IRS of your hard-earned dollars), there’s a limit to how much you can contribute each year. For 2020, the contribution limit is $19,500, although people aged 50 and above can make “catch-up” contributions of as much as $26,000.

It’s up to your employer to decide how your 401(k) funds are invested, although you may have a range of options to choose from. These can vary from one business to another, so make sure to research your company’s 401(k) plan.

Withdrawing Money From a 401(k)

Any money you withdraw from an IRA before reaching age 59½ is usually subject not just to the usual taxes but also to an additional 10% tax penalty. Fortunately, you can get the penalty waived in a variety of extenuating circumstances.

Some of the most common reasons include disability, loss of employment while 55 or older, and court orders following a divorce. In short, you shouldn’t expect to use the money before you reach 59½, but you may have access to it in a pinch.

On the other hand, you can’t put off withdrawing your 401(k) funds — and paying taxes on them — forever. Generally speaking, you’ll have to start taking a required minimum distribution (RMD) from your 401(k) account when you turn 72.

If you’re still working at 72, though, you can put off your RMD until you do retire. The minimum withdrawal age is subject to change and may be different by the time you’re ready to retire.

401(k) Employer Match

As mentioned above, 401(k) employer match programs are relatively common. Employer matches don’t count toward the annual contribution limit. For example, if your employer matches 50% up to $5,000, you could contribute both $19,500 of your own funds and the additional $2,500 from your company match.

Some companies offer a full or partial match on 401(k) contributions up to a certain limit. If your employer matches 50% up to $2,500, for example, you’ll receive an additional $1,250 when you put in $2,500.

Even if you can’t contribute more than the maximum amount your company matches, you should try to take full advantage of these programs whenever possible. Talk to someone in your company’s HR or accounting department to learn more about your 401(k) policies and investment options.

IRAs

IRAs, or individual retirement accounts, are a special type of retirement account that comes with tax benefits up to a contribution limit. You can use an IRA to invest in stocks, mutual funds, ETFs, bonds, and other assets.

As the name implies, IRAs are opened by individuals — you don’t need to use your employer’s plan or select from their investments. IRAs offer a substantially wider range of investment options compared to some 401(k)s, which are often limited by the employer.

IRAs come with both income and contribution limits. Single filers can only make the full contribution if they earn $124,000 or less ($196,000 for joint filers).

From there, contributions are gradually phased out up to $139,000 ($206,000). You can’t contribute to an IRA in 2020 if you earned more than $139,000, or $206,000 if filing jointly.

The contribution limit is $6,000 in 2020, or $7,000 for those 50 or older.

Spousal IRAs

For married couples who file taxes jointly, a working spouse can also set up and contribute to an IRA for their non-working spouse. The maximum annual contribution is $12,000, or $14,000 for those 50 or older.

A spousal IRA is not a joint account; it’s a separate account in the non-working spouse’s name.

Withdrawing Money From an IRA

Money can be withdrawn from an IRA at any time, but withdrawals made before age 59½ are typically subject to a 10% additional tax penalty. This penalty can sometimes be waived — for example, if you lose your job or need to cover medical expenses.

Similarly, you’re required to start taking withdrawals from an IRA once you reach age 72 (70½ up until 2020). Each individual’s minimum withdrawal is determined using a combination of their portfolio’s value and their future life expectancy.

Roth IRAs and 401(k)s

Both IRAs and 401(k)s also have Roth versions.

As with traditional tax-deferred accounts, Roth contributions are taken out of your paycheck. The difference is that Roth contributions are taken after taxes. When you retire and start withdrawing your funds, you’ll pay no further taxes on your withdrawals or on any capital gains (increased value).

This is considered to be especially advantageous if you expect to be in a higher tax bracket after you retire than you are now.

Roth accounts have other advantages as far as income and contributions limits. These can be complicated and subject to change, so it’s important to educate yourself before deciding how to allocate your retirement dollars.

Start Investing as Soon as Possible

Early contributions are extremely important for two main reasons.

Compounding

First, with the effects of compounding, your initial contributions will gain value more and more quickly over time. Compounding is the process of earning returns on previous returns, leading to accelerated growth.

For example, if you earn 5% per year on a $1,000 investment, you’ll have $1,050 at the end of the first year. In the second year, you’ll earn 5% on the initial $1,000 plus the $50 that you earned the year before, giving you a total of $1,102.50.

Investments can be unpredictable, so you may lose money in some years. That said, the overall impact of compounding generally makes early contributions even more valuable.

Contribution Limits

Retirement accounts like IRAs and 401(k)s come with annual contribution limits. In 2020, IRA contributions were limited to $6,000, or $7,000 for those aged 50 and above.

You can contribute up to $19,500 to a 401(k), an increase of $500 from the 2019 limit.

With that in mind, if you don’t make a contribution this year, you won’t be able to make up the difference in 2021 by contributing an extra $6,000. Even without considering compound interest, contributing up to the limit every year gives you the opportunity to maximize the benefits of tax-advantaged retirement accounts.

Get Out of Debt

Debt is relatively widespread in all age brackets, but it’s extremely common among millennials. Like investments, your debts gain interest every year, so it’s crucial to pay them off as soon as possible.

Credit Card Debt

The importance of paying down debt as quickly as possible is especially true for high-interest credit card debt. Credit cards typically charge 20% or more in interest — sometimes considerably more. Paying high-interest debts off quickly could save you thousands of dollars.

At 20%, a $10,000 balance would increase to $12,000 in just one year. If you paid the debt down by $200 per month, it would take you more than nine years to become debt-free.

Furthermore, you would end up spending $21,800 to get rid of a $10,000 debt, meaning that more than half of the cash would go toward interest rather than the principal balance.

Doubling that monthly payment to $400 would allow you to overcome the entire debt in under three years, less than one-third of the time. You would also spend just over $3,000 in interest for overall savings of almost $9,000.

At 24% interest, the benefits of making larger payments are even more obvious.

Even if you can’t double your monthly payments, the key to paying off credit card debt as quickly as possible is to always pay more than the minimum required payment each month.

If you’re carrying a large credit card balance, you should also consider looking for ways to reduce your interest rate. You can try negotiating a lower rate with your current card provider, or move the debt to a new creditor.

For example, you could take out a personal loan or apply for a balance-transfer credit card.

Personal Loans

One option is to take out a personal loan and use it to pay off your credit card debt. You could save a significant amount of money by paying off one or more high-interest credit cards with a lower-interest loan.

Unlike a credit card, a loan will have a set number of payments to be made. You’ll know exactly how much your payment will be each month, and you’ll be able to see the total interest charges before accepting the loan.

When a bank makes a personal loan, though, it’s counting on receiving the total calculated interest. Some lenders will charge prepayment fees if you decide to pay the loan off early. Of course, the specific terms vary from one loan to another.

Personal loans typically come with lower interest rates than credit cards, but your options will depend on your credit history. If you currently have a poor credit score, you should consider improving your credit before applying for a personal loan.

Balance-Transfer Credit Cards

Many credit card providers offer cards specifically designed for transferring balances from other credit cards. You’ll typically be responsible for a balance-transfer fee of around 3%, but you may also get important benefits.

The primary benefit, of course, is a lower interest rate.

But balance-transfer cards often come with long introductory periods during which you can make interest-free payments. That means every dollar you pay goes directly to reducing your debt, allowing you to pay it down much more quickly.

This may be enough to enable you to pay off your entire balance, saving hundreds or even thousands on interest. Even if you can’t pay off the whole thing, you can reduce your balance enough to save significantly once the interest kicks in.

Student Loans

As with credit card debt, making more than the minimum payment on student loans can help you pay down the balance more quickly and avoid as much interest as possible. With student loans, though, you have additional options.

Refinancing and Consolidation

As with credit cards, you can refinance or consolidate your student loan debt in order to secure smaller payments or a lower interest rate. Again, your credit score will determine whether you can qualify for a loan with more favorable terms.

When looking for an alternative, remember the interest rate isn’t the only factor to consider — the length of the loan matters, too. A lower interest rate can actually lead to more total interest payments if you pay off the loan over a longer period of time.

For example, a loan of $10,000 for 10 years at 6% interest would result in a monthly payment of $111 and $3,322 in interest.

On the other hand, the same loan paid off in five years at 10% interest would result in a monthly payment of $212 but would incur just $2,748 in total interest.

In other words, finding a shorter loan could save you a significant amount of money on interest even if you take a higher interest rate. Of course, the trade-off is a higher monthly payment, but if you can manage the payments you’ll get out of debt faster and have more money at the end.

That said, you may need to make smaller payments if you’re having issues with cash flow. The best option for your situation depends on your unique financial circumstances.

With that in mind, you should always look over the details before committing to a loan. Companies often emphasize certain aspects of the contract in order to attract debtors.

Tax Deduction for Student Loan Interest

If you’re working and earning enough to owe taxes, you can deduct up to $2,500 in student loan interest each year from your taxable income.

The full deduction is available as long as your modified adjusted gross income is $65,000 or below as a single filer, or $135,000 if you file jointly. The deduction is gradually phased out as income increases up to $80,000, or $165,000 for joint filers.

Start an Emergency Fund

Nobody could have predicted the coronavirus outbreak, but it’s a good reminder that emergencies can come out of nowhere. Without an emergency fund, many people go into debt in order to cover unexpected expenses or loss of income.

Getting out of debt is tough, but staying in the black can be even more difficult. An emergency fund is the most effective way to avoid taking on high-interest debt. You’ll also have money to fall back on in case you lose your income for a long period of time.

Start Saving Now for Emergencies

If you don’t have an emergency fund, your first goal should be to save a few hundred dollars. Don’t worry if it takes a while to reach this target  — some progress is always better than none.

Even just $250 can make a real difference in a sudden change of circumstances.

Over time, you can aim to save up more money and give yourself an even larger cushion. Most experts recommend putting enough away to cover at least three months’ worth of expenses.

People with low job security should think about saving even more, especially if the economic downturn continues. Don’t forget to consider your health insurance deductible when deciding how much to save. It’s always better to be safe than sorry, especially when it comes to personal finance.

Where Should I Keep My Emergency Fund?

Savings accounts are the natural choice for an emergency fund, but some accounts are substantially better than others.

The national average interest rate for savings accounts is just 0.09% annual percentage yield (APY). The US inflation rate varies but is always higher than this, meaning your emergency fund will actually lose value as time goes on.

Just as it’s critical to minimize your interest rate on debts, you should always look for ways to earn more money on your savings and investments. Some high-yield savings accounts offer more than 10 times the national average, helping you come closer to keeping pace with inflation.

While index funds and other passive investments typically outperform high-yield savings accounts, it’s generally a bad idea to put your emergency fund in the market. High-yield savings accounts provide a guaranteed interest rate with no risk of losing value overnight.

Read more: 9 Best Savings Accounts for 2020

Other Goals

Of course, your goals ultimately depend on your unique situation. Everyone has different short- and long-term priorities, so there’s no one-size-fits-all approach to financial planning.

These are just a few of the most common financial goals for millennials.

Buying a Home

Rent is extremely expensive, and you don’t walk away with a tangible asset. While buying a home can be costly upfront, you’ll have a place to call your own, and the interest on your mortgage is tax deductible.

You can even rent out rooms in your home to cover some of your expenses.

Find out more: 23 Home Financing Tips for People With Poor Credit

Having Children

Financial concerns are among the main reasons why millennials avoid or put off having children. It’s important to start saving for this goal early, even if you haven’t committed to having kids.

You can always use the money for something else, but it’s tough to make up lost time if you wait too long before getting started.

Buying a Car

Public transportation is better for the environment and often more affordable, but many Americans need a car for commuting and other responsibilities. Most people don’t think of their car as a source of income, but there are a surprising number of ways to make money with your car.

Starting a Business

Creating your own business gives you more flexibility and control over your work life. Even if you’re happy with your current job, you can work on a side project in your free time.

If you don’t have time to run a company, start by looking for ways to earn passive income.

How to Save Money

Awareness is a vital step toward a better financial future, but you still need to take concrete steps in order to save more money and reach your goals.

Saving cash doesn’t happen overnight—it’s about building sustainable spending habits that allow you to live comfortably while putting more of your income toward long-term targets.

With that in mind, it’s ok to start slow by making gradual adjustments. Over time, you’ll start saving more money without feeling like you’re sacrificing your quality of life.

You can even reduce your spending without making any lifestyle changes at all.

Negotiate Bills

Most people think of their bills as fixed costs, but you may be able to pay less by negotiating with your providers. For example, you could try negotiating bills for credit cards, utilities, cable, internet, and more.

These are typically monthly expenses, so getting a discount will save you money for as long as you stick with the same service provider.

If you’d rather avoid negotiating on your own, you can use a professional bill negotiation service like BillShark. These companies generally take a cut of the money they save you, although some charge a set monthly fee while you keep all of your savings.

Cancel Unnecessary Subscriptions

We all forget about free trials and monthly subscriptions. These costs can cut into your savings, and you won’t even notice unless you take the time to review your bank and credit card statements.

As with bill negotiation, there are also premium cancellation services that manage the process of unsubscribing. Cushion can cancel subscriptions, fight bank fees, negotiate bills, and more.

You’ll be surprised by how much money you can save simply by getting rid of unnecessary subscriptions.

Look for Cheaper Insurance

Insurance is another common expense that people accept without shopping around or comparing options. It’s easier than ever to find alternative providers for rental insurance, home insurance, car insurance, life insurance, and more.

Some insurance companies offer discounts or other perks in exchange for buying multiple policies from the same provider. If nothing else, looking for other options will give you more leverage when negotiating with your current insurance company.

Avoid Impulse Purchases

Saving money is an ongoing challenge, and a few impulse purchases can undo weeks or even months of progress. You should always consider your budget when shopping, especially if you tend to be an impulse buyer.

Fortunately, budgeting apps streamline the process of setting money aside for different types of items and staying within your spending limits. Setting a limit in advance allows you to buy what you want without feeling guilty or worrying about losing financial progress.

Spend Less While Shopping

You can make your budget go further by using a variety of shopping tools. For example, price comparison tools, cash back apps, and coupon sites can help you find the best deal while shopping with a wide range of online retailers.

Like negotiating bills, this tip helps you reduce expenses without making any changes to your spending habits. These easy changes should be your first priorities when you start making an effort to save more money.

With the right tools, you can spend less money while shopping online or in physical stores.

Pay Off Debts in Order

You may not know where to start when paying off multiple debts. Some people focus on the smallest debts first for the psychological benefits of paying off balances sooner.

If your goal is to get out of debt for the least amount of money possible, you should begin by paying off the balance with the highest interest rate. Debts with lower rates grow more slowly, so you can afford to put them off for longer.

Alternatively, some experts recommend paying off debts in order of minimum payment. If you have to pay at least $100 per month toward a specific balance but only $50 per month toward another, paying off the first one will free up more cash flow.

All things considered, there’s no right way to approach paying off more than one debt. The right strategy for you depends on your financial situation and priorities.

Above all, the most important thing is simply to pay off balances as quickly as possible until you become debt free.

How to Earn More Money

Saving money is usually the first step toward building a better budget, but you shouldn’t underestimate the importance of increasing your income. With younger generations moving between jobs so frequently, passive income is one of the best ways for millennials to improve their financial future.

Earning Passive Income

Fortunately, passive income is more accessible than ever, with a growing number of services connecting consumers to people with extra time or resources.

Passive income is possible on almost any work schedule. While you might need to do some work upfront or perform regular maintenance, you’ll be able to make money without spending more than a few hours on the project per week.

Rent Out Space

If you have extra space in your home, you can rent it out to short-term or long-term renters. Airbnb is the most popular app for vacation rentals, but there are many other options available.

Renting out extra rooms is an effective way to cover mortgage payments and add a new source of income after investing in a home.

More and more people are renting out space for storage rather than using it as a vacation or long-term rental.

While storage spaces don’t generally generate as much income, they also don’t require as much upkeep. You’ll have your home to yourself aside from when renters are dropping off or picking up.

Rent Out Your Car

If you only need a car on certain days of the week or at certain times, you can rent it out the rest of the time to earn passive income. Turo is one of the most popular apps for peer-to-peer car rentals.

As with driving for rideshares or deliveries, a significant percentage of the money you earn renting out your car will go to vehicle upkeep. While Turo offers protection against damage and theft, you’ll still be responsible for routine maintenance.

You can also display ads on your car through platforms like Carvertise or StickerRide. As long as you don’t care about putting ads on your car, this is an effortless way to cover gas and other expenses while you drive.

Earning With a Side Hustle

With a little more time on your hands, you have additional options for making extra money.

Drive or Deliver

Uber and Lyft have made it easy to get started as a rideshare driver, and you can also deliver food through platforms like DoorDash.

While some of your earnings will have to cover maintenance and other vehicle-related expenses, many drivers make good money. You’ll also have the opportunity to set your own hours rather than working a specific schedule.

Walk Dogs

People use platforms like Rover to find dog walkers. Like Uber and Lyft, these services usually let you set a flexible schedule, so you can work as little or as much as you want.

You can generally earn more than minimum wage by walking dogs, and it’s a relatively low-stress way to earn some extra cash. Some clients will ask you to walk multiple dogs at the same time, allowing you to make even more money.

Read more: 90+ Ways to Make Extra Money

How to Invest

Your emergency fund should be kept in savings or a similarly low-risk account, but you won’t be able to generate significant returns unless you put some money in the market. While investments can have bad months and years, they consistently outperform savings accounts over long periods of time.

Getting Started

It’s impossible to predict how market conditions will change over time, so there’s no sense in trying to time the market. For most investors, time in the market is virtually always more important.

Getting in early gives your money more time to gain value, especially considering the impact of compound interest. As mentioned earlier, tax-advantaged retirement accounts also have contribution limits.

Risk Tolerance

In general, accepting a higher level of risk gives you the opportunity to earn even better rewards. Everyone’s risk tolerance is different, but you can typically take on greater risks at a young age.

The closer you get to retirement, the more short-term fluctuations can affect your returns.

If you’re in your 20s or 30s, the COVID-19 market crash will be a distant memory by the time you reach retirement age. There’s no reason to avoid investment risks when you have decades to make up any losses.

With that in mind, millennials should have as much of their retirement funds in stocks as possible. Some experts recommend keeping some money in bonds, but there’s nothing wrong with putting everything into stocks if your goal is to maximize returns throughout your career.

Stocks, Bonds, and Other Assets

Everyone knows someone who invested early in a once in a lifetime opportunity like Amazon, Apple, or Bitcoin. It can be tempting to chase those results; if you identify the next big thing, you could turn $10,000 into $100,000 (or more).

That said, investing heavily in a single company (or even a single industry) increases your overall level of risk. Diversification is key for people who want to invest in stocks without betting on the success of individual companies.

These are a few of the best alternatives to stocks for millennials. Keep in mind that some of these options may not be available with certain accounts.

For example, your company’s 401(k) plan may only support specific investments.

Bonds

Bonds are basically loans taken out by governments and businesses that need to raise cash. As with personal loans, the borrowers must pay back the loans with interest. That interest is your return on investment.

Bonds are low-risk options that can offset potential losses from stocks and other unpredictable investments. You’ll have a guaranteed return if you wait for the bond to mature — that is, for the borrower to pay back the entire loan.

However, you can generally cash out early for a lower return if you need the money.

The downside to bonds is that they offer modest returns without the opportunity for large gains you sometimes get with stocks. In other words, you’re sacrificing some upside for a safer investment.

With that in mind, bonds usually become a better investment opportunity as you approach retirement, when you need to be sure your money is safe.

If you’re in your 20s or 30s, the security of bonds is less valuable. In most cases, you shouldn’t worry about putting much of your portfolio into bonds until you’re within 10 or 15 years of retirement.

Real Estate

Real estate works somewhat differently from stocks and bonds, but it can be even more effective as a source of income.

There are a variety of ways to make money through real estate, and the field is more accessible than ever. Real estate investment trusts (REITs), for example, make it easy to invest in a diverse range of assets, and many are publicly traded.

Similarly, crowdfunded real estate investments enable traders to chip in for a share of the asset or assets. These are great options for investing in real estate with a smaller budget.

Some people flip houses and other developments as a secondary source of income, but this is a much more active project compared to buying shares in REITs or crowdfunded investments. That said, you can earn an incredible return if you’re willing to put substantial time and money into buying and reselling real estate.

Cryptocurrencies

Cryptocurrencies are digital currencies that offer several advantages over traditional forms of money. For example, many cryptocurrencies come with quicker transfers, lower fees, and better accessibility around the world. You can also use cryptocurrencies at a growing number of merchants.

Cryptocurrencies provide some of the best returns of any investment if you buy the right coin at the right time. On the other hand, they are extremely volatile assets, so you should be careful about investing too heavily.

Earning Money by Cryptomining

Cryptomining involves using your computer to verify cryptocurrency transactions and add them to a digital ledger called the blockchain. Every cryptocurrency transaction needs to be authenticated through a complicated mathematical process.

Cryptominers compete to be the first to validate a transaction, earning some amount of cryptocurrency when they succeed.

While this was once a lucrative opportunity for anyone with a decent computer setup, it has generally become less valuable over time. Bitcoin, for example, offers smaller and smaller yields every year.

Additionally, large-scale operations have invested massive amounts of money into mining, making it more and more difficult for individuals to turn a profit. Considering setup and energy costs, it simply isn’t practical for most people to invest in cryptomining.

You can join mining pools for a share of the profits, but you’ll lose some of your potential earnings to pay the group’s leaders, and it will likely take a long time to earn anything significant.

Free Cryptocurrencies

Furthermore, there are more ways than ever to get free cryptocurrencies without mining. If you’re interested in free cryptocurrencies, you can get bonus coins by signing up for an initial coin offering or earn Sweatcoins by tracking your steps through the mobile application.

Investment Funds

Investment funds are the simplest option for people who want to diversify their portfolios without researching each individual investment. They allow you to diversify assets by pooling your money with other investors and letting the fund’s manager decide where to invest.

There are many different types of funds including bond funds, real estate funds, and crypto funds. Many funds are publicly traded on stock exchanges, making it easy to buy and sell shares in them.

Passively Managed Funds

Some funds, such as index funds, are passively managed — they are based on a buy-and-hold strategy. Rather than having managers who try to beat the market by frequently buying and selling stocks, index funds buy stock in many companies in a certain sector of the market and hold on to them, letting them rise and fall with the market.

An S&P 500 fund, for example, automatically tracks the S&P index, which measures the overall performance of 500 large, publicly traded companies. Passively managed funds generally achieve decent returns for a relatively small fee.

Actively Managed Funds

Actively managed funds have managers who constantly watch the market and try to time trades to maximize gains. They typically charge higher fees, so they need to outperform passively managed funds by a significant margin in order to be worth your money.

Now Is the Time to Start

Millennials are facing unique economic challenges, but you can improve your situation over time. Regardless of where you are now, these tips will help you save more of your paycheck and make progress toward your financial goals.

Frequently Asked Questions

• Why should millennials worry about retirement?

  Retirement may seem a long way off, but the financial decisions you make, and habits you develop, in your 20s and 30s will impact your financial health for years to come.

• Can’t I retire on Social Security?

  Social Security is meant to supplement your retirement savings, not replace it, and while the system is robust there could be significant cuts to benefits by the time you retire.

• Is it a good idea to make the minimum payment due on credit cards?

  No. Minimum payments are designed to cover the interest due while making very little impact on the balance owed. You should strive to always pay as much every month as possible.

• Is it worth taking out a personal loan to pay off a credit card?

  If your credit card has a high interest rate, you may be able to save a very significant amount of money by paying it off with a personal loan.

• What is compound interest?

  Compounding is when interest earned on an account is added to the balance, so that you begin earning interest on the interest itself.

• What is passive income?

  Passive income is income that doesn’t require a lot of your time and effort, such as renting out extra space or a car you don’t drive much.

• Which is better, an IRA or a 401(k)?

  Each has its own advantages, but if your employer offers a 401(k) you don’t have to choose — you can have both.

• How are Roth IRA or 401(k) accounts different from traditional accounts?

  Contributions to traditional accounts are taken from your paycheck before taxes, and you’ll be taxed when you start withdrawing funds. Contributions to Roth accounts are taxed before they are taken from your paycheck, so you’ll have no taxes due when you start withdrawing them.

• Which are better investments, stocks or bonds?

  Stocks offer potentially larger returns, but also run the risk of decreasing in value; they are a better option when you’re young. Bonds offer modest, but secure, returns, and are a better option as you near retirement.