Book Summary – Broke Millennial (Stop Scraping By and Get Your Financial Life Together)

In the United States, look for a bank that’s insured by the Federal Deposit Insurance Corporation (FDIC). This gives you automatic insurance covering up to $250,000 in case your bank goes out of business. The FDIC covers checking, savings and money market deposit accounts. FDIC insurance does not cover investments, such as stocks, bonds, mutual fund investments or other securities, nor does it reimburse expenses for life insurance or safe deposit boxes.

“Do you tend to get stuck with that feeling of ‘What the hell did I spend my money on?!’ each month?”

Don’t pay unnecessary banking fees. Find a checking account without charges for maintenance, minimum balances, overdraft protection, early account closures, lost cards, or ATM use. Seek credit cards with no annual fee, activation fee or monthly fee. Finding a no-expense checking account without restrictions can be difficult, but Internet-only banks offer them. Online banks include Ally, Bank of Internet USA, USAA and Charles Schwab. You can’t deposit cash easily with an Internet-only bank. Most banks offer just 0.01 annual percentage yield (APY) savings accounts. If you manage to save $2,000 a year at 0.01%, you will earn only $0.20. But if you save $2,000 at a 1.00 APY, you’ll at least have $20 at the end of the year. Internet-only banks offer higher APYs.

Monitor Your Credit

Lenders and landlords use credit scores or credit reports to determine your level of financial responsibility. Credit scores get the most attention, but credit reports are more important. Your credit score signifies your creditworthiness; your credit report contains detailed information that determines your credit score. Credit reports list credit card applications; student, personal or car loans; and mortgages and any other type of debt. They list whether you pay bills on time, have ever declared bankruptcy, suffered foreclosure, paid your taxes late or not at all, or have other defaults on payments. The common FICO credit score goes from 300 to 850. Anything above 800 is exceptional, 750–799 is excellent, 700–749 is good, 640–699 is fair, 580–639 is poor and anything below 580 is bad. The higher your score, the less interest you’ll pay on debt. A 700-plus credit score tells lenders that you have made prudent financial choices and are a safe risk.

“Okay, Broke Millennial, let’s get your financial life together. #GYFLT”

Five factors determine your credit score. Your payment history makes up 35% of your credit score, while the amounts you owe constitute 30%. The length of your credit history counts for 15%, your credit mix for 10% and any new credit you’ve applied for is 10%. Your credit score does not consider your race, age, sex, religion, salary, employer or occupation. Check your credit report annually through one of the three credit bureaus – Experian, TransUnion and Equifax. The official website for obtaining a free annual copy of your credit report is annualcreditreport.com. Look for errors and to rule out potential fraud. Report any mistakes to all three credit bureaus.

Beware of Credit Cards

Using credit cards builds up your credit score, if you use them wisely. The primary rule is to pay your full balance each month on time. Card companies let you pay a minimum amount or some figure between your full bill and the minimum, but when you have a balance due, you’ll have to pay interest which is how credit card companies make money.

“The first thing you do with a paycheck is to save a chunk instead of waiting until the end of the month and hoping there is some left over.”

Interest rates on credit cards can be 20% or higher. Some of them also have a penalty clause, which means if you’re late or miss a payment, your interest rate soars even higher. The “minimum due” line on your credit card bill is usually in boldface type or is highlighted, as a way to lure you into paying the lowest amount possible and thus paying more in interest. You should always pay off your balance on time and in full.

“‘Pay yourself first’ is the war cry of personal finance experts.”

Credit cards may offer a special low-interest promotional rate, but usually for a limited time only. You might pay annual fees, penalties, foreign transaction fees, and more. Credit cards offer rewards, like cash back or travel points, but don’t sign up for a rewards card until you’ve mastered the basics. Avoid using your credit card for unexpected expenses or emergencies.

Dealing with Debt

Apply the “debt avalanche” or the “debt snowball.” To use the debt avalanche, write down all of your debts in order based on interest rate, from the highest to the lowest. Take married couple Pete and Paula who have three credit cards and a student loan. They have a $3,000 balance with Town Bank Credit Card with an APR of 25.99%, a $700 balance with Orange Store Credit Card (24.50% APR), a $1,200 balance with Follow Bank Credit Card (18% APR) and a $10,000 student loan (4.29% APR). After budgeting, they discover they can pay $330 a month total toward debt. They pay $166 a month APR on the Town Bank Credit Card because it has the highest interest. They pay the minimum amount due on their other debts: $25 to the Orange Store, $36 to Follow Bank and $103 towards the student loan. Once they pay off Town Bank, Pete and Paula can tackle paying off the Orange Store Credit Card and so on down the line.

“The credit report is used as a way to judge…how well you’re succeeding at adulting.”

To use the debt snowball strategy, list your debts, from the smallest to the largest balance, and ignore the APR. Pay the minimums due on all debt and put extra money toward the smallest balance first. After you pay that off, move to the next smallest balance, and so on. If Pete and Paula used the debt snowball method, they’d pay $101 to the Orange Store Credit Card (instead of the minimum balance of $25). Their other minimums would stay the same. Once they pay off the Orange Store Credit Card, they’ll move on to Follow Bank, Town Bank and the student loan.

“The base FICO credit score uses a range from 300 to 850. Just like pretty much anything in life (except golf and darts), the higher the score, the better you’re doing.”

Other alternative strategies include balance transfers and personal loans. You can’t use a balance transfer offer from the same bank that has your debt. Transfer your balance due immediately, pay it on time and don’t use this credit card for spending. The final option is a personal loan to consolidate all debt into one payment with a lower interest rate. Personal loans with interest rates of less than 10% are available to those with high credit scores, steady employment and a DTI ratio of less than 40%.

“Always choose federal student loans. The government is a far more benevolent lender than private entities.”

Avoid future debt by putting money away now. List your monthly expenses. Subtract them from your monthly net pay. Is the number positive? If not, curb your spending by cooking meals and making coffee at home, cancelling gym memberships, and the like.

Student Loans

Student loans are a part of the millennial generation’s experience. You’re better off with federal student loans than with private loans. Federal loans offer crucial perks, including subsidized loans, grace periods, deferment or forbearance, income-driven repayment options, and forgiveness. With subsidized loans, the government pays the interest while you’re in school full time. With unsubsidized loans, you are responsible for the accrued interest. A grace period means you can delay your first payment, usually due six months after graduation, unless you become a part-time student or leave school. Deferment or forbearance allows you to delay repayment if you can prove financial hardship. Income-driven repayment means you pay based on your income.

“Deferment is better than forbearance because it allows you to temporarily stop making payments, and the interest may be subsidized by the government.”

Begin making loan repayments while still in school. Just paying the interest while you’re enrolled reduces your overall financial burden. If you can’t afford to pay your loans within the Standard Repayment Plan of 10 years, most lenders will work with you to base your loan payments on what you can afford. You might consider Public Loan Service Forgiveness, which means working in an eligible public service position for 10 years in exchange for loan forgiveness. The last option for paying off loans or delaying repayment is to refinance them. Refinancing with great interest rates is available to those with good credit scores (700-plus), and a history of employment and on-time loan payments.

Buying a House

Renting gets a bad rap as “throwing away your money,” but in some situations, you should rent instead of buying. Consider renting if you can’t afford to purchase a house where you live now, if you plan to move soon, if you have career opportunities in a high-priced housing market or if your career requires you to move quickly. Owning a home can help you build equity. Figure out how much house you can afford to buy. You shouldn’t pay more than 28% of your gross income on housing, including principal, interest, taxes and insurance. Many local and national programs, such as the Federal Housing Administration and Veterans Affairs, have incentives for first-time homebuyers. Typically, purchasers put 20% down. If you make a down payment of less than 20%, your mortgage rate may be higher, and you’ll have to pay for private mortgage insurance. In addition, your home equity will be lower, and your mortgage origination fee will be higher.

Retirement

The new age of retirement is predicted to be between 72 and 75. Many millennials will use student loans as an excuse for not investing or contributing to a company-sponsored 401(k). That means losing free money if your employer offers a 401(k) match.

“I can already sense the eye rolling and sarcastic ‘yeah, rights’ at the notion of managing to save several months’ worth of living expenses when you’re already dealing with student loans.”

Pre-tax dollars fund traditional Individual Retirement Accounts (IRAs), 401(k)’s and 403(b)’s (tax-advantaged retirement plan usually offered by non-profits). This lowers your taxable income. Post-tax dollars fund the Roth IRA; it won’t lessen your tax burden today, but you won’t pay taxes on those earnings in the future. Most US-based employees can invest in a 401(k) or 403(b). The self-employed should consider a traditional IRA, Roth IRA or SEP-IRA (Simplified Employee Pension). Freelancers or regular employees with side income can put money into SEP-IRAs, which have a higher contribution limit than IRAs ($53,000 vs. $5,500 in 2016). Account fees include expense ratios, administration or investment costs, and account maintenance or management fees. If you switch jobs, don’t cash your 401(k). If you withdraw money from it before the age 59 and 1/2, you’ll pay taxes on that amount plus a 10% penalty. Hold on to the money, or roll your 401(k) into your new 401(k) or into an IRA.