Kimberly Palmer answers your questions on her new personal finance book for today’s twentysomethings, Generation Earn. Plus, the winners of the book giveaway are announced at the end of this post.
1. Is your book mainly descriptive or prescriptive? Did you do interviews with people of this generation and does this book detail their strategies, or are these theoretical suggestions for strategies we should employ? If the latter, how many have you tried out yourself?
The book is based on my interviews with people in their 20s, 30s, and 40s who, for the most part, figured out how to successfully take control of their financial lives so they feel financially secure, can support their families, and even give back ways that align with their values and goals. I picked most of the people profiled because they were doing something a little different, or inspiring, and I wanted to get to know them better. And yes, I have tried out a lot of the ideas myself!
2. What is the most common obstacle is for getting out of debt?
Feeling completely overwhelmed. Having debt, especially larger quantities of it, can be paralyzing. Taking small steps is usually the best way to start, but of course, it’s easier said than done. In my chapter on debt, I profile Veronica, who recently finished grad school. She has over $100,000 in student loans and had a lot of trouble finding a job after she got her degree. But now, after getting hired at a nonprofit and a lot of hard work, she’s saving 10 percent of her salary and slowly paying off the debt.
3. How did you first become interested in personal finance?
After getting hired at US News & World Report to be a business reporter, I found myself more and more drawn to the personal side of money. I discovered I loved talking to people about their decisions, goals, and motivators. It was more interesting to me than looking at companies’ balance sheets and annual reports!
4. How do you choose between renting and owning. When do you know that you’re ready?
Such a tough question because it depends on so many factors, including where you live, your lifestyle, and your financial goals. Personally, I didn’t feel ready until I had enough money saved to make a 20 percent down payment and buy a house I could see myself living in for the next five to 10 years, at least. But I could also see the upsides of continuing to rent, especially given the many uncertainties in the economy.
5. How do you know when you’re “Set”? Everyone has a different number for what you need to do to build a healthy financial future, but how do you know what you will be comfortable with? I know I need to put money aside to save for retirement, but how much is “ok”? I have other things I need to save for as well – house, marriage, emergency fund, etc, and I still want to enjoy life!
For example, I have around 35% ($750) of my take home pay available for saving to different areas. Is it fine to put $325 of that to retirement, and the rest to other savings (vacation, home, emergency fund, wedding), or do I need more money going into that retirement fund? If it matters, I’m 25 and with no debt.
I think even if you had a million dollars in the bank, you might still feel like it’s not enough. There’s definitely something to be said for living in the moment and not being overly stingy in the name of savings. And that’s the tricky part, figuring out that balance for yourself. Personally, I like to go on a percentage goal for savings like the one you describe, so you’re always living below your means, which means collecting a sizable amount of savings for a rainy day.
My recommended goal is to save at least one quarter of your income, and ideally one-third. That includes money going into retirement savings accounts, too. A good goal is to put 20 percent of your income into your retirement savings account from pre-tax dollars and then save 15 percent into after-tax accounts for emergencies and goals, such as a home purchase or travel. It sounds like you are doing just that, and to be doing it at age 25 is especially impressive!
6. We know we have to save for retirement, build our nest egg, pay our debts and invest, but sometimes it feels so difficult to tackle all those things with a recently-grad paycheck. Is there a hierarchy of importance as to which of these aspects we should focus more money into? should we do it proportionally instead?
Also, If we’re planning on investing, but only on moderate amounts (im thinking on $100 monthly for the first year and then review it) which is the safer (yet at least mildly profitable) long-term choice? Should we invest in the housing market or wait a little longer?
Yes, you are right, setting up these priorities is key! I like your approach of starting with a realistic amount to invest each month instead of waiting until you feel like you have “extra” money, which of course will never happen.
Here’s how I recommend setting up the priorities, starting with what’s most important and with the estimated percentage of your spending dollars:
1. The basics: food, housing, and transportation: 50 percent
2. Debt payments: Less than 5 percent
3. Savings: 25 percent
4. Professional expenses: Less than 5 percent
5. Household expenses: Less than 5 percent
6. Entertainment: 5 percent
The categories don’t add up to 100 percent to leave yourself from wiggle room and so you can personalize the plan for yourself.
To answer your investing question, I would recommend sticking with something low-fee and simple, such as an S&P 500 index fund. Investing in the housing market is complicated because it usually means you’re money is locked up and hard to access if you need it. Whether or not to buy a house is a separate question (addressed above!), but don’t buy a house just for the investment return.
7. How did you growing up influence or shape your views on Personal Finance?
My parents had a huge impact on me! They set an example of always living below their means. Even though they earned just $40,000 (combined) as newlyweds, they managed to save $10,000 in one year so they could buy their first house. Of course, this was in the 1970s, so it was easier to live on $40,000, but still – they saved one-quarter of their income. And even though they bought us whatever we needed for school, they were frugal in other areas and didn’t let us waste.
8. Any advice or tips for putting aside money for large purchases (car, home, etc), without the temptation to draw money from those accounts when in a bind?
Every month, when you are preparing to transfer money from your bank account into your savings account (or investment fund), make a celebration of it, so it feels as good as splurging on some indulgent purchase. Turn it into a ritual. Then, once it’s in that savings or investing account, it’s not as easy to access, even if you’re tempted.
In addition, you should be automatically saving money through your retirement account so you’re not even aware that you had the money to begin with– that way you won’t miss it. You might even want to set up the same feature on your bank account so it automatically saves money out of your paycheck. A combination of automatic saving and celebratory saving should help you get to your goal.
9. What is your advice regarding planning for taking care of parents for Generation Earn, since many of them will have parents whose retirement plans were hit by the recent economic downturn, and may not fully recover in time for their retirement?
Great question and one reason I have a whole chapter on this topic. Taking care of parents is a huge concern for our generation. In fact, one survey found that two in five of us plan to give money to our parents at some point. First, I recommend keeping an open mind. Even though our first reaction is often to feel resentful of these requests for help, it’s not always a bad idea, because our parents did, after all, raise us!
If you find yourself in this situation, first decide if you are able to help without putting your own financial security at risk. If the answer is yes, then consider giving a set amount instead of endless support whenever requests are made. That will help your parents (or other family member) to plan and get on top of their own budgets instead of grow dependent on you. Also, look into non-financial ways you can help out: Could you sit down and help your parents come up with a budget, or better investment plan? Do they want help getting a part-time job in retirement? Maybe you could have more family meals together to save on food.
10. I would like to know if the author has any suggestions for 20-somethings who are feeling discouraged and jealous of their peers who are better off. I am making serious progress paying off my student loans, but then I look at my friends who own houses and make $$, and never had to deal with student loans, and it makes me really jealous. I try to focus on my own blessings, goals, and progress, but this still pops up from time to time. Thanks!
Yes! My advice is to embrace these feelings of jealousy. It sounds counter-intuitive, but some types of jealousy can be very useful to us because it helps to show us what we truly want. It sounds like what you want is financial security and maybe even luxury – and that you’re making steady progress towards getting there. Beyond that, remember that their lives are probably not as perfect as they seem. Everyone has their own internal struggles that aren’t always obvious. If they received money from their parents, then they might be beholden to them in some way. Celebrate your independence!
11. What is the difference between our generation and our parents (or previous) that made us generation consumer/debt/spoiled.
I completely reject the idea that we are “generation debt.” Yes, credit card debt and student loan debt has risen, but that’s largely because we are seeking more degrees and earning higher incomes. One of the key differences of our generation is that we have been shaped by two recessions in the last 10 years. It’s taught us to be savvier with our money and more financially conservative, which, in the long-run, will probably help us.
12. In your personal opinion (and after doing the research you did) so you think our Generation (Generation Y, or as you call it Generation Earn) will be one of the most successful generations or one of the worst in terms of saving money, being financially savvy, etc?
Maybe I’m being overly optimistic, but I think we are spearheading a new wave of financial savviness. Just look at all the websites and blogs dedicated to being smart with your money. We love talking about this stuff and educating ourselves, and that will pay-off.
And… the winners of the giveaway are Yumi, Kathleen, and Kari!
I will forward your contact information to Kim so she can arrange for your books to be shipped to you.
Thanks to everyone who have entered the contest. Also a big thanks to Kim for her answers and for providing the books to be given away.
. So as someone with a ridiculously strong frugal gene I can tell you that what helps me spend, and what I’m guessing will help your hubby spend, is have a clear financial roadmap.