The hackneyed phrase “Money doesn’t grow on trees” is about as annoying as “Live and learn.” But unfortunately, these have become cliches because they are so true. Money doesn’t grow on trees, and there’s no easy fix to paying off your student loans or saving for a down payment. It would be nice if there were some neat financial trick that would ensure you have a healthy emergency fund without making any compromises. And while Priya Malani, Refinery29’s financial expert, doesn’t like to tell you to skip the lattes, the truth is, sometimes you have to skip the lattes in order to pay your bills.
While there aren’t any easy ways to get rich (I mean, there’s gambling and playing the lotto, but neither of those are guarantees), there are a lot of financial institutions that offer deals that would suggest otherwise. There are so many ways to get money fast, but 99.9% of the time, these offers can have terrible long-term consequences that will end up costing you a whole lot more money.
Ahead, Priya and I discuss nine financial offers that all twentysomethings should avoid, from 401(k) loans to credit card consolidation offers. Because when it comes to your finances, if the deal seems too be good to be true, it most definitely is.
We talk all the time about how important it is to invest in your 401(k). Priya recommends you at least max your match (more on that concept here), but if you can afford it (and you’re no longer eligible for a Roth IRA), you should be investing at least 10% of your gross income in your company’s 401(k). One of the big reasons is because once that money is in the account, you won’t be tempted to touch it. Right?
Okay, I know what you’re thinking: What if I REALLY need it — can I take advantage of one of those 401(k) loans everyone’s always talking about? (I might exaggerate a bit here — I’m not sure people always talk about this.) Don’t do it. Don’t even think about doing it. Pretend you’ve never ever heard of the concept of 401(k) loans.
Why? Because they are a terrible deal.
First, as Priya points out, if you leave your job or get laid off, the loan must be paid back almost immediately and in full. Just spent that loan on a down payment? Sorry, you still need to repay it.
Then there’s the little issue of all the taxes you have to pay on this loan. You’re essentially being taxed twice, because your 401(k) is a qualified plan, Priya says, so you pay taxes when you take the money from the account for the loan, and then again when you take the money out at retirement. And while the money you invest in the account is pre-tax dollars, that’s not the case when you’re paying back the loan. You can’t be investing in your 401(k) account while you’re paying back the loan. So you’re not saving for retirement. Bad news.
Your 401(k) is a savings account for the future, and taking a loan from there today should be the very last line of defense, Priya says. Your first line of defense: that emergency fund we’ve been encouraging (begging?) you to start.
Even if you’re secure in your job and planning on staying there forever (in which case we all want to know where you work), you still shouldn’t be tempted by a 401(k) loan. Tapping into that money can seriously undermine your future financial security, Priya warns. If you don’t feel secure in your present, focus on saving toward that emergency fund before you start putting money into a 401(k).
Illustrated by Tristan Offit.
It’s not unusual — especially when you’re first starting out — to live paycheck-to-paycheck. And that can be tough, particularly during those weeks when it seems like payday will never get here. If you haven’t been contributing to your emergency fund (for whatever reason), any unexpected expenses (hello, root canal), can leave you desperate for quick cash, and payday loans can seem like an easy option. Just say no.
Payday loans are such a bad deal Google AdWords has banned advertisements of them. You might think: I would never fall for such a practice. But research from the Pew Charitable Trust finds the the typical payday-lending customers are white women between the ages of 25-44, and nearly one in six U.S. households have relied on these loans in the past.
These short-term loans seem so easy and straightforward: You borrow a small amount (on average $375) and then pay a flat fee. Borrowers are generally required to pay back these loans within two weeks, and when they can’t (if you don’t have $375 this week, why would you have it two weeks later?), they are hit with more fees in what becomes a never-ending cycle. Pew reports that borrowers pay an average of $525 in fees on that $375 loan.
Bottom line: Focus on putting away every bit you can toward your emergency fund until you’ve reached a three-month cushion. As Priya tells her Stash Wealth clients, your emergency fund is just your first line of defense — once you have that set up, you’ll continue putting savings into a taxable investment account, which you can access if a worst-case scenario does arise. If you find yourself totally strapped, it’s time to find alternative ways to pay off your debt rather than trying to reach for a quick fix by taking on more debt. (Yes, that is easier said than done, but as we’ve been saying over and over, there are no quick fixes, and sometimes you have to spend the time and energy to find the best financial solution.)
Illustrated by Tristan Offit.
Deciding where and how to invest your money is tricky. I’ll be the first to admit, I’m terrible at it (and Priya would confirm this confession!). When you’re going through all the options (IRA, index funds, mutual funds, etc.), one option that might pique your interest is whole life insurance. Priya recommends you skip this one in favor of better, more cost-effective choices.
First off, what is a whole life policy? Basically, when you pay for whole life insurance, you get coverage forever, Priya explains. Term life insurance policies have a time limit, so if you sign up for a 20-year policy, you’re covered for 20 years. Insurance brokers also like to point out that whole life policies have the benefit of also being a built-in savings account, which you can borrow against. But the catch is these policies are grossly expensive, costing thousands of dollars a year.
But wait, you might be thinking, don’t I need life insurance? Well, if you have dependents (i.e. kids or a spouse who rely on your income), then you do. If you’re 27, single, with no debt, then you can probably skip the life insurance for now and use your money for other things.
Priya argues that there are a few cases when you might want to consider a whole life policy. If you’re terrible at saving, whole life is essentially a forced savings account. (Or you could follow what Priya recommends for her Stash Plan clients and automate, automate, automate.) The only other time you might want to consider whole life? If you make so much money that you can use it as a tax shelter. I’m guessing most of you reading this don’t make that much, so we’re going to stick with our first bit of advice: Skip the whole life policy, invest (when it’s the right time) in a term policy instead, automate your savings, and live happily ever after.
Illustrated by Tristan Offit.
In college (a long time ago), I knew this guy who dropped out and was making money as a day trader online, trading stocks on E*Trade and trying to beat the market. That was before the first tech bubble burst (I told you, a long time ago), but I’d like to imagine that was a twentysomething folly and he’s since found a real career.
There is a very dangerous misunderstanding about investing — among our generation and the public in general. It mostly has to do with the confusion between investing (a long-term strategy to grow your income into wealth) and gambling (short-term bets to make a quick buck off of buzz, hype, or misinformation in a single day). Day-trading — trying to beat the market — is essentially gambling. So many of Priya’s clients at Stash come to her with a few thousand dollars and want to know how to invest it. Before you even get into investing, you need to answer Priya’s first question: Do you have an emergency fund? (See the theme here?) If the answer is no, you are not ready to be investing, let alone day-trading.
Illustrated by Tristan Offit.
I’m totally guilty of letting my money sit in savings. And Priya has been trying to get me on track for the past year. I might be good at handing out financial advice, but I’m not always good at following it.
As Priya explains, a savings account is essential for your emergency savings — three months of fixed living expenses (basically, this money should cover your rent and regular, monthly bills — not your Soul Cycle addiction). But any extra money you might be saving should be invested, so it’s making you money for your mid- to long-term financial goals (think buying a car or taking an amazing vacation).
The main reason Priya recommends that you don’t keep your money sitting in savings is because of inflation — essentially, a dollar tomorrow won’t buy the same amount as a dollar today. The average savings accounts pays less than 1% interest; inflation averages about 3% a year, which means you’re actually losing money when you just leave it in a savings account.
So what should you do with that extra money? Invest in your future: Check out our stories on making the most of your retirement funds and how to dip your toes into the stock market. Or, talk to a financial expert like Priya, who can offer pro advice on what to do with your money.
Illustrated by Tristan Offit.
We don’t need to tell you that credit card debt is bad (very, very bad). And if you’re struggling with paying it off, you know firsthand just how crazy-high the interest rates can be. That sweater you bought on sale can actually cost a whole lot more if you didn’t pay your balance off right away. As Sallie Krawcheck says, it’s like buying something on un-sale.
One way to cut back on your monthly payments is to consolidate your credit cards so you have one low monthly rate. Browse through Credit Karma, and you can find a slew of “balance transfer” cards that offer you a chance to enjoy 0% interest so you can get caught up on paying down your debt without paying additional money each month just toward the interest.
Sounds almost too good to be true, right? Well, it can be — if you can’t pay off the balance transfer before the 0% interest rate offer runs out. As Priya explains, the card’s interest will reset to a ridiculously high rate once the teaser period is up.
For example, Credit Karma has info about the AmEx Everyday Card from American Express, which offers a great deal on balance transfers and 0% interest for the first 12 months. After that, the APR goes up to a variable rate between 13.24% and 23.24%. So, according to an example provided by Priya, if you consolidate $8,000 in credit card debt on this card, you need to be able to make the $667 monthly payments in order to pay it off within the year. If you continue to only pay the monthly minimums on the card, when the year is up, your debt will cost you north of $9,800. Ouch.
All this is to say that you should take advantage of a good deal on balance transfers; just be 100% committed to paying down the debt in the time frame offered, even if it might mean making some sacrifices along the way.
Illustrated by Tristan Offit.
Last year, when Priya worked with a millennial woman, Katie Lewis, to get her financial life in order, Lewis referred to the stock market as the “cowboys of Wall Street.” And I totally get her aversion to investing. For many of us, the 2008 stock market crash was a disaster that affected us on many levels, from our ability to get good jobs to our parents and grandparents losing their retirement savings. Why would we want to let a bunch of Wall Street bros play with our money?
It doesn’t help, as Priya points out, that the media dramatizes every little movement in the stock market, which results in consumers not really even understanding what it means to invest. Should you be “checking the markets” every day? How do you "buy low and sell high," anyway?
Priya makes it more simple and less sexy: On the most basic level, investing in the market allows your money to participate in the growth of the overall economy. There are many ways to invest, at varying levels of risk. You should be investing in mid-term (three-to-10 years) and long-term goals (10+ years). Priya recommends you invest the money you have for mid-term goals into investments that are less risky, because you want to use that money sooner. You can be a bit more daring with money that will sit in the stock market longer, because there’s more time to recover if/when the market does take a dip.
One thing is certain: The stock market is volatile and it will move up and down. To get comfortable with this fact, Priya recommends you avoid the one mistake she sees individual investors make all the time: emotional investing. For the most part, the best way to invest in the stock market is to set it and forget it — or, again, have a professional manage your money for you.
Illustrated by Tristan Offit.
You might be thinking: Health insurance has nothing to do with my financial situation. I’m young, healthy, and broke — I can’t afford to be paying for insurance each month, and I don’t really need it.
It’s tempting to pass up health insurance when you’re self-employed, but if something does go wrong, not having it can wreak havoc on your financial future. Priya points out the worst-case scenario: You get really hurt or sick, end up with huge medical bills, and are forced to liquidate your savings and declare bankruptcy, effectively ruining your credit score.
Healthcare.gov has a number of plans at a range of price points. If you don’t have insurance, you face a year-end tax penalty that’s been steadily growing year over year since the Affordable Care Act passed in 2010. No, insurance isn’t cheap, but it’s way more affordable than the alternative.
Illustrated by Tristan Offit.
Loan forgiveness seems like a sweet deal — and for the most part, it is. Not everyone qualifies, but if you work as a teacher or in the public service sector, you might be able to take advantage of this benefit once you’ve paid off a certain number of years of your loan (usually around 10). Unfortunately, when it does come time for forgiveness, you can be hit with a pretty big tax bill. And if you’re not prepared, that can hurt — a lot.
As Priya points out, if after 10 years, the federal government forgives the last $20,000 of your loan, you’ll receive a 1099 for an additional $20k in income that you’ll need to pay taxes on. If you’re in the 25% tax bracket, that’s an additional $5,000. Ouch.
That’s not to say you shouldn’t take advantage of loan forgiveness programs (after all, paying $5,000 up front is still significantly less than paying $20,000 plus interest over several years). But you should be prepared and start stashing away some extra money before the bill comes due.
Illustrated by Tristan Offit.
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