What are the top financial tips for millennials? Here are my top five:

1. Save at least 20% for your future self.

   Saving 20% of your income might seem like a lot, but the more you save now, the more options you’ll have later. This 20% can include things like extra student loan payments or building an emergency fund. The key is to avoid spending this money now. There are two main reasons for this:

   – The more you spend, the more you need to save. Most people don’t significantly change their spending habits in retirement. For example, if you want to maintain a $200K/year lifestyle, you need to save about $1.2M more than if you aim for a $150K/year lifestyle. You can use various resources to check if you’re on track.

   – Saving 20% gives you flexibility. Most financial models suggest you need to save at least 10% of your pre-tax income annually from your early 20s to support yourself in retirement. If you took time off for grad school or have multiple savings goals, like a home down payment or a college fund, saving 20% helps you cover retirement and other goals. If you start saving for retirement in your 30s, you may need to save 25% or more of your pre-tax salary. The earlier you start saving, the more choices you’ll have.

2. Don’t spend more than 30% of your pre-tax income on housing.

   I understand that in places like San Francisco or New York, this might seem unrealistic. However, the more you spend on housing, the less you’ll have for food, retirement, and enjoying your life. For example, if you earn $120K in San Francisco, after federal and state taxes, you’re left with $83,067, which is about $6,922 per month. If you spend $3,500 a month on housing, that leaves only $3,422 for everything else. Saving on rent, like living with roommates and spending $2,500 instead of $3,500, can save you $1,000 a month. The same principle applies when buying a house. Although banks might approve a mortgage up to 28% of your pre-tax income, keeping your housing costs to 20% or less will leave more money for other expenses.

   This tip might be hard to accept, but if you can discipline yourself to spend less on housing, you won’t regret it.

3. Have an emergency fund.

   Everyone should have 4-12 months’ worth of expenses in an emergency fund. This money is for unexpected events like job loss, medical bills, or needing to care for a loved one. Having this cash reserve will help you sleep better at night and keep you from accumulating credit card debt.

4. Don’t keep too much cash.

   Besides your emergency fund and money allocated for a big goal in the next two years (like a house down payment), avoid keeping too much money in cash. Two reasons for this are inflation and performance returns. Cash loses value over time due to inflation. For example, a McDonald’s hamburger cost $0.62 in 1967 and $2.49 in 2021. Inflation has averaged 3.1% per year in the U.S. Meanwhile, the broader U.S. stock market has averaged 10% returns per year. After adjusting for 3% inflation, your money could still grow around 7% per year in the stock market.

5. Focus on consistent savings rather than trying to optimize returns.

   It’s easy to get excited about market news, Bitcoin, or meme stocks. However, as the New York Times noted about GameStop, “Timing a trade perfectly is nearly impossible even for the best stock pickers.” Instead of trying to pick winning stocks, I prefer to invest in a basket of stocks, such as index funds. With index funds, you don’t have to pick the next big company. You can invest in an index that tracks the top 500 companies in the U.S., which changes over time as companies grow and shrink. Historically, investing in index funds has yielded great returns. The top 500 companies in the U.S. have averaged 7% annual growth, adjusted for inflation, over the past 50+ years. While there are down years and no guarantee this trend will continue, you can do very well with average, steady returns.

   One of my favorite hands-off ways to invest for retirement is through Target Date Funds. These funds automatically shift from stock index funds to bond index funds over time, making investing as easy as possible.