One of the most challenging things when you are out in the real world for the very first time is managing your money. Unfortunately, there is very little preparation at school to guide you through so being fairly clueless about how to use your bucks and live a comfortable, prosperous life is the most common case scenario. To help you get started on the right foot, let us take a look at some of the key steps/actions you can consider to understand more about money and how to wisely use it so that it serves your goals and not become a victim of discomforting circumstances and/or bad decisions as you grow older.
Avoid Credit Card Debt
Considering that the overwhelming majority of American adults (3 out of 4) have more than one credit card, according to a 2016 Gallup report, and do a fairly poor job managing their credit usage, it is almost impossible to escape the norm unless you are completely against purchasing on credit. Of course, carrying a high credit card debt will affect your credit score, which is not something you want for yourself, especially when you are just starting out in life. This is because your credit score affects your ability to qualify to get an auto loan, rent an apartment, get a mortgage or even purchase something as simple as a cell phone plan.
So, although it might be easier for you to purchase an item on credit because you buy it the exact time you need it, it is much better to learn self-control and wait for it. Save up the money and then go ahead. Besides the interest you will be called to pay after your purchase, if you make it a habit of putting everything you purchase on credit cards you actually teach yourself a really bad habit. At some point, you will probably find yourself unable to pay your balance in full. Plus, you are very likely to pay for something you bought on credit for many years to come. Is it really worth it?
Better keep a credit card for the rewards it offers or the convenience factor and always make sure you can keep track of the credit cards you have.
Everyone’s prosperity is totally dependent on whether they can balance their income-expenses equation. It is critical your expenses (anything from food and gifts to utility bills and transportation) do not exceed your income and budgeting is the best way to make sure of that. For those new to budgeting, experts suggest you follow the 50/20/30 rule:
- 50% of your income goes to living expenses/essentials, such as rent, transportation (for work only), groceries, and utilities.
- 20% goes to your savings/paying off debt/investments or other financial goals you may have.
- 30% goes to everything you purchase that you do not necessarily need but add quality to your life (per your personal preferences), such as money spent on travel.
Take note of what you spend over the course of a month so you know where your money goes and you will soon be able to make small changes in your daily expenses; changes that can have a huge impact on your financial situation overall. That aside, another good way to save a decent amount of money over time is to keep your recurring monthly expenses the lowest possible (here is a budget calculator you could use – there are also plenty of budgeting apps to help you stay organized).
Start an Emergency Fund
It doesn’t have to be something big; just find some amount (ANY amount) of money you can easily save in an emergency fund for the times the unexpected comes your way (i.e. injury, car repairs, divorce, etc.). This is done through a process often referred to as Pay Yourself First, where you schedule to make savings contributions to your investment account. The money goes there automatically from each paycheck you receive. So, before you start paying your bills and make the purchases you see fit each month, you pay yourself!
According to a Pew Charitable Trusts report, nearly 60% of adult Americans polled experienced a major setback or financial shock at some point, and more than 50% of those said that their experience made it much more difficult to make ends meet. So, you can understand how important it is to automate your savings and have some money saved for an emergency. Not to mention that by following the Pay Yourself First principle, you also get into the habit of saving money.
Keeping it up will get you more than emergency funds; before you know it, you will have vacation money, retirement, money, you name it! Set your financial goals, (i.e. want to buy a house or car, save for a vacation so you do not charge your credit card and increase your debt or even save for your retirement or your kids’ college education); this will be enough to help you stick to your savings regime.
Only, make sure you put your money in a high-interest (preferably online) savings account (or a money market or certificate of deposit account) to prevent inflation from eating away the value of your savings.
Prepare for your Retirement
Although it might seem a bit too premature, saving money for your retirement well in advance is one of the best moves you can make.
First, try to have a good credit rating (credit history) by paying your bills on time and not exceed the credit limit on your credit accounts. Then, you will be able to negotiate interest rates on future loans and achieve considerable savings (hence, the amount of disposable income – hence, the amounts you can save for your retirement) on interest paid over time.
It is the job of credit card companies to bombard you with tons of offers to get you into debt. That is how they make money. Your job is to carefully consider the pros and cons of each offer and employ proper debt management strategies (i.e. consider a lower annual percentage rate or APR, use credit cards only for when it is absolutely necessary, pay more than the minimum payment required, compare credit card offers).
Between individual and company-sponsored retirement plans, we tend to prefer the latter as the contribution limits are usually higher (companies will probably also match part of your contribution) and you get to put in pre-tax money.
Rent or Buy Property?
If you are a newly financially independent individual (i.e. college graduate), deciding to rent/buy a place or move back to your parents for a few years will affect your finances and, consequently, the amount you will be able to save for retirement or any other reason.
In the first case scenario, renting an apartment will help you save some money if only you are keen on sharing your living quarters, and, therefore, the expenses. If not, then you should seriously consider whether the money you pay to rent a place is close or the same amount of money that you could pay for a mortgage, although a homeowner will also have to pay for additional expenses, such as insurance, repairs, property tax, and general upkeep of the property. On the upside, the house you purchase could increase in value over time. This means that you can either use it to refinance a reverse mortgage or even sell it and get yourself some nice retirement money.
Now, if you decide to live with your parents for a couple of years after you landed your first job or graduated college, your overall living expenses are significantly reduced, which will allow you to save up for something big, such as an emergency fund, a retirement account or a down payment on a mortgage. Of course, nothing can be achieved if you do not have a budget or throw money here and there on unnecessary purchases. Also, set a deadline for moving out and stand by it.
Understand Income Taxes
It is important to know whether your paycheck will provide you with enough money (after taxes) to meet your financial obligations and, of course, goals. To save yourself the headache, you can use an online calculator to help you determine your net or take-home pay.
Consider Applying for Health Insurance
Being uninsured is totally out of the question – we can all understand why – so the next best thing to do to ensure you will get proper medical treatment if, say, you have to go to the ER, is to apply for health insurance.
Have various insurance providers give you quotes and see how low their rates are (feel free to negotiate rates) and focus on keeping yourself in the best possible shape by following a healthy lifestyle while also driving without the recklessness that usually distinguishes young drivers. You will certainly thank yourself down the road when you realize how much money you have saved from (unreasonably) high medical bills.
Protect your Hard-Earned Money
If you feel that you need help managing your money, seek the assistance of a financial planner. Prefer trusted fee-only professionals that know what they are doing, who will provide you with unbiased advice with your best interest at heart, as opposed to many of their commission-based peers whose key function is that of a salesperson and financial expertise is usually much further down their list of strengths. In the end, you get to pay their salary to some extent while they are paid to sell their company’s products.
However, if you can take charge of your financial future and not rely on other people’s advice by expanding your knowledge on personal finance, then you will never be caught off guard for sure.
- Renter’s insurance to protect all your belongings within your apartment against fire or burglary.
- Disability-income insurance to make sure you will still get a steady income in the unfortunate case you are unable to work for some time due to injury or illness.
- High-interest vehicle, such as a high-interest savings account, stocks, mutual funds, bonds, of money market funds.
As a young adult, managing your finances might be difficult at first. Nevertheless, if you make saving part of your everyday life the moment you start getting money on your hands from work and treat your retirement or other savings as a recurring expense – to the point this does not put a strain on your finances, of course – then the future will decidedly open up for you.