Learning to manage your finances is an important money skill at any age. We offer 5 money management tips for young adults to reach financial independence.
For many young adults, the initial steps to your financial independence begins with your first job. Growing up, your parents likely gave you an allowance based on some chores they wanted you to complete each week. This was your first experience being paid for your hard work, but you were still young enough that financial consequences really didn’t occur. With your first job, your path to financial independence starts as it’s now your responsibility to start managing your finances, as opposed to your parents managing your allowance.
To help you become fiscally responsible we have some tips to help you realize your newfound financial freedom.
Open a Checking/Savings Account
Your first step should be to open both a checking and savings account at a local bank. Hopefully your parents helped you do this long ago, but if this was not the case, now is your chance to open these accounts. Your paycheck will likely be (automatically) deposited in your checkings account, so you should allocate a certain amount each week (or month depending on your paycheck schedule) to transfer into your savings account. This is one of the most basic ways to start saving money.
To help determine how much you can save and of course spend on fun things, determine your monthly expenses. Do you make a car payment? Pay for car insurance? Or, pay for your cell phone bill? Start keeping track of all these expenses. This amount is what you must have in your checking account each month to make these payments. The amount above and beyond your expenses can be split between saving and personal spending expenditures.
The purpose of your savings account is to save towards a financial goal (i.e. buy a new car) or to have money available in the event of an emergency. So be sure you become a diligent saver as you will want this money accessible when it’s needed.
Managing Monthly Bills
Your first job may mean that it’s time to get your own place. This means that rent and utility bills will become part of your monthly expenses, so avoid luxury accommodations when you are unable to afford it. Typically your rent should not exceed more than thirty percent of your income. Consider skipping that luxury apartment complex or opt for roommates. Affordable housing options are out there, so be sure to check your cities website. If your rent starts approaching half of your monthly income, you might find living on your own a struggle. Be wise and choose a less expensive apartment.
Managing Grocery Expenses
A nice steak or lobster for dinner each night might be appealing, but it can really put you in a financial hole. After rent, your expenditures on food and groceries is likely your next largest expense each month. After all, we all have to eat! Managing your grocery bill can really help you stay on a good financial path. Learn more about how-to save money on groceries.
Start by making a list of the items you will need each week. Consider less expensive substitutes whenever possible. Clip coupons to help you save even more at your local grocery store. Just don’t overdo it each week with “wants” as your grocery bill can add up quickly.
Establish Good Credit
If your parents helped you finance your first car, you probably gained some experience into why credit is important. Having an established credit is important as it is necessary in many purchases (e.g. buying a new car or home). This doesn’t mean that you should overdo it building your credit. You don’t need to be taking on unnecessary debt just so you can establish your credit. It means being smart about what you buy.
To start building your credit, find a credit card with a low interest rate and low credit balance. Use the credit card for expenses in which you have the money already set aside for it. This way you start establishing a good credit score while paying off your credit card balance in-full each month.
Avoid Missing Payments
There are going to be times in your life that may lead you to miss a scheduled payment. Do not ignore these situations. Missing a payment and then ignoring the creditor is NOT a wise idea as it will destroy your credit. Instead, be smart and proactive about this issue and contact the creditor in advance to work out arrangements. They might be willing to lower your payment so that you can once again afford to pay it each month.
Learning to manage your money as a young adult is an important skill that will help you reach financial success later in life. Save money whenever possible and avoid taking on too much debt. Make sure you are building a good credit score and never miss a payment. By following these simple money skills you can realize a more stable financial future.
What are some of the ways you managed your finances as a young adult? Share your tips and advice with our readers in the comments section below.