There are a lot of things to think about when you’re young and starting out in life – your career, your education, and your social life. But one of the most important things you’ll need to think about is your financial future. Here are some great financial tips for young adults to help you plan for the future and make good financial decisions.
Budgeting is one of the most important financial tips for young adults that you’ll need to master. Knowing how much you have to spend each month will help you track your spending and make smart decisions when it comes to your finances. It will also help you get on the right track with your financial goals and set yourself up for a bright future.
How To Budget
Step 1: Track your spending
Start tracking your spending for a week to get an idea of how much money you’re spending on things like groceries, utilities, gas and other bills. Then you can start coming up with a plan to save money and reduce your monthly expenses.
If you have time, it is best to track your spending for about two months. By tracking your spending for two months you get a more accurate picture of how you really spend your money.
Then you can use this information to create a budget that will help you cut back on unnecessary expenses and get the most out of your money.
Step 2: Evaluate your current spending patterns
Once you have an idea of what you spend on each month, evaluate your current spending patterns. Are you overspending often? Is money being left idle without a purpose? Are there areas where you could save more money?
Look at where your money is going and decide if there is an opportunity to make better use of your money.
Step 3: Create a budget based on your income and priorities
Include all of your sources of income in your budget – salary, side jobs, investments, etc. Keep in mind that you may have to make trade-offs in some areas in order to prioritize others.
For example, if you need to reduce spending in one area to free up money for an emergency fund or to put towards your retirement account, understand that trade-off.
Step 4: Compare your tracking with your prioritized budget.
Look at your spending patterns over the last two months. Are they sustainable? How does your spending align with your prioritized budget? These are the discrepancies that you need to be aware of and take steps to address.
Perhaps you have been eating out too often, which means you need to cut that expense from your budget; or maybe you’ve been buying a lot of frivolous items that don’t contribute to your financial goals.
Whatever the case may be, be sure to make a note of any discrepancies. Write down what you think needs to change and come up with a plan for how you will make those changes a reality. Once you know what changes you need to make, commit to following the plan and keeping to it.
Step 5: Slowly develop and implement a budget that addresses your discrepancies
You should now have a good understanding of where you are currently (two months of spending data) and where you want to be (prioritized budget). Develop a budget that is sustainable and fits your accepted lifestyle. Commit to following that budget and track your progress as you go.
Step 6: Use and refine your budget as you progress in life
Continue to make adjustments as necessary and continue to follow the budget over the long term. Remember, your budget is a spending plan.
So when necessary, revisit your budget and adjust your priorities to reflect changes in your financial situation or your spending habits.
Best Practices For Budgeting As A Young Adult
While it may be tempting to jump into the deep end right away and create an overly strict budget that leaves no room for fun, it is important that you start slow and work your way into being more of a money manager rather than a stickler.
If you start off being too restrictive with your money, you might end up resenting it and end up not being able to stick to the plan at all. Understand that the best budget is the one that you actually stick to following.
Best Budgeting Software For Young Adults
If you are a frequent reader of Adulting Starts Here, you know that YNAB is the favorite budgeting software for young adults. We use it ourselves and highly recommend it because it is incredibly easy to use and helps you get into the habit of budgeting daily.
However, there are a number of other software options out there that you can use to help you get started as well. Mint.com is another option that comes to mind. It is free and easy to use.
At the end of the day, which program you use is completely up to you, but if you want to take budgeting seriously check out YNAB.
I even have a 34-day free trial for you to give it a go. Click here to get the trial!
Why Have An Emergency Fund?
Emergencies can occur at any time and usually when you least expect them. Often emergencies are unforeseen and can come up suddenly without any warning.
You should have an emergency fund to cover these types of expenses because they can be very costly if you don’t have the funds available to cover the costs. The more money you have saved up in your emergency fund the better off you will be in an emergency situation.
Your preparedness can help you stave off debt and further monetary stress when emergencies arise. Don’t underestimate an emergency fund’s importance as a staple financial tip for young adults.
How Do I Create An Emergency Fund?
Your first step should be to determine what your expenses will be in an emergency and how much you can afford to set aside each month. Then you will need to set up a transfer or automatic withdrawal to take place each month from your checking account to your savings account so that you will have the money available when it is needed.
Not sure what I am talking about? Keep reading.
1) Start with calculating your emergency fund goal.
Most people aim to have 6 -12 months of their overall expenses saved in an emergency. So the actual dollar amount varies by person and their circumstances.
Since you are opening your emergency fund and probably starting from zero, only focus on saving up 3 months of your monthly fixed expenses for now. How do you find that dollar amount?
Multiply the number you calculated when figuring out your monthly expenses by 3, and round up to the nearest hundred dollars. That value should be your first dollar amount goal as you begin funding your emergency fund.
For example, if I calculated that my fixed monthly expenses are $769 a month. I would multiply $769 times 3 which would give me $2,307. Next, I would round that up another $100 totaling $2,400. So my first emergency saving fund goal would be $2400.
Note: As you reach your 3-month goal, increase your funding amount to 6 months of monthly fixed expenses, then 12 months of monthly fixed expenses. Once you reach 12 months, focus on funding the dollar amount of your variable expenses starting back with a 3-month goal.
If interested, here is a detailed guide to setting up emergency funds for young adults.
Best Practices For Building An Emergency Fund
Set up automatic transfers to your savings account each month. Then set up an automatic savings reminder on your calendar so you know it is happening. Many banks offer online tools to help you track your savings progress and set up regular transfers. This is a great way to make sure you are never without your emergency fund savings. Take advantage of these features.
Consider housing your emergency fund in a high-yield savings account (HYSA). They usually offer a higher interest rate compared to regular brick-and-mortar banks, so you will have the opportunity to grow your money faster. Be sure to keep this new account separate from your other accounts to decrease your likelihood of using it for non-emergencies.
If you are savvy enough, consider using I-bonds as a part of your emergency fund to hedge against inflation. It is one of the more initially time-consuming financial tips for young adults but it should not be overlooked.
Why Have a Credit Card?
A credit card is a type of debt that can be used to finance purchases and pay off the balance at a later time. It can also be used for emergency expenses if funds are not available at the time of the purchase. Having a card can help build your credit and provide a flexible and convenient way for you to finance purchases.
How To Use A Credit Card
Use a credit card as you would a debit card or cash. Just remember to not charge more on the card than you can afford. Additionally, always pay off the statement balance in before the payment due date to avoid interest.
A credit card offers a ton more benefits than cash or a debit card. Educate yourself on how best to use these to your advantage.
In fact, below I have compiled a series of lessons that you can use to familiarize yourself with the ins and outs of credit card use. It is by no means a comprehensive list but it should help you get started. Of course, I am not a financial advisor so please do your own research before you make any financial decisions.
Best Practices For Using A Credit Card
One of the biggest things to remember is that you should be paying your statement balance in full each month to avoid paying interest. If you do not pay off your statement balance in full you will accrue interest on the remaining balance. Alternatively, if you pay off charges before the statement cycle ends you run the risk of slowing your credit growth.
Why Plan For Retirement At A Young Age?
Well, first and foremost because the sooner you start planning the more time you have to save for retirement. This is one of the most important financial tips for young adults due to it affecting you later in life. 60% of people nearing retirement say they didn’t start saving early enough. Take the time now to develop a long-term plan for retirement while time is on your side.
How Do I Start Saving For Retirement?
Most employers offer some sort of retirement plan for their employees. You can enroll in these plans and start investing pre-tax dollars. There are many retirement vehicles like a 401(k) and a Roth IRA to look into now.
A 401(k) is the most common retirement plan. It is the plan that employers often offer, allowing employees to designate a portion of their paychecks to an account.
It is probably one of the most common terms that come to mind when people think about personal finance terms every adult should know.
The money put into this account is considered pre-tax money. Your employer withholds your contribution from your paycheck before the money can be hit with the income tax.
Therefore a 401(k) is a tax-deferred account. The money gets taxed when you withdraw it.
Once you hit the qualified 401(K) age, which is currently 59 ½ years old, you gain access to the account. Any withdrawals from the account are then taxed as if it is income.
A 401(k) is a great way to start investing, especially since many employers offer matches. An employee match means you will pretty much get free money from your employer every year as a benefit up to a certain amount.
A rule of thumb is to always max out your match contributions to get as much “free” money as possible.
A Roth IRA is another common retirement plan. It is however different from a 401(k). An individual sets up a Roth IRA at an investment firm. They do not have to wait on an employer to do this.
Now, the Roth IRA is vastly different from the 401(K) because of how it is taxed. A Roth IRA is funded with after-tax dollars. Because of this, the money in the account grows and can be withdrawn tax-free once you reach retirement age.
Additionally, unlike a 401(k), a Roth IRA has yearly contribution limits.
Best Practices For Building A Retirement Portfolio At A Young Age
Start simple and do your best to keep it simple. You do not have to do fancy financial planning right now. Keep your retirement portfolio simple early on and take this time to educate yourself on how things work. Then as you become more financially literate you can flex your retirement planning muscles more.
Consider simple retirement methods like the Boglehead method. The Boglehead method is a method advocated by “The Bogleheads“, a group of investors that advocate a simple investment method that focuses on low-cost index funds with minimal fees instead of actively managed mutual funds and other expensive products often pushed by the financial industry.
This method is simple and easy to implement and understand and is one that can benefit young investors looking to plan for the future of their financial futures. Their website offers financial tips that regular adults can follow.
There are other methods and pathways out there. Always do your own due diligence. Again, I am not a financial advisor and this is not explicit financial advice to do a certain thing. This post is here to pique your interest and make you aware of areas where you can further educate yourself about your finances.
Useful software or young adult-friendly apps for managing retirement opportunities
There are a ton of wealth management and investing apps out there. I have not used them all, so I won’t give a specific comparison of them.
I will say that I have 1 app that has been helpful to me and that is M1Finance. M1Finance is an app that gives you control over your investment accounts in one place and is easy to use for beginners. I also like their modern and intuitive interface.
Putting It All Together
Remember, there are a lot of things to think about when you’re young and starting out in life – your career, your education, and your social life. But one of the most important things you’ll need to think about is your financial future. The financial tips for young adults outlined in this post will be integral to your future at one point or another. Educate yourself and use what you learn to put yourself in a better position for future success.
Best of luck adulting!
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