Broke to Boss: Essential Personal Finance Tips for Young Adults
Young Adult Personal Finance Guide: Learn Control Over Your Finances
Nothing compares to that feeling of excitement when you receive your first real paycheck. That excitement can quickly turn to sadness when you realize that paycheck never lasts long.
One day, your bank account looks great and the next, you have no money to buy what you need because rent, groceries, gas, and food purchases have robbed your account. Then you throw student loans and credit card payments into the mix and good luck figuring out where it all goes.
The transition is easier once you learn the basics of personal finance. You don’t need to mastermind some huge savings plan or earn a ton of money or even build some complicated income system. You just need to understand your income and spending and be prepared for the unexpected along the way.
Take control over the common early adult personal finance problems and take the pressure away that you need to earn more to save more when you’re still learning how to manage your money.
What Is Young Adult Personal Finance?
Young adult personal finance is paying for your personal costs like rent and groceries by learning how to manage your income. This also includes understanding the benefits of your job.
Financial decisions interrelate. The more you spend on a large house, the less you save. The bigger the car loan, the less you have at the end of the month. Credit card debt makes every new purchase more costly, too, thanks to interest.
If someone makes $3,500 every month and spends $1,300 on housing, $400 on transport, $500 on food, and $300 to pay debt, they are left with $1,000 every month. That seems great until you factor in that subscriptions, restaurant meals, and retail shopping, can quickly reduce that figure to nothing. A financial plan preemptively assigns each of these dollars to a purpose before they are lost completely. Maybe that means $300 goes to savings, $250 to more debt payments, $150 to investing, and the remaining dollars to flexible spending.
This example is simplified. It’s important to know your numbers and understand that you can assign purpose to your dollars rather than waiting to see what’s left at the end of the month. The beginning of your financial education can be found through Banxia Xiaoshuo.
Struggles of Young Adults and Personal Finance
Entering adulthood and leaving home means the start of financial independence. Unfortunately, this means transportation, housing, insurance, debt, and taxes start to pile up. The reality is that you aren’t taught valuable financial skills in school.
Social media affects spending. Your friends go out for dinner. They take trips, or buy new apartments. You think this is all normal. You don’t know about their debts or family troubles. Even though some expenses are predictable, like insurance, car repairs, or holiday shopping, they can feel like they come out of nowhere.
Rising Living Expenses and Lifestyle Inflation
As living expenses go up, raises lose value. Even though making more money is a good thing, some people think it gives them permission to spend money they couldn’t spend before. If someone goes from making $2,800 a month to $3,400 a month with a new car, new apartment, and a new lease that costs $400 more, they just lost their $600 raise to new expenses. The fun part of money is enjoying it, but the problem is when every raise means you’re forced to pay more expenses.
Lack of Financial Knowledge
Mistakes from a lack of financial knowledge are expensive. Finance vocabulary is scary, especially if you’re staring down a credit card statement and all the information is new. The answer is to become educated about finances. It’s not avoiding credit or debit cards.
Social media affects spending. If the people around you are doing expensive things you start to do them too. But you can only afford things based on your own financial situation; having friends that make a $40 dinner reasonable does not make it a good dinner if you can’t afford it.
Unpredictable Costs
Unpredictable costs will catch you off guard. Monthly bills are usually routine, but car insurance comes due in a lump sum bi-annually, making payments feel like a crisis. If you save $100 a month, and plan ahead to pay the lump sum, the crisis is averted. Knowing the difference between planned costs and true emergencies is more important than you think.
Greatest Tips for Financial Control
The greatest tips for control are the simplest. Sophistication is not the goal, keeping up with the tips is.
1. Track Your Spending Before Making Changes
1. Track your spending before making changes Group your transactions from the last month into the following categories — housing, food, debt, subscriptions, entertainment, savings. You may think your spending on dining out is $150, but in reality delivery, coffee, snacks, and meals may bring your spending up to $275. Tracking your spending is the first step to financial control; don’t expect to stop spending immediately.
2. Automate Your Savings With Your Pay
2. Automate your savings with your pay. You save what is left at the end of the month? That won’t get you savings. Automate your savings to occur as your pay comes in. Flipping your spending and savings order is the most important part.
3. Build an Emergency Fund
3. Emergency funds are meant to be built. Protect yourself from unexpected costs with a little saving. Cash cushion can help you in the event of unexpected job loss, or tech break. Funds are meant to be readily available. Your goal is to protect against loss, not to earn more.
4. Treat Credit as Borrowed Money
4. Consider credit to be borrowed money. Treating credit like a legitimate income can be a dangerous mistake. Although the limit can be $5,000, you will have to pay that $5,000 limit plus interest back. Make sure that you only use credit within your budget, and stay informed on your statement balance, the due date, and the interest rate. If your goal is to get out of debt, the minimum payment should never be your target.
5. Understand Your Employer Benefits
5. Understand your employer benefits. Money isn’t the only reason to work a job. Many jobs offer retirement account contribution matches and insurance as benefits. Check out your employer’s benefit guide to see the benefits, rules of contributions, and eligibility.
6. Give Your Money a Purpose
6. Money assigned to your goals should not be available to spend. For many, seeing $2,000 in a checking account can relieve stress, and seeing $800 of that money assigned to bills and $700 assigned to savings can create even less stress. Make sure you have separate bank accounts or clear money categories so you don’t spend money assigned to your goals.
7. Review Your Subscriptions
7. Consider your subscriptions. Six monthly subscriptions that cost $12 can add up to a crazy $864. You should not have to cancel every subscription, just make sure you are not spending money on subscriptions that do not give you value.
8. Customize Your Budget
8. Slightly customize your budget. A good rule to start with when making your monthly budget is the 50/30/20 budget which allocates 50% to needs, 30% to wants, and 20% to savings/debt. Someone living in a lower cost of living area may actually benefit more from adjusting their needs to a 40% allocation for example, so adjust your budget to your situation to gain the most value.
9. Use Sinking Funds for Predictable Expenses
9. Use sinking funds for predictable expenses to avoid credit card debt. Your trip won’t have to go on a credit card if you managed to save $200 each month for your upcoming $1,200 trip to be taken in six months. The sinking fund method also works for tuition, maintenance, and insurance. These funds change your thought process from “how will I afford this?” to “how much will I need to save each month?”
10. Set a Goal for Every Pay Raise
10. Set a goal for every pay raise. Purposefully save $200 of your pay raise and use the other $200 to improve your lifestyle. This way, you still enjoy the raise and your finances still get the raise they deserve.
Expert Tips for Building Stronger Money Habits
Successful money management is a lot easier if you have a system in place for managing your biggest expenses, such as rent, versus buying your morning coffee. Systematically tracking your expenses helps you avoid subscriptions and other unnecessary expenses.
Also, no plan for managing your money should make you feel miserable. You should avoid the mindset that gives your morning coffee the same weight as a trip to Hawaii.
Common Financial Mistakes
Considering Credit Limits as Income
Considering credit limits as income — credit is a borrowing limit, not additional income.
Saving the Leftovers
Saving the leftovers — spending adjusts to the new limit. Rather, save upfront.
Not Accounting for Recurring Automatic Payments
Not accounting recurring automatic payments — minor recurring payments significantly impact your budget over the year.
Trying to Keep Up With the Joneses
Trying to ‘keep up with the Joneses’ — you have no idea about their expenses.
Not Maintaining a Cash Buffer
Not maintaining a cash buffer — you will end up borrowing money for unplanned expenses.
Avoiding a Plan for Salary Increases
Living with the ‘use it or lose it’ mentality for salary increases — set new goals for each salary increase.
Having a Complicated Budget
Having a complicated budget — if a system is overly complicated, you won’t stick to it.
Not Budgeting for Yearly Expenses
Not budgeting for yearly expenses — you need to budget for all expenses in advance.
Starting to Budget Early: Benefits and Drawbacks
Benefits of Starting Early
Benefits — less debt, improved budgeting and savings, easier to anticipate expenses, more financial freedom.
Drawbacks of Starting Early
Drawbacks — you have to stick to a budget so less spending freedom, slow progress in the beginning, social discomfort.
To see the benefits, it’s important to stick to budgeting, but it is not necessary to make perfect budgeting decisions.
Budgeting for Your First Paycheck
Budget for your first paycheck before you spend it. Track your essential spending, savings, debt repayment, and discretionary spending.
Frequently Asked Questions About Young Adult Personal Finance
How Much Should Young Adults Save?
This differs for everyone. Start with an emergency fund. Save more based on your expenses, how stable your income is, and how much debt you have.
Do You Still Need to Budget With a High Salary?
Yes. Budgeting becomes tracking less frequent expenses, savings, and debts with a high end financial goal.
Is It Better to Save or Pay Off Credit Card Debt?
That depends on how high the interest is and your financial safety. Many people think it is a good balance to have some cash available while paying down high cash debt.
How Can You Start Budgeting?
Set up a budget based on your actual spending. Determine your income, bills, and spending from last month and set savings and spending goals. Choose a budgeting system you think you will stick to.
How Can Young Adults Control Impulse Spending?
Set some spending limits. You can also add a waiting period before a nonessential purchase. A spending limit coupled with the removal of saved payment info from shopping sites helps you make some spontaneous purchases.
Is the 50/30/20 Rule the Budgeting Goal Young Adults Should Aim For?
This rule should be followed loosely, and these guidelines can be adjusted based on your circumstances.
How Should Someone With Irregular Income Budget?
To budget for irregular income, start with your worse month, not the best. Expect the unexpected, and consider lean months and strong months when budgeting. Strong months can help fund weak months, savings, and help make debt payments.
Should Young Adults Invest Before Paying Off Debt?
Young adults can invest before paying off debt as long as good debt like a credit card isn’t the focus, along with a good emergency savings. Taking debt into consideration along with the employer’s benefits is essential. However, not all young adults need to take the same route.
How Can I Manage Money Without Feeling Deprived?
When discretionary funds are put into the budgets of big expenses, money can be spent guiltlessly on things like out to eat meals and hobbies.
Conclusion
Managing money does not need extreme sacrifices and minimizing comforts to a great extent. The best ways to manage money include simple techniques, such as having savings, understanding spendings, and managing credit to a good extent. Additionally, there needs to be planning for expenses and consideration for budgeting goals.
You do not need to do everything at the same time. Start with reviewing your transactions, and then build good habits to manage money when life changes, then your system should change as your income changes.
Consistency is most important. The small, day to day decisions over months and years will instead be more important than a big change that resets after two weeks.
