Tips on Managing Your Money
The key to successfully manage your money as a young adult is to live within your means, and always make sure you have enough to pay your living expenses and any debt.
When you are young and starting your career (or even if you are still studying and working part time), you will have many distractions that could potentially erode your finances. Although it might not sound fun, it’s important to live lean and limit your expenses whenever possible.
This means that you need to:
- Limit any new debt that you take on (your debt to income ratio should ideally be 33% or better).
- Live within your means by eliminating unnecessary expenses and impulse spending.
- Keep up to date with all bills and debts so that you can maintain a good credit score.
- Start saving for your future.
- Develop a mindset that money saved now will be money that you can spend later in life.
- Create a simple spreadsheet budget if you need help visualizing all your incoming and outgoing transactions.
Living lean doesn’t mean that you can’t have fun. Giving yourself small rewards is important, just as long as you are spending responsibly.
Building an Emergency Fund
In life, the unexpected can happen at any time. Whether it’s emergency car repair, a family emergency where you need to fly long distance, or even something simple like repairs at home, you will need to have money put aside to cover these unexpected costs.
Start a savings account that is separate from your general and retirement savings. Make sure this money is in a standard savings account rather than a CD (certificate of deposit) account. This account needs to be accessible at any time without any early withdrawal fees.
A low interest rate savings account with your bank or credit union is the best option for your rainy-day fund.
Saving for Retirement
It’s easy to ignore retirement in your 20s and 30s. After all, you’re at the peak of your youth, your career is developing, and retirement is almost impossible to visualize.
No matter how far off it might seem, you need to understand that the earlier you save for retirement, the better off you will be in the long term.
When you start a retirement fund early you will benefit from a head start, but the biggest benefit comes from compound interest. The earlier you save, the higher your interest gains will be over the years and decades. Watching your money grow will offer you peace of mind as you head towards your golden years.
Retirement savings in your 20s and 30s should be as much as you can afford to contribute. Talk to your employer if a retirement plan is offered, because many companies offer contribution matching that will help your fund grow.
Making Big Purchases
When you start earning money, it’s natural to want to start spending some on things that you need, and maybe on some luxury items too. Making big purchases is not a bad thing, as long as you are still living within your financial means.
As a rule of thumb, try to avoid using a credit card for non-critical purchases such as televisions and other electronics. If you are making big purchases for essential items, such as a car, a computer that is used for work or study, or any other big purchase for your home, then credit is OK, just as long as you stay within a stable debt to income ratio.
Big purchases can throw a budget out, which is why finance is necessary sometimes. The trick is to keep your borrowing to the essentials and use additional savings for your luxury purchases.
Over time you will create good spending and savings habits that become second nature. Making small sacrifices today will secure your financial future, and you will appreciate today’s decisions in later life.
Just Do It Afraid members, during the next few months, we will be delving deeper into understanding and budgeting your paycheck. Be sure to watch the monthly video lessons and as always…feel free to ask questions.
If you are not a member, visit our mentorship site, JustDoItAfraid.com to learn how you can be taught practical life skills and be empowered for the adult world. The BEST part? You get to ask all the questions you want.
Talk to you soon,