There are many challenges inherent to the transition to adulthood. One of the most difficult aspects for many young people is dealing with finances. Handling money responsibly is one of those things that must be mastered. Read on for the eight big, important rules young adults must follow when it comes to their finances.
1. Use a budget. The best way to track and plan spending is a budget. People who don’t watch their spending often have no idea where their money goes, and are constantly surprised at how little they have. Keeping a budget will reveal areas of overspending and waste, allowing for better financial decisions. Organize a budget into areas of spending such as food, rent, and transportation. This will allow true necessities to be prioritized over stuff that falls into the category of ‘wants,’ such as eating out or vacationing.
2. Understand taxes. Someone who has never held a job before may forget to account for the money the government will be taking out of every paycheck. It’s important to calculate take-home pay when making decisions about where to live, how much to set aside for leisure spending, and how much to save. Understanding taxes is particularly critical for those who do some work for themselves, either full-time or as a side gig.
3. Start an emergency fund. Living paycheck to paycheck is living on the edge. Life is filled with unexpected exigencies. It could be getting fired, a medical emergency, car repair, theft, or some other unforeseen expense. The point is that it’s important to have some money set aside to deal with a major bill, since life does not always go according to plan. A good rule is to have enough to pay six months of regular expenses.
4. Build credit. Credit becomes critically important when taking out loans, such as when getting a mortgage on a home. Anyone just starting out in life will not have a significant credit history. Fortunately, credit can be easily built. Instead of paying for purchases with cash or via a debit card, use a credit card. Taking care of the bill at the end of every month demonstrates the ability to properly handle a line of credit.
5. Pay off debt. The high expense of a modern college education means many young people are deep in debt. While debt isn’t good, it needs not be a financial death sentence. The key is to steadily make payments. Tackle whichever debt has the highest interest rate first. Of course, paying off debt is only half the puzzle: the other part is avoiding new debts. The simple rule is to not spend money you don’t actually have.
6. Start saving for retirement. Retirement can seem incredibly far away to young adults. However, that doesn’t negate the value of an early start to retirement preparation. Investments grow over time. The longer period the principle has to grow, the larger it will ultimately be. That means investing a relatively small amount at age 25 can be better than investing a large amount at 45. Bottom line: the sooner savings are begun, the better.
7. Practice self-control. Discipline might be the most important element of handling money properly. It is the umbrella skill under which all the other rules fall. The key is the ability to delay gratification — to resist the impulse to spend on something unnecessary but tempting in the short-term. Often, considering the awful consequences of the misuse of money helps instill discipline. Saying no to a bad financial decision might not be fun in the moment, but it will pay off. Self-control is worth it.
Knowing how to deal properly with money is an incredibly important life skill. Irresponsible use of money can easily result in financial ruin. While most younger folks are not naturally blessed with self-discipline and the ability to handle money responsibility, such skills can be learned. Anyone who is truly interested in using their money wisely and willing to put forth serious effort will do just fine.