Adulting is full of surprises, and can often be beset by financial stress. You might be a budgeting pro, but that dream vacation keeps getting pushed aside. Or maybe you have student loans and wonder how you’ll ever afford a decent apartment let alone your own home. The good news is that you can be the boss of your own money, not the other way around. From budgeting and saving money to investing and debt management, personal finance and financial literacy help ensure a comfortable present and a prosperous future.
Understanding Your Financial Health
Take the time to understand your current financial situation before jumping into any investment strategy.
Financial Self-Assessment
- List Your Assets: An asset is anything you own that has value. This includes cash in your checking and savings accounts, investments like stocks and bonds, your car (if it’s paid off), and any valuable possessions.
- Identify Your Liabilities: These are your debts. They include student loans, credit card debt, car loans, and any other money you owe.
- Calculate Your Net Worth: Now, subtract your total liabilities from your total assets. This number represents your net worth, a key indicator of your overall financial health.
The Basics of Financial Planning
Here’s how to get started with your financial plan.
- Set SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) goals: For example, instead of a vague goal of “saving more money,” aim for “saving $500 per month for a down payment on a house within two years.”
- Create a Budget: This ensures you’re living within your means and allocating funds towards your financial goals.
- Build an Emergency Fund: Save enough money for three to six months’ worth of living expenses. This helps you navigate unexpected expenses without derailing your financial goals.
- Invest: A financial advisor or financial planner can help you create a personalized investment strategy that aligns with your goals and risk tolerance. Young adults should start early to take advantage of compound interest and maximize their retirement savings. Set up a retirement account early and contribute to it every pay period.
- Debt Repayment: Consolidate all your debts, listing everything you owe, including the outstanding balance, interest rates, minimum payments, and due dates. Prioritize paying off debts with the highest interest rates first and avoid new debt before repaying what you owe. A proven strategy: when repaying the money you owe, you can pay back your smallest debt balance first and work your way to larger debts.
Budgeting Basics for Young Adults
Creating Your First Budget
Whether you’re starting your first job, managing student loan payments, or have recently moved out, here are some budgeting tips for young adults to better achieve financial independence.
- Identify Your Income Sources: List all your sources of monthly income, including your after-tax salary (your pre-tax dollars are part of your gross pay), allowances, and wages from freelance work. If you freelance, you will have to withhold every quarter to pay federal, state, and local taxes. That’s how income taxes work when you have side gigs or are a 1099. You’ll want to do this so you don’t incur a troublesome tax burden come tax time.
- List Your Expenses: Divide your monthly expenses into two categories: fixed and variable. Fixed expenses are those that stay the same each month, such as rent, utilities, and student loan payments. Variable expenses, like groceries, entertainment, and transportation costs, can fluctuate from month to month.
- Track Your Spending: Know where your money is going to identify what to cut back on.
- Set Financial Goals: Separate short-term from long-term financial goals. That could include vacations, paying off debt, and building an emergency fund. Clear goals motivate you to stick to your budget.
- Allocate Your Income: Start by covering your fixed expenses, then allocate money for your variable expenses based on estimated costs. Finally, allocate a portion of your income towards your financial goals.
- Monitor and Adjust: There are various budgeting apps and financial tools to track your expenses and stay on top of your budget. Review your budget regularly to see if you’re staying on track. Additionally, plan for adjustments as your income and everyday expenses change.
Budgeting Tools and Techniques
There’s no one-size-fits-all approach to budgeting. The key is to find a method that aligns with your spending habits and financial goals. Here are some options to consider:
- 50/30/20 Rule: It allocates your income into three categories: 50 percent for needs (rent, groceries, utilities), 30 percent for wants (entertainment, dining out), and 20 percent for savings and debt repayment.
- Zero-Based Budgeting: You assign every dollar of your income a specific purpose. This ensures you’re intentional with your spending and helps identify areas for potential cuts.
- Pay-Yourself-First: This method prioritizes savings and debt repayment. The idea is to automatically allocate a portion of your income towards these goals before covering any other expenses.
- Envelope System: This traditional method uses physical envelopes designated for different spending categories (groceries, gas, etc.). Once an envelope is empty, you can’t spend any more in that category for the month.
You can take advantage of more financial tools to simplify your budgeting process. They include:
- Budgeting Apps: Budgeting apps help you track your income, expenses, and savings goals in one place, providing insights into your spending habits and offering budgeting tips.
- Expense Trackers: Expense trackers make it easier to see where your money is going and identify areas where you can cut back.
- Automated Savings Apps: Savings apps help you save money automatically by setting aside a portion of your income for savings or investments.
- Bill Payment Apps: These apps help you manage and pay your bills on time to avoid late fees and stay on top of your finances.
- Financial Aggregators: Financial aggregators pull in information from your various financial accounts, such as your bank account, credit cards, and loans, to give you a complete picture of your finances in one place.
- Budgeting Spreadsheets: While not technically a digital tool, spreadsheets like Excel or Google Sheets can be powerful for creating customized budgeting templates and tracking your finances.
- Investment Tracking Tools: Tracking tools can help you monitor your portfolio’s performance and make informed investment decisions.
Saving and Investing Wisely
The key to maximizing the power of compounding as a young adult is to start saving early. Compounding is the process where your money earns interest, and then that interest earns interest, creating a snowball effect. For example, if you save $1,000 at an annual interest rate of 5 percent, you would earn $50 in interest in the first year. However, in the second year, you would earn interest not just on your initial $1,000 but also on the $50 of interest from the first year, resulting in a total of $1,050.
When it comes to investing, young adults have a wide range of options to choose from. They include:
- High-Interest Savings Account: This account offers a higher interest rate than traditional savings accounts, allowing your money to grow steadily while remaining easily accessible.
- Stocks: When you buy stocks, you’re buying a share of ownership in a company. Stocks can be riskier than savings accounts, but they also have the potential for higher returns. Young adults with a long-term investment horizon can consider investing in a diversified portfolio of stocks to benefit from economic growth over time.
- Bonds: These are debt securities issued by governments or corporations. They offer a fixed rate of return and are generally less risky than stocks. Bonds provide a steady income stream and can be a suitable investment for young adults looking for more stability in their portfolios.
- Mutual Funds: Mutual funds pool money from many investors and channel it to a diversified portfolio of stocks, bonds, or other securities. They offer diversification and professional management, making them a popular choice for young adults who may not have the time or expertise to manage their investments actively.
- Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They offer diversification, low fees, and the flexibility to trade throughout the day, making them a convenient option for young investors.
- Real Estate: Real estate can be a lucrative investment option, offering the potential for rental income and property appreciation. You can consider investing in rental properties or real estate investment trusts (REITs) to diversify your investment portfolio.
Smart Spending and Credit Management
Mindful Spending
Conscious spending promotes thoughtful consumption, leading to purchases that align with personal values and long-term priorities. It also promotes a sense of financial responsibility, setting a strong foundation for future financial success. Practice conscious spending using the following financial habits:
- Research Before Buying: Compare prices, read reviews, and consider alternatives before making a purchase to ensure you’re getting the best value for your money.
- Invest in Quality: While it may be tempting to buy cheaper items, investing in quality products that last longer can save you money in the long run.
- Delayed Gratification: Exercise self-control before buying something new. Chances are you’ll change your mind about the purchase after 24 hours.
- Ask Yourself Why: Before buying something, ask yourself why you want it. Is it a need or a want and can it wait? Additionally, consider cheaper alternatives and the option of borrowing or renting it from someone.
- Stick to Cash: Counting out physical money prompts you to reconsider the value of the item you’re buying and whether it aligns with your priorities.
Understanding Credit
A credit score is a numerical representation of your creditworthiness. It’s a big part of financial wellness, affecting everything from loan approvals and interest rates to apartment rentals and phone plans. Scores range from 300 to 850, with higher scores indicating a solid history of repaying debts. Your credit score depends on factors like:
- Payment History: Your payment history looks at whether you’ve paid your bills on time, including credit cards, loans, and any other debts.
- Credit Utilization: This is the amount of credit you’re using compared to your total credit limit. It’s expressed as a percentage. For example, if you have a credit card with a limit of $1,000 and a balance of $200, your credit utilization ratio would be 20 percent. Generally, keeping your credit utilization below 30 percent is considered good for your credit score.
- Length of Credit History: The longer you’ve had credit accounts in good standing, the better it is for your score.
- New Credit: Applying for new credit cards or loans can cause a temporary dip in your credit score since each application triggers a hard inquiry on your credit report. However, the impact is usually small and temporary.
- Types of Credit in Use: Having a mix of credit accounts, such as credit cards and installment loans (like mortgages or car loans), can positively impact your score. This shows lenders that you can handle different types of credit responsibly.
Responsible credit card use is key to boosting your credit score. Here are financial tips for young adults to build good credit.
- Regularly check your credit report for errors or unauthorized accounts and dispute any inaccuracies.
- Apply for a student or secured credit card with a low limit. Secured cards require a deposit that becomes your credit limit.
- Don’t max out your credit cards. Aim to keep your credit usage below 30 percent of your limit.
- Avoid opening too many accounts within a short period; seeing it can lower your average account age and negatively impact your score.
- Maintain a mix of credit such as credit cards and installment loans. However, don’t take on debt you can’t afford to manage.
Protecting Your Financial Future
Emergency Funds
Life is unpredictable, and emergencies can happen when you least expect them. Whether it’s a sudden medical expense, car repair, or unexpected job loss, an emergency fund provides the cushion you need to weather these storms without slowing down your financial journey.
How to Build an Emergency Fund
- Set a Realistic Goal: Aim to save at least 3–6 months’ worth of living expenses. Don’t wait until you have enough money—you can start small and gradually increase your savings target.
- Review Your Budget: Track your income and expenses to identify areas where you can cut back to free money for your emergency fund.
- Automate Your Savings: Set up automatic transfers from your checking account to your emergency fund to ensure consistent savings.
- Use Windfalls Wisely: Redirect unexpected windfalls, such as tax refunds or bonuses, to your emergency fund.
- Avoid Temptation: Keep your emergency fund separate from your regular savings to reduce the temptation to dip into it for non-emergencies.
Insurance Essentials
Insurance protects you from financial losses due to unforeseen circumstances. Here’s a glimpse into your insurance options as a young adult.
- Health Insurance: Insurance providers cover medical expenses, including doctor visits, hospital stays, and prescription medications, reducing your out-of-pocket costs.
- Renters Insurance: While your landlord’s insurance covers the building, it doesn’t protect your personal belongings. Renters insurance provides coverage for your possessions in case of theft, fire, or other covered perils. It also offers liability protection if someone is injured in your rental unit.
- Auto Insurance: Auto insurance is not just a legal requirement in most states—it’s also crucial for protecting your finances. It provides coverage for damage to your vehicle and liability protection if you’re at fault in an accident, helping you avoid significant out-of-pocket expenses.
- Disability Income Insurance: Disability income insurance is a crucial safeguard for young adults, providing financial stability in the event of an unexpected illness or injury that could prevent you from working. This type of insurance ensures you continue to receive a portion of your income to cover essential expenses such as rent, student loans, and daily living costs, even if you can’t work or are limited in what you can do.
Manage Money Better at NobleBank & Trust
By budgeting wisely, saving diligently, and investing thoughtfully, young people can build a strong financial foundation to secure their financial future. This involves creating a budget to understand your cash flow, building an emergency fund for unexpected costs, and harnessing the power of compound interest. Your future self will thank you for the smart financial decisions you make today.
Contact NobleBank & Trust to receive banking, savings, and mortgage advice from a banking professional.