Financial literacy is a life skill, one that’s best learned at a young age. The sooner you start building good money habits, the better you’ll be at saving, budgeting, getting out of debt, and living a financially sound life.
Let’s look at some of the basic building blocks of personal finance that young adults can start mastering.
First, What is Personal Finance?
I define personal finance as the broader term of managing your money, including spending, savings, and investments. It covers everything from budgeting, debt repayments, credit building, banking practices, and your overall wealth throughout your life.
Personal finance matters at every stage of your adult life. Having a good grasp on your finances affects everything from buying a house to getting a credit card to growing your money over time. The sooner you can start mastering your finances and making good money decisions, the less money will be an issue as you go through life.
Personal Finance Tips for Young Adults
Now that you know what personal finance is, how can you start taking control of your money? As a young adult, you might not have things like retirement accounts and mortgage payments just yet. But there’s no better time than the present to start learning. Let’s begin with the following personal finance basics and tips.
Know the Difference Between Wants and Needs
Self-control is one of the first pieces of personal finance to master. It’s not easy to say no to something you want, especially if it looks like you have the money for it.
But it’s more important to think of your future finances and not just your current account balance. It only takes one flat tire, one broken arm, or months of inflated gas prices to wipe out your savings.
Think carefully about whether you’re buying into your wants or if you really need that new purse or a night at the club. A good rule of thumb if you want to buy a physical item is to sleep on it. Give yourself the chance to let the impulse pass. If you still want it a few days later, then it might make sense to go ahead and buy it.
Consider the Long-Term Costs of Your Purchases
Buying something on credit today means not having to come up with the money for it today. But how much is it really going to cost you? Credit carries interest, and you might still be paying for your purchases five years from now.
Likewise, some things end up costing you more in the long run even if you don’t buy them on credit. For example, something that requires a lot of maintenance or constant replenishment will keep you in a spending cycle for years.
That’s not to say all long-term purchases are evil and should be avoided! Your house, for example, will need constant upkeep, taxes, and insurance. But you should think about both sides of the coin before you go all in. Factoring in all potential costs can help you decide whether you can really afford it.
Use Credit, But Don’t Abuse It
Another word on credit — you’re going to need it. Life takes credit unless you’re so wealthy that you can pay for your home, car, education, and other expenses with cash. The key is to build credit early in life, but don’t rely on it too much. Starting credit building young will help you bulk up your credit history, which will come in handy when applying for a mortgage or auto loan.
Try to only charge what you can pay off each month. A few charges here and there make it easier to pay off your bill in full, which allows you to avoid interest charges.
Start an Emergency Fund
You’re not as invincible as you might have thought you were when you were a teen. Disasters can and do happen, and you’ll be better able to weather the storm when you have some emergency cash stashed away.
I suggest creating a separate bank account to act as an emergency fund. Add to it until you have at least 3-6 months of expenses saved up. If you lose your job, wreck your car, or suffer a serious injury, money will be one less thing you have to worry about. Peace of mind is so valuable!
Track Where You Spend Your Money
In a world of Venmo and credit cards, it’s not easy to visualize how much money you’re actually spending (unlike the days when cash ruled all). The next best option is to track your expenses on your monthly bank statement. A lot of banks will combine your expenses into categories (e.g., food, entertainment, etc.) so you can see which areas take most of your paycheck. Tracking your expenses can help you decide where to cut back if needed and which expenditures are non-negotiable.
Save for Retirement Early and Often
Retirement is lightyears away for young adults, but the sooner you start saving, the more comfortable you’ll be later in life. It’s never too early to start thinking about your retired lifestyle and how much you need to save to make it happen. Your future self with thank you.
For more personal finance tips and tricks, head to my Free Financial Resource Center, CreditMakesSense.me. See you there!