Money management is one of the hardest things about young adulthood. At least at first. Unless your parents taught you well, you may feel a bit overwhelmed by it all. As a result, when you land your first “real” job, it may feel like you are making a lot and finally have financial freedom. Regardless of how much you are actually making, it is a great time to start setting some financial goals and employing smart habits.
Mitch and I have never had a lot of money. But we’ve always made things work and avoided many (not all) mistakes because we had the right tools and wise advice from those older than us. Financial freedom is incredibly exciting, but if you fail to make wise money decisions, you will feel more burdened and trapped by your finances. Even though being an adult is hard and frustrating at times, there are some basic money decisions you can make that will help ensure stability.
Setting Up an Emergency Fund
Dave Ramsey, the famous financial guru, talks a lot about the importance of emergency funds. He proposes that the first thing you should do with your money is set up a $1000 emergency fund for sudden, unexpected emergencies. For example, your car breaks down and you have an unexpected $750 bill. Your emergency fund should be easy to obtain money from. You should keep it in a separate savings account or money market account.
After the second baby step of paying off debt, you can build a larger emergency fund to protect against a loss of job/income. This way your expenses are covered while you find another job. The main idea is that if something big happens that you had not planned on, you have money set aside to protect you from resorting to taking out a loan, charging a credit card, borrowing money, or busting your budget.
We are living testimonies to the importance of the second emergency fund! Fortunately, we haven’t had to dip into it yet, but knowing it is there brought us some security.
Go ahead and roll your eyes. But there are several important reasons to start saving money early in life. First of all, you are probably looking forward to things like getting married, buying a house, and having kids. If you have been wise enough to build up your savings, this will be a huge blessing to your future plans. If you are single and have extra money after paying your bills and for necessities, saving money is an opportunity you should not pass up. Your future spouse or kids will thank you!
This word sounds intimidating. But it doesn’t have to be. Making a monthly budget is one of the smartest things you can do–whether you have a lot of income or very little. Oftentimes, those who are making way more income then they need to cover expenses fail to make a budget because they feel like there is no point. But in reality, they are missing out on opportunities to be intentional with their income and reach financial goals like starting a Roth IRA or saving toward a house or new car.
Whether you are new to budgeting or not, there are some great, FREE tools available. Our favorite for our family budget is Dave Ramsey’s free EveryDollar online budget. You can also get the app on your phone. It is an easy way to make your budget each month. It walks you through it, but it also allows you to add any line items that you may need. Moreover, if you are following the Dave Ramsey baby steps, it has places for you to record your progress toward goals like emergency funds, paying off debt, vacations, etc. A budget gives a name and purpose to every dollar you make. This sounds constrictive, but in reality, it is liberating because it helps you meet your goals faster.
Pay Off Debt
If you are just graduating college, chances are high that you have student loans or credit card debt in your life. The earlier you start paying off debt in earnest, the earlier you can reap the benefits of true financial freedom and build wealth. All your income, after rent, food, and necessities, needs to go towards paying it off until you are debt free. Also, avoid the trap of financing a car, taking out unnecessary loans, and purchasing via credit cards. These seem common and convenient, but you often pay back much more in the long run.
You can pay off debt faster by taking a second job (think driving Uber or delivering pizza), selling stuff you don’t really need, paying ahead on the principal, and using the debt snowball method. Why should you be in a hurry to pay off debt? First of all, if you lose income and cannot make the monthly payments, you will be hit with a lot of interest and penalties. Also, you may get sent to collections where you will be hounded with calls. Defaulting on a loan can severely hurt your credit score. Moreover, debt inhibits you from being truly financially secure.
Financial Planning for the Future
As a young adult, thinking about investments and retirement may seem crazy, but you should start as soon as possible. The younger you start, the more compound interest will work for you.
To help you get things like mutual funds or retirement investments, you might consider Blueprint Wealth financial planning or look into finding an Edward Jones advisor. Of course, you don’t want to start this until you have funded your emergency funds and paid off your debts!
If you are new to this whole money management thing–despair not! I still remember how nervous Mitch and I felt making our first budget as newlyweds. And we were full time college students with only work study jobs! I think we lived off of $700-800 those first few months . . .
Take heart. You CAN do this!