Money Management Tips for Young Adults
As a new consumer, you might not have much experience managing your money, but that’s okay. If you are looking to start good money habits now and make the most of your hard-earned money, use these money management tips to help you get started.
Create a Budget
Whether you are a new college graduate or nearing retirement, it’s important to think ahead about your future. Along with personal goals and objectives, it’s also important to plan for your financial future. Part of this plan should include creating a budget. You should get in the habit of tracking how much you make on average from month to month. You should then come up with a list of monthly expenses to see how much money you can expect to spend on nonessential items like restaurants, going to the movies or the latest video game.
There are so many ways to create a budget. You can try the all-cash diet, so you only spend how much you take out at the ATM. Many people use mobile apps such as Ent’s Money Insight and Money Insight Lite to learn valuable insights about your habits, track expenses and help you to make smart financial decisions. The 50/30/20 rule is another popular option. This means spending 50% of your earnings on essentials items (needs), 30% on unessential items (wants) and putting 20% in savings.
Creating a budget helps people get a better idea of where their finances are headed. You can set goals for saving your money, whether it’s paying for college, buying your first car or renting an apartment. You will also learn to adjust your spending habits if your income changes unexpectedly.
Your credit report and score can help you in many ways—from qualifying for low interest rates to obtaining great insurance premiums to landing your ideal job. Additionally, you will need a strong rating when applying for a car loan, signing the lease on your first apartment or taking out a private student loan for school.
You can’t build credit without using credit. If you are looking to build up your score, you can start by applying for a credit card and using it for small purchases. You should also get in the habit of paying your monthly bills on time, if not early, to show creditors that you are responsible with your money. Establishing a solid relationship with your financial institution(s) is also a great start in building credit. Your financial institution may have services, offers and/or advisors who can help you build credit and reach your financial goals.
Avoid Taking on Too Much Debt
As important as it is to build credit, you should avoid taking on too much debt. It’s important for you to understand that having a credit card is not the same as getting money for free. You will have to pay that money back over time by making regular monthly payments. You should always make sure you can afford your monthly credit card payments and keep your balance low before making a purchase. Ideally, you should be able to pay off your balance monthly and treat your card like cash, never spending more than you can pay off.
You should be cautious when taking on additional debt. Some credit card companies will use promotional offers and giveaways that sound too good to be true to lure in consumers, but once the promotional period is over, you could face high interest rates.
In most cases, you should be able to get by with just one credit card. If not used responsibly, taking out more than one credit card can lead to additional debt and high interest rates.
Make Regular Student Loan Payments
Regular payments to your student loans will lessen your principal, thus reducing the total amount that you will pay back over time by minimizing what you will pay in interest. Typically, there is a 6 month “grace period” after you graduate or leave school. However, get off to a good start by making your first payment on time. Not only will a missed payment lower your credit score, over time, your debt will also continue to grow due to compound interest and other late fees. You may want to consider signing up for automatic payments with your lender to avoid missing the payment date. Just keep in mind that you’ll need the funds in your account to cover the payment.
Unsure what compound interest is? Discover why compound interest is important to your finances and how it works.
If you’re not able to make the full loan payment every month, contact your lender. Some lenders may offer repayment plans, deferment options or the opportunity to negotiate your loan payment terms. Keep in mind subsidized loans, a type of federal student loan in in which the government pays the interest while you’re in school at least half-time, also don’t charge borrowers interest during some periods of deferment, but unsubsidized loans do charge interest for the duration. Interest not paid will be capitalized, which means it will be added to the principal amount on your student loan and increase the cost of the loan since interest will be charged on the higher principal amount.
Also, private student loans don't have to follow the same rule set as federal student loans when it comes to repayment and late payment forgiveness. If you have a private student loan, you'll need to read your loan contract or contact your lender to see what relief options might be available.
Pay Off High-Interest Debt First
When taking on additional debt, you should consider focusing on paying off high-interest debt first. This kind of debt will continue to grow at an accelerated rate due to high interest rates. It could easily double in size after a few years, depending on the total amount and the frequency that it compounds (daily, monthly, quarterly etc.).
You should go through your financial obligations to see which ones have the highest interest rates. You may need to refinance some of your debt if the interest is getting out of control. You may be able to defer other payments as you focus on high-interest debt. Read our “How to Get Out of Debt” article to learn more.
Eliminate Unnecessary Spending
You may not have that much debt as you begin to utilize your spending power, but even small loans can grow over time if not handled properly. The sooner you pay off this early debt, the better equipped you will be to buy a house, car or save for retirement down the line.
That’s why it’s always a good idea for you to live within your means. You should reduce wasteful spending habits that add little to your quality of life. A surcharge here and there could add up as the months go by. You should also do your research before making a purchase to make sure you’re getting a good deal.
Excess money should go towards things like paying off debts, building an emergency fund or saving for retirement. Try to focus on long-term goals, rather than feeding into the short-term gratification of buying unnecessary items.
Get Proper Insurance Coverage
Having health, disability and life insurance may sound like something for older people, but young people can benefit from the right kinds of coverage. For many types of health insurance, the younger and healthier you are, the less the premiums will cost. One accident can lead to medical debt if you don’t have the funds to pay for it and may also affect your ability to earn a living. If you wait until you are older to invest in quality insurance, you will likely face more expensive premiums, which can make it difficult to get the right policy.
Keep these money management tips in mind to make the most of your finances. Small habits can lead to big rewards down the line.