Young people worry about money quite a bit. Trying to make ends meet and maintain some semblance of a social life is no easy balance to strike. Without proper planning and careful budgeting, you could run into a financial disaster that wipes you of your savings and damages your credit score.
Thankfully, there are many proven ways to effectively budget your money and get a grasp on your personal finances so that you can stop thinking about money all the time.
Getting a Grasp on Your Budget
Below are several effective budgeting tips and how you can go about putting them to use in your own life. If you have children, MLR has posted budgeting tips for teens previously, along with a worksheet.
Know What You Spend Money On
Stop reading for a second and think: where does your paycheck go every week? If you’re like most young people, you can name a few frequent expenses — food, gas, nights out with friends, etc — but a good portion of your money is spent and unaccounted for.
This is because it is difficult to keep track of all of your expenses. If you’re out and about and need something, you most likely just buy it and forget about it, but come the following payday you’re nearing your last dollar and can’t say exactly why.
This is a sign of bad budgeting practice. If you knew everything you spent your money on, you could identify areas to improve. But if you don’t you’ll just keep spending unabated week after week.
Try keeping a small notepad and jot down everything you buy along with it’s price for a few weeks. This will help you gain a clear understanding of your spending habits and where you should cut back.
Use Automatic Bill Pay
As a young adult, you’re probably encountering serious bills for the first time. Rent, cell phone, insurance, credit cards and their insane carrying costs — all need to be paid in different amounts, on varying dates.
To remember the specifics of each bill and pay it on time every month is a burdensome chore, and forgetting a payment or two here and there can quickly stack hefty late fees onto your monthly budget.
Avoid this problem by setting up automatic bill pay. Most debt accounts you have (as in, any of the ones listed above) have online bill pay options that allow you to input your bank details and pay the bill automatically each time it is due. By taking the chore of remembering your bills off of your shoulders, you need only make sure your account has money in it and you’ll never incur another late fee again.
Save Living Expenses
No matter how secure you think your employment is, saving several months’ worth of living expenses is the anchor of any responsible budget. Ideally, you should aim to squirrel away between 3 and 6 months worth of expenses so that if a sudden financial crises strikes, you won’t be totally destitute.
To find a month’s living expenses, add up every single bill that must be paid in one month. Things like rent, insurance, utilities — these are unalterable bills that cannot go unpaid if you want to maintain your living standard.
Now, take this number (which represents one month’s total expenses) and multiply it by 3 – 6 to get your new savings goal. This number may be quite high, and it will probably take you some time to achieve. However, once you reach your goal, you will have the security of knowing that, should you lose your primary income source, you will have a firm cushion under you until you find new employment.
Use Online Budgeting Tools
Planning and sticking to a budget is hard work, no matter how old you are. Effective budgeting requires you to plan out how much money you can spend per month on every area of your life, from shopping to food to entertainment, etc. Trying to keep track of how much you’ve spent in each category in your head is nearly impossible, even for the most mathematically inclined among us.
This is why online budgeting tools (check out my review of Quicken!) can be so helpful in planning and maintaining a healthy financial life. I know MLR pushes this a lot, so… sites like Mint.com integrate directly with your bank account and track exactly what you spend money on.
You can then set budget limits within their online software, (say, $200/month on entertainment), and log in from anywhere to see how much room you still have to work with. As you spend, the software will update you (via phone or email) and alert you as you reach the end of your budgets so that you don’t begin overspending.
Never Neglect Retirement
Retirement may seem like a far ways off, but waiting to save for your golden years is a mistake that could keep you working far past your 60s. Financial advisory website BankRate.com reports:
“If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you’ll have around $560,000, assuming earnings grow at 8 percent annually.”
Conversely, the same saving habits begun at 35 will yield just $250,000, less than half the original amount. This is because you are loosing out on the interest gained on your money for those crucial first 10 years.
Consider opening a Roth IRA and contributing regularly. This type of retirement account allows you to invest your money in stocks and bonds while you save for retirement, but it also offers a significant tax advantage. With a Roth IRA, the money you contribute is taxed upon deposit, but is not taxed when you withdraw it in retirement. In this way, your money is allowed to grow tax free, and will not be reduced by taxes down the road.
Get Necessary Insurance Policies
Saving money is only half the battle; protecting your savings is just as important. To avoid unwanted, expensive surprises, it is important to have the necessary insurance policies in place.
Health insurance is perhaps the most important because it seriously reduces the costs of health care, should you ever need it. An uninsured trip to the hospital can cost you tens of thousands of dollars, wiping out all the savings you’ve worked so hard to build. Had you been insured, your premium is the only bill you would receive.
Renter’s insurance is just as important for those who rent an apartment or home. Renter’s insurance is very reasonable – generally between $20-$50/month, but the protection it provides is invaluable. This insurance protects all of your personal belongings from unexpected home disasters. If your apartment suffers a fire, a flood, or other devastating force, your valuable possessions are insured and will be replaced or compensated for.
You Are On Your Way!
All of the above tips should be taken as a framework to get your financial life on course. You should not stop paying attention once you have followed through on all of the above.
Are there any other “Back to Basics” that I have missed that you would like to share with other young adults who may be reading?