Written By: Thomas Haarmann
With age comes responsibility, so if you're a young adult in your 20s or 30s, chances are you've been introduced to the realities of adulthood.
While you're excited by all the opportunities life has to offer, you're also aware of your emerging financial responsibility. In the financial realm, the millennial generation (young adults born between 1981 and 1997) faces a unique set of challenges, including a competitive job market and significant student loan debt that can make it difficult to obtain financial stability.
Poor money management can lead to debt, stress, and dependency on others. Fortunately, good money management skills can make it easier for you to accomplish your personal goals. Become familiar with the basics of planning now, and your future self will thank you for being responsible.
Figure out your financial goals
- What are my short-term goals (new car, vacation)?
- What are my intermediate-term goals (buying a home)?
- What are my long-term goals (saving for your child's education, retirement)?
- How important is it for me to acheive each goal?
- How much will I need to save for each goal?
Once you have a clear picture of your goals, you can establish a budget that will help you target them.
Build a budget
- Identify your current monthly income and expenses (include entertainment, travel, hobbies, housing, food, transportation, utilities) Compare the totals. Are you spending more than you earn? Make adjustments if needed
- Identify where you can scale back your spending
- Or, you may discover that you have extra money you can put towards savings
- ADD to your retirement account or EMERGENCY fund
Establish an emergency fund
- It's an unpleasant thought, but a financial crisis could strike when you least expect it, so you'll want to be prepared.
- Set up a cash reserve so you have funds available in the event of an emergency
- Have three to six months of living expenses in your cash reserve
- Always consider factors like job security, health, income, and debts owed when deciding how much money should be in your cash reserve
- Earmark a percentage of your paycheck each pay period, but don't stop when you reach your goals -- the more you have saved, the better off you'll be.
- Review your cash reserve periodicially
Be careful with credit cards
Credit cards can be useful in helping you monitor how much you spend, but they can also lead you to spend more than you can afford. Before accepting a credit card offer, evaluate it carefully by doing the following:
- Read the terms and conditions closely
- Know what the interest rate is and how it is calculated
- Understand hidden fees such as late-payment charges and over-limit fees
- Look for rewards and/or incentive programs that will be most beneficial to you
- Avoid overspending by setting a balance that you're able to pay off fully each month, this will allow you to safely build credit while being financially responsible.
Always remember that missed payments of any sort can cause your credit score to suffer.
Deal with your existing debt
A 2015 Pew Research study revealed that 86% of millennials have debt. (Source: "The Complex Story of American Debt," July 2015) In particular, you might be concerned about how to pay off your student loan debt. Here's a few ideas to deal with debt:
- Check to see whether you qualify for income-sensitive repayment options or Income-Based Repayment
- Even if you're not eligible, you may be able to refinance or consolidate your loans to make it easier to pay
Beware of new borrowing
Think carefully before you borrow more money. Ask yourself the following questions before you do:
- Is this purchase necessary?
- Have you comparison-shopped to make sure you're getting the best possible deal?
- How much will this loan or line of credit cost over time?
- Can you afford to add another monthly payment to your budget?
- Will the interest rate change if you miss a payment?
- Are your personal finances in good shape at this time, or should you wait to borrow until you've paid off pre-existing debt?
Take advantage of technology Access to technology at a young age is one major advantage that benefits millennials, compared with their parents and grandparents when starting out. There's an app or program for everything including financial basics.
- Do your research and find out which apps could be beneficial to you
- Do you need alerts to remind you to pay your bills on time?
- Do you need help organizing your finances?
- Are you looking for a program that allows you to examine your bank, credit card, investment, and loan account activities all at once?
- Many apps offer built in calculators to help with monthly budget or figuring out loan repayment plans, etc.
These are just a few of the financial basics to get started, consider working with a financial professional for a more personalized strategy. Thom Haarmann, J.D. is the Manager of Finaical Services for Money Concepts at CFC.