Guest blogger and financial consultant Dr. Joel Lang (langfinancial@verizon.net) shares eight money management tips for young adults:
1) Develop a relationship with your money
“Your money . . . are you managing it or is it managing you? How can you tell?”
· If your life revolves around frustration of not having enough income, worrying about how you’re going to pay all your bills and feeling victimized by leading a deprived life for lack of money, then your money is managing you.
· If you are using your money to accomplish your goals or if you view your money as a tool to make things happen or if you see money as a lubricant which eases your path forward, then you are managing it.
It is not always a question of the amount you have, but your point of view.
The first step is to “own” your financial life. Accept your financial status as it is without self-judgment and regret. Don’t dwell on past mistakes, we’ve all made them.
2) Open Your Mail Every Day
You may not like the bills or the bank statements you receive, but they are the ‘facts of your financial life.’ Embrace them and recognize that you can manage them. (For more on a system for managing mail and bills, see these prior blog posts: 1, 2.)
3) Develop a system for paying bills
Dedicate a regularly scheduled time each week to pay bills. (See prior blog posts for tips: 1, 2.) Once this habit is established, it will become easier.
4) Follow General Budget Guidelines
It’s advisable to have a guideline against which you can compare your own spending patterns. There are many such guidelines which can easily be found on the Internet. One example is outlined below. These are not firm numbers, but are provided as an example. Your personal figures may vary somewhat, but if the variance is substantial, some detailed re-evaluation may be necessary.
For example, it will be very difficult to manage if your housing cost (rent or mortgage) exceeds 35% of your net income (the amount of money you take home).
· 30% Housing
· 10% Utilities and other housing expenditures (including renters insurance)
· 15% Food (at home and away)
· 10% Transportation (including car loan)
· 10% Debt repayment (student loans and credit cards)
· 10% Saving – emergency fund
· 5% Clothing
· 5% Entertainment
· 5% Insurance and miscellaneous personal expenses
It can be both educational and enlightening to track your daily spending. Each month you calculate subtotals for the various categories. You may be surprised at the results.
5) Pay Yourself First
It may surprise you that ‘saving’ is an expense item in your budget. The list includes everyone else with whom you share in your income. So what about you? The establishment of an ‘emergency fund’ is necessary for your financial security. Life is full of surprises and many of them cost money; like a new set of car tires, a major medical expense and even the loss of your job.
Establishing an emergency fund and keeping it ‘untouchable’ except for genuine emergencies, will provide you with long-term peace of mind. It gives you more confidence that you can handle a financial emergency when (not if) it occurs. Keep that money in a readily available local savings or money market bank account. While it may not earn much interest there, keep in mind that the purpose of this money is to provide security, not growth.
6) Manage Debt
Some degree of debt is unavoidable, such as, student debt, mortgages, and credit cards (even if you pay them in full every month – it is still debt). Prioritizing each debt is essential for effective money management. Student debt is virtually inescapable, so payments must be made regularly and on time. There are some complicated alternative payment options available in this category, which could be an entire separate discussion.
Prioritizing credit card debt is generally based on interest rates. Pay off the highest interest rate debt first, while making only minimum payments to the rest, regardless of relative balances.
Mortgages are another complicated category. Everyone should consult with unbiased experts before obligating themselves to hundreds of thousands of dollars in debt which will be a part of life for many years to come.
7) Plan for Investments and Retirement Savings
This is possibly the most complicated subject of all. There are multiple questions that need sensible answers, but the easiest question to answer is “When should I start?” The answer is “Now”!
If you are 25 and you plan to retire at 65, you have 40 years to save. The money you put away now has 40 years to grow. For example, if you save $100 per month starting at age 25 and earn just 5% per year, you will have $152,600 at age 65. However if you wait till age 45 to begin, you will only have $41,100, nearly 75% less. This is the miracle of “compound interest” and starting to save early.
8) Final Thoughts: Maintain Flexibility
Of one thing you can be certain – “Things will change.” Having a plan is a wonderful thing, but be prepared for changes. Life holds amazing surprises for which you will have to make adjustments. Some will be wonderful and others may be seriously challenging or frustrating. Financial planning and saving is a journey, not a destination.
Believe in yourself and your ability to survive, adapt and overcome all that comes along.
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