Congratulations on your recent graduation! The excitement is just the beginning of the lifelong responsibility that is adulting. Here is a practical guide to help you navigate essential financial concepts as a young adult and build a secure future for yourself.
Building Your Financial Foundation
Budgeting Basics
The first step towards developing a secure financial future is cultivating smart spending habits. A budget is perfect for stability, giving you a stronger footing on your finances. Make the most out of your earnings by creating a budget.
One way to budget your salary is the 50/30/20 budgeting rule, where 50% of your earnings covers needs, 30% goes to wants, and 20% handles savings and debt repayment. Utilize technology to streamline the planning and management process.
Microsoft's Excel or Google Sheets are excellent free tools to track your income and expenses, automate calculations, and visualize your spending patterns. You can also use applications like NerdWallet to track your spending and credit score. Mint doubles down as a tracker and planner.
Building an Emergency Fund
Set aside funds for emergency purposes. Life has a way of challenging you when you least expect it — from job loss, car repairs, or sickness. Set an emergency fund containing at least six months of your living expenses to avoid accumulating debt in emergencies. Open a savings account with minimal fees and high interest rates. Automate payments to maintain consistency.
Understanding Credit
Credit Cards
A credit card contains borrowed funds. Every time you use it, you accrue debt on your future earnings. It’s crucial to use your credit card responsibly. A credit card can build or hurt your credit score, depending on how you use it. Debt owed on your credit cards has the biggest impact on your credit score. You can develop a good credit score by making timely payments, using your credit card sparingly, and avoiding late or missing payments.
Student Loans (If Applicable)
Establish automated payments for your student loans. Federal student loans offered by the government are low-interest loans. They have flexible repayment options. You can opt for plans based on your income or sign up for a plan with a fixed monthly amount.
Students can also get loans from banks or lending institutions. These private student loans charge higher interest rates and fewer borrower protections. They offer a standard repayment plan that is either fixed or gradually increasing over time.
Here are additional resources to help you manage your student loans
Use the Federal Student Aid (FSA) Loan Simulator to calculate your loan and choose a repayment plan.
Use this government website to find more resources or eligible benefits on student loans.
Planning for the Future
Opening a Retirement Account
As a young adult, you can leverage the time before retirement to increase your retirement savings. When you start early, you harness the power of compound interest to accrue funds for a comfortable retirement.
You can save money (contributions) tax-free, and funds grow without taxation in a traditional Individual Retirement Account (IRA). However, withdrawals (distributions) get taxed like income. This account is excellent if you expect to be in a lower income bracket after retirement.
Alternatively, you can open a Roth IRA account where your contributions get taxed, but funds and distributions are tax-free. This account is suitable if you will be in a higher tax bracket after retirement. Whatever option you choose, start making those contributions early, regardless of the amount, to grow your savings.
The Importance of Insurance
Money has a way of diminishing because of unexpected expenses. One smart way to prevent depleting your resources is by getting basic insurance coverage on health, renters, or homeowners’ insurance. Consult an insurance professional for tailored guidance on your specific needs.
Take Control of Your Financial Future Today
Financial responsibility is essential for young adults. Create a budget, start saving for emergencies or retirement, pay your debt, and manage your credit card to maintain a good credit score. Manage your financial resources now. Talk with financial professionals at Barnum for guidance through this journey.
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