So you’ve scored that first “real-world job,” and the time has come to make it on your own. This transition into financial independence is an exciting part of adulthood, but it can also be stressful if you don’t have much experience with money management.
A recent poll from the FINRA Investor Education Foundation reveals that only 17 percent of Americans between the ages of 18 and 34 demonstrate financial literacy.
However, it’s not too late in the game to learn how to be smart and responsible with your finances in this new season of life. Whether your goal is to track expenses and income flow, build a savings account, create and follow a budget, plan for success and security in the future, or a combination of all the above, it’s within your grasp.
Here are some tips to help you determine which areas to focus on as you take charge of your finances in this next chapter of young adulthood.
Basic Living Expenses
The first step of financial independence is to calculate your living expenses and work out how much of your income must be used to cover those costs each month. Before you can spend money on entertainment or sock away funds for that dream vacation, it’s imperative to ensure you can afford all the basics. As you create a budget, start with these essentials so you know the projected amount to set aside from each paycheck:
- Rent or housing
- Groceries
- Personal care
- Water and utilities
- Transportation
- Phone and internet
- Medical visits
Health Insurance Costs
On the subject of medical care, part of adulthood is becoming responsible for your own health insurance costs. If you don’t receive these benefits from an employer, then you’ll need to purchase health insurance from the ACA Marketplace. As of 2019, the national average cost for a one-person health insurance ACA plan was $612 before tax subsidies.
However, the exact amount you spend on premiums each month will depend on certain factors such as where you live, how old you are, which plan tier you choose, and the number of beneficiaries on it. In most cases, you can also reduce the cost of health insurance premiums with a higher deductible plan, but be aware, this will often come with more out-of-pocket charges for physician visits or medications.
Student Loans and Debts
Whether you have student loans, credit card bills or vehicle payments, debt is a common barrier for young adults to overcome. In fact, as of 2020, Experian notes that the average Gen Z American was more than $16,000 in debt, while the average Millennial was over $87,000 in debt. But the amount of time it takes to eliminate debt will hinge on how intentional you are about those payments. Here are some ways to lower debt quickly:
- Focus on paying off the least expensive debts first to help build momentum, then work incrementally toward larger debts.
- Pay more than just the minimum required balance, which not only reduces your debt faster, but also saves on interest.
- Schedule more than one payment each month, and if you use a credit card, pay off each transaction as soon as it’s posted.
- Request a loan consolidation with your bank to combine multiple debts into a single payment with a lower interest rate.
Emergency Fund Savings
As with all circumstances in life, some financial disruptions occur that you just can’t see coming, but you can still plan for those eventualities with an emergency fund. From a job loss to a medical operation to a home or vehicle repair to an unforeseen move, there are all kinds of situations you can’t predict but can be ready for.
This is where an emergency fund comes to the rescue—it’s separate from your main savings account, and the money it contains is earmarked for emergencies only (hence the name). Once you’ve taken care of all basic line items in the budget each month, transfer some of your remaining income into this account. A solid goal is to save about three to six months’ worth of living expenses in the emergency fund to keep yourself afloat.
Short and Long-Term Goals
Now this is the fun part of creating your financial independence—after you learn how to manage the essentials, it’s time to start dreaming for the future. Think about your priorities, both in the short and long-term, then plan for how to make these goals a reality.
Whether it’s a small want such as attending a concert with your friends or a major investment such as purchasing your first house, carve out room in the budget for what matters to you. This will also teach you how to curb spending habits since it’s easier to forego an impulse buy in order to save for a more meaningful purchase.
Now Is the Time to Take Hold of Your Finances.
There is so much to look forward to as you enter this new phase of life and becoming financially literate is no exception. Sure, the freedom to earn your own income and manage it responsibly can require a learning curve, but it doesn’t have to be an overwhelming task. With these tips in mind, you can step into adulthood with financial confidence.
