Picture this: you’re freshly graduated from college, trying to gain ground in a new career, figuring out life on your own. “Adulting” if you will. You realize you aren’t exactly sure what is going on or what you should be doing. You’ve been thrown into this thing called life and you’re treading water trying to figure it out. Sound familiar?
You’re not alone. The reality is most people in their 20’s experience this in one way or another. Here is some good news: it will be okay, and I’ve got the answers. At least some, anyway.
For most 20 somethings, the concept of personal finance is unfamiliar and probably a little scary, yet it isn’t the monster it is made out to be. It can be simple once you get the basics down.
Let’s take our first step in our journey to financial confidence: understanding the basics -budgeting, saving, paying off debt, and investing.
While the thought of creating, let alone sticking to a budget might make you shudder, give it the benefit of the doubt. Budgeting helps you keep track of where your money is going, set parameters for spending, make goals for saving or paying off debt, and plan for the future. Budgeting isn’t solely about creating and sticking to a budget, it gives you power to make decisions that will positively affect your financial life.
One of the most powerful uses of a budget is setting parameters for yourself. Many people earn more as they gain experience in their lives and careers. Many also spend more than they might need to, especially as their earnings rise. A great example of this is how much you spent in college versus what you spend now. I bet your living expenses have increased a significant amount. Living on so much less might have not been comfortable and I am certainly not advocating you live off Top Ramen. The point is during that time, you survived off much less. I encourage you to create a budget that meets your needs, allows for some discretionary spending, then stick to it. As you earn more, your money will be spent with intent, not wasted on items you don’t need.
The budgeting process might also free up some cash right now. Analyzing your current budget could draw attention to spending habits you want to change, and free up money to put into something that will benefit your financial wellbeing.
The next step is building your emergency savings. Emergency savings are used for unexpected expenses and income loss. From vet bills to job loss, emergency savings are the difference between keeping you on track and being completely financially derailed. Many people don’t have financial troubles until an emergency arises and they can’t afford it.
For a one-income household, the golden rule is to have six months’ worth of expenses saved in emergency savings. For a two-income household, the rule is to have 3 months’ worth of expenses saved. It might seem like a lot, but anything you have will be a major help. You’ll be surprised how comforting it is when an emergency happens, and you can pay for it.
Paying off debt and investing
Once you have your budget down and you’ve built up sufficient emergency savings, you’re ready to move on towards paying off debt and investing. In general, it’s always a good idea to put some money towards paying off debt and some towards investing. If you have a loan, you’re already making progress on paying it off due to your monthly minimum payment. Therefore, you should also contribute to an investment account so you’re making headway in both directions.
After these payments towards your loans and investments, you might be wondering how to put any additional cash to work. How to decide between prioritizing investing or paying off your loans. Generally speaking, if you have high interest loans, target those first. Then, prioritize your investments.
Even if you don’t have a lot of cash to work with, you can still learn and implement these practices on a smaller scale. Not only will you be making progress towards your financial goals, but you will be building a positive habit for the future when you have more money to put to work.
Remember, you’re not alone and it will all be okay, just start with the basics. It is also always a good idea to ask questions and continue learning about personal finance. You can begin by asking your employer about your retirement plan, reading articles and books about personal finance, or scheduling an appointment with a financial advisor to discuss your personal situation. Anything that furthers your learning will have a positive impact on your confidence.
Sign up for our newsletter at tenbridgepartners.com or give us a call if you’re ready to take the next step and define your path forward. We would be happy to meet with you to provide you confidence and clarity in your financial life.
From the desk of Sirra Anderson-Crum FPQP™