Striking out on your own as an adult comes with a swirl of emotions. With more freedom around your financial choices, the question of how to adult comes with more pressure.
Taking care of yourself is more than simply finding an apartment to call home. You also want to excel in your career without losing your friends. Plus, the long list of financial things you should be doing can be a constant worry. After all, who has time to eat healthily, maintain a budget, and nail down the appropriate insurance policies?
It seems like you have a never-ending to-do list. Luckily, it doesn’t have to feel like that. Instead, you can take charge of your finances to tame at least one area of your life. So if you are ready to learn the basics of financial adulting, read on.
Start learning how to be an adult
If you are avoiding working on your finances, then you need to pull yourself together. Whether we like it or not, money has the power to dramatically influence our lives. A properly managed balance sheet can lead to lower stress levels. Since long-term stress can lead to serious medical conditions such as heart disease and high blood pressure, it is important to take this seriously.
With that, taking the time to sort through your finances is critical. Although taking that first step towards understanding your finances can be scary, the long-term effects are worthwhile. If you can change course now, then you have the opportunity to end up in a better financial position down the road.
1. Find your reason
It is easy to say that you want to start effectively managing your finances. It is an entirely different thing to follow through on that intention.
I’m not going to lie, getting a handle on your finances can be a time-consuming process. However, the time you put in can dramatically change your financial position for the better. So, what makes your life worth living? Think about the people and goals in your life.
Maybe you are a newlywed with plans to start a family. Maybe you want to take your dog on a trip around the world before you turn 30. Or maybe you simply want to have enough money in your bank account to break the paycheck to paycheck cycle.
Whatever your reason, hold on tight. Organizing and cleaning up your finances might be a long process. Whenever the going gets hard, think about your why and just keep moving in the right direction.
2. See where you stand
You cannot move forward before you know where you stand. That would be similar to building a house before pouring the foundation. Take stock of your financial situation.
First, track your spending and your income. It is critical that your income is more than your expenses.
Next, calculate your net worth by subtracting your liabilities from your assets. If you’ve found a positive number, congrats! If you’ve found a negative number, that just means you have a little bit more work to do. No matter what you find, it is important to be brutally honest in this step. A bleak financial picture cannot improve if you ignore the problems.
3. Determine where you want to be financially
After you’ve taken stock of your financial situation, it's time to dream. Where do you want to be financially?
First, think about your long-term goals. Do you dream of retiring at some point? Make sure to prioritize your retirement savings now. You can reap the rewards of investing while you are young.
Next, think about your short-term goals. Are you focused on saving for a downpayment on a home within the next few years? Do you plan to upgrade your ride to a brand-new car soon? Is an expensive trip the next stop on your bucket list?
The best part is that there is no right or wrong type of financial goal. You simply need to be honest with yourself about these goals.
Make a plan to become a financially responsible adult
Once you have a better understanding of where you stand financially, it is time to move forward. Take a look at your goals and set up a timeline for when you want to reach them. It’s okay to have an aggressive plan but remember that good things often take time.
Tackle your financial game plan one step at a time. Don’t let yourself get overwhelmed. You can dramatically improve your financial picture by following a simple plan. The focus here is to become financially and fiscally responsible!
1. Stick to a budget
As you start to take your finances seriously, it is time to lock down your budget. Are you spending every penny you bring in? Do you know how much you are spending each month? It’s important to get a handle on these numbers.
One way to do this is by tracking your spending for a few months. Find out how much you are spending in each category. You might be in for a surprise. The regular meals out can add up very quickly. After you have an idea of what you spend each month, it is time to set up your new budget.
You can make a budget with specific allocations set up for each month based on your spending goals. It might include strict categories such as food, gas, toiletries, and more. However, this can feel restrictive to many people. It is effective if you are a master at self-discipline, but unfortunately, I’m lacking that department.
My budgeting strategy is a reverse budget. Instead of deciding how much I will spend in each category, I decide how much I will save upfront.
For example, you may decide to save 25% of your income. If you make $50,000 a year, then you will set aside $12,500 each year or $1,041 monthly. You’ll be free to spend the rest of your income without worrying about hitting your savings goals.
Personally, I find the second strategy more effective because I am less likely to overspend. However, the method you choose will vary based on your personal strengths.
Remember, living on a budget is not a bad thing. In fact, it can be freeing. You no longer have to worry about whether or not you can afford to treat yourself because your budget will let you know. Sticking to a budget can help you to know exactly how much you can spend in order to meet your savings goals. Find a budgeting method that works for you!
2. Build an emergency fund
After you get your budget under control, the next step is to build an emergency fund.
Life happens. If you haven’t already run into a major financial emergency, then you likely will at some point. Emergencies can come in many forms. A major car repair, an unexpected medical expense, or a job loss can all lead to serious financial headaches.
Building an emergency fund can help to alleviate the financial stress of an unexpected situation. In most emergencies, you would rather focus on the problem at hand instead of wondering how you are going to pay for it. With 3 to 6 months of expenses on hand, you’ll be better prepared to tackle whatever life throws your way.
3. Pay off your debt
Debt is a burden. There is no other way to put it. Whether you have student loans or mounting credit card debt, you’ll want to act on this fast.
Not only is a debt payment a drain on your monthly balance sheet, but it is also a dampener on your financial future. Imagine if you could save a few hundred dollars each month instead of throwing it at a student loan. Over time, those monthly savings will lead to a healthy nest egg. If you have debt, then make it a priority to eliminate it. Learn more about debt repayment strategies and how to get started.
Look to the future
Part of learning how to adult is to look past today. You’ll need to plan your financial goals into the future. One way to set up a great financial future is to take charge of your finances today. Here are a few more ways you can start to set up a bright financial future.
1. Build and maintain good credit
A credit score is a three-digit number that can have a big impact on your life. With a high credit score, you’ll have access to better loan terms for future large purchases.
For example, if you plan to buy a home one day, then you’ll need a good credit score to lock down the best rate. Borrowers with low credit scores are less likely to be approved at all. Even if they are approved, they will pay a premium for that privilege.
You can potentially save thousands of dollars on big purchases, like your future home, by improving your credit score. Take action today, your future self will thank you!
2. Start investing
Although you have likely heard this advice one hundred and one times, it bears repeating. Investing your money while you are young is absolutely critical.
When you start to invest your money at a young age, it has more time to grow. That growth can lead to an impressive investment portfolio. Even if you only have a little bit of money left over each month to invest, make that contribution.
You have a few different options when it comes to investing. A good place to start is checking to see if your employer offers a retirement account or a matching contribution. If there is a match, then make sure to contribute at least that amount. Match money is basically an immediate 100% return on your investment which is unbeatable.
If you aren’t sure where to get started, then check out our course on stock market investing.
3. Think about insurance
Until this point, you’ve likely only paid for healthcare insurance and car insurance. As you test the waters of adulthood, it is time to rethink your insurance needs.
If you have any dependents, then you need to think about life insurance. Otherwise, they could be left in a bad spot if something happens to you.
If you are renting your home, then you should consider renters insurance. You have things worth protecting like your laptop or a nice TV. In the event anything from your apartment got stolen, your landlord is not going to help you cover that expense.
Even if you feel that you have nothing worth insuring, renters insurance can protect you from liabilities. Let’s say you accidentally cause some major damage to your rented digs, the landlord will expect you to pay for that. Renters insurance can save you from a potential legal headache if the unexpected strikes.
Another form of insurance that most people overlook is long-term disability insurance. In the event that you are unable to work due to a disability, your income would be replaced by this insurance. You never know what life holds. Long-term disability insurance can lead to peace of mind that is worthwhile.
Finally, if you have a pet then you need to consider pet insurance. Our furry friends are known for getting themselves into trouble. For example, my friend’s dog recently rummaged through the trash can for a tasty corn on the cob. That story ends with a trip to the vet and an outrageously expensive surgery. Don’t let that unexpected expense blow your savings goals for the year, get insurance instead!
4. Focus on your career
Excelling at your career is one way to boost your income. That money can be thrown to propel you to your financial goals faster. Starting from the bottom of the ladder at work can be frustrating. You know that you have talent, but you’ll need to put in long hours to reap any rewards. If your career is important to you, then make it a point to stand out from the competition.
You may want to consider investing in your career through continuing education courses. If graduate school is in your future, then check out the opportunities that your organization offers. Many large companies offer to pay for your higher education if you meet certain work goals.
5. Invest in yourself
Investing your money into long-term investments is not enough. You should also invest in yourself. Maybe you need to boost your personal finance knowledge through one of our many courses. Perhaps a graduate degree might be the best step to increase your earning potential. Do you have a business dream that you have wanted to make a reality?
Make it happen through investments of energy and money! Although there are many ways to invest in yourself, choose a path that will bring you the most happiness.
The bottom line
Financial adulting does not have to be difficult. You will need to make an effort to go through the steps. That effort will translate into long-term financial well being. If you want to wake up in a better place financially in 6 months, then you need to take action today.