It’s scary living paycheck to paycheck. It’s exhausting working to pay the bills and having no fun money left over at the end of the month. It isn’t comforting to think that you may have to work until you’re 80 because you haven’t started saving for retirement.
Many young adults have no idea how to improve their financial situation and build future wealth. And if you’re struggling to keep your finances under control, don’t worry — you’re not the only one.
Here’s the good news: there are a few simple things you can do right now to start improving your cash flow situation.
Ready to learn how? Here are the seven most important financial tips for young adults.
1. Analyze Your Spending Habits
The first step to improving your financial situation is to analyze your spending habits.
Does all your extra cash go to eating out? Shopping? Traveling?
Before you can fix your situation, you need to understand it — and that means you need to know where your money goes.
Identify where you spend your money. Then, look for areas where you can cut back. The more you can cut back, the more you can save (which is key to managing your money).
Analyzing spending habits isn’t just something for young people. This is something you can and should do throughout your entire life.
As your priorities, responsibilities, and salaries change, you’ll need to reanalyze your spending habits. That way you'll always know where you’re overspending and where you can save.
2. Stick to a Budget
Tired of spending more than you make?
Overspending is easy to do, but it’s time to quit that habit and create a budget.
To create a budget, total up what you spend every month on rent, utilities, car insurance, student loan payments, food, and other expenses. Your total monthly costs need to be less than your total monthly take-home pay (after taxes). If they’re not, you need to identify places where you can spend less.
Creating a budget often means eliminating certain things. You may need to get a roommate to supplement your rent. You may need to cancel (or cut back on) your cable and streaming services.
It may be time to start brewing your morning coffee at home rather than spending $5 a day at that coffee shop with the mermaid logo.
3. Start Saving Now
Whether you have a full-time salary, a side hustle, or a part-time gig, you need to save money every single week.
Financial experts suggest that you save 20% of your take-home pay, but that’s not always possible.
Make it a point to save what you can. 20% is ideal, but even 10% is an excellent place to start.
If you are eligible to contribute to a 401k plan or some other retirement savings account, start doing so NOW. The sooner you begin planning for retirement, the better off you’ll be.
4. Create an Emergency Fund
It doesn’t matter if you’re a barista, a marketing director, or a brain surgeon, there’s no job or career on earth that’s a lifelong guarantee. You can have all the degrees in the world, but if your company goes out of business, you could find yourself temporarily out of a job.
Aside from your savings, you need to have an emergency fund.
Curtail your spending habits as best you can and save up at least three months’ expenses. That way, if you do lose your job, you’ll be able to stay afloat until you find a new one.
If you can build your emergency fund to sustain you for six months or a year, even better!
And if you’re lucky enough never to have to use it, you’ll have that much more money saved up to spend in retirement.
5. Use Your Savings to Make Even More Money
Saving money is key to building financial strength. But if you want to build wealth, you’ll need to invest that money in a way that generates even more income.
Don’t stash your savings in a tin can in your closet or tuck it under the bed. Instead, put your savings into an account with compound interest. That way, you make interest on your interest.
When your savings is small, do this with a low-interest compound savings account. When you have more money to play with, you can start putting some of your savings into other investments, such as stocks, index funds, and bonds.
6. Build Your Credit
If you’re an over-spender, credit cards can be dangerous. But you can’t avoid them altogether — you need them to build your credit!
You’ll need a good credit score when it comes time to take out a mortgage or get approved for a new car lease. And an easy way to get a good credit score is to have credit cards that you carry a minimum (or zero) balance on.
When you do use credit cards, try to keep a $0 balance. Only charge what you can afford to pay back at the end of the month. Otherwise, the items you charge will end up costing you way more by the time you finish paying them off with interest.
Building your credit also means paying your bills and loans on time. If you have to skip a dinner and drinks night with your friends every once in a while, so be it. To be financially sound, you’ll need to pay your bills on time every single month.
7. Live Within Your Means
When it comes to money, there’s one main rule to live by:
If you can’t afford it, don’t buy it!
The car you want to drive, the lavish vacation you’re dying to take, that designer handbag you think you need … There will be things you’ll have to learn to live without.
Resist the temptation to splurge on things that you can’t afford. In five years, you’ll be better off having that money in the bank rather than having a car with 50k miles or a handbag that’s no longer in style.
When you’re young, saving money can seem like an impossible thing. You have tons of expenses. There are so many things you want and so many things that you deserve. But the best gift you can give yourself is the gift of financial independence and security.
Analyze your spending. Create a budget. Save what you can and invest when you can. Build your credit and, above all else, learn to live within your means.
You may never make it into the 1%, but if you put these practices in place when you’re young, you might just find yourself in the top ten.
Ryan Sundling is a Group Marketing Manager at Cardinal Group Management. He has over ten years of experience in the conventional housing industry and works with The Oliver on a daily basis to help them with their marketing efforts.