You’re young, you’ve got plenty of time to save money, right? Many young adults think of savings and financial responsibility as goals to put off until later in life. In reality, the pandemic has affected credit in unprecedented ways.
The economic damage done by COVID-19 is not finished and likely won’t be for years. If you are a young adult, the time to plan for financial success is today, not tomorrow, not next year. This article will give you five simple yet effective tips for setting up a strong financial foundation.
1. Develop Responsible Financial Habits Early
Did your parents teach you responsible habits at an early age? If not, it’s never too late to learn on your own. Start as a high school student. If you know you are going to college, start looking for scholarships for high school students no later than the summer before your senior year. The competition for scholarships is fierce. The earlier you start applying, the better your chances of getting some of the awards.
2. Create a Repayment Plan
Are you in debt? Many Americans are. Most of our debt comes from credit cards. With an average of nearly 18% interest, it’s no wonder many people cannot get out from under the crippling effects of credit card debt. If you have $7000 in credit card debt, paying just the minimum payment each month will take you about 21 years to pay off that card!
Many financial experts advocate two systems to pay credit cards. Neither system involves merely paying off the minimums, either. The first method is called the “Avalanche Method.”
To do this, list your credit cards in order from the highest interest rate down to the lowest. You put as much money as you possibly can on the card with the highest interest rate each month. You’ll pay this card off the fastest. The other cards will be paid just the minimum amounts. Once the card with the highest interest rate is paid off, move to the next-highest, paying as much as you possibly can for that card each month. Repeat until you whittle down each card.
The second method is called the “Snowball Method.” With this method, you tackle the card with the smallest amounts first, paying as much as you can each month. You pay just the minimum amounts on the other cards. Once the card with the smallest amount is paid off, you move to the next card in line. The idea is you’ll create momentum by paying off cards and you’ll feel motivated to keep going.
3. Time to Learn Self-Control
Perhaps the biggest lesson in smart finances is learning to control your spending. This means asking yourself, ‘do I really need that?’ You can also ask yourself, ‘will this make a difference in my life one year from today?’
The idea is to simply curb impulse shopping. It’s far too easy to fritter away money by buying drinks with your friends, going out to eat, or engaging in ‘retail therapy’ when you’re feeling down.
If you use a credit card because of the rewards or points, only use the card when you know you can pay it off each month in full. To find out what you can afford to pay off each month, you will need to create a budget.
4. Start a Budget
When you establish a budget, you can figure out your spending limits each month. There is good news, though. Budgeting is not nearly as complicated as some people make it sound.
Start by listing all of your expenses. List your expenses that are the same amount each month. These include car payments, rent, your cell phone bill, and so on.
Then list the expenses that are not the same amount of money each month. This may include food, heating and electric bills, and gas money for your car if you own one.
For the expenses that shift in dollar amounts each month, add up the amounts you spent on each for the last six months. Divide the total by six and you have an average amount you plan for.
Look at how much money you have coming in each month. This could include jobs, graduate school scholarships, and any other sources of income.
Do you come up short of being able to afford everything without using credit cards or falling behind in payments? If so, it’s time to look at cutting expenses.
Are you spending a lot on clothes? Do you go out to eat multiple times a month? Part of setting a budget means taking a good long hard look at everything. Save every receipt for every dollar you spend. If you don’t get a receipt, write down what you spend.
Many people have “blind spots” for some of their spending. They don’t think about their daily trip to Starbucks. Seemingly minor daily expenses turn into a lot over a month.
5. Start Smart Shopping
There are creative ways to save money when you shop. One simple method is free and automatic. Many companies offer “shopping extensions,” like the one offered by Capital One Shopping and Honey.
These extensions are downloaded to your computer. They work in the background to help you save money while you shop. When you get to the shopping cart when completing a purchase, these extensions search out any discounts or coupon codes and automatically enter them into your shopping cart. It’s an easy way to save money that takes no effort on your part.
Summing Up
You are never too young to learn sound financial habits. Interest rates are rising, making it harder than ever to get out from under debt. The techniques in this article can give you a good foundation to build on, but if you need more help, seek out a financial planning expert.
