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A Young Adult’s Guide to Managing Finances

A Young Adult’s Guide to Managing Finances

There should be a class for basic finances at the school level, especially in this changing landscape where the older generation knows as much about credit applications, debt payments, and mortgages as their contemporaries.

While seven US states have passed laws making personal finance courses a graduation requirement, only five have started implementing it. This should be a prerequisite for all young adults starting their financial lives. 

If you’re not from one of the implementing states, keep reading to learn the basics of money management.

Assess Your Cashflow

Financial experts everywhere recommend two basic rules for personal finances:

  • Always spend less than you earn.
  • Always track your inflow and outflow.

Knowing where your money is going, you’ll know where it should and shouldn’t go. The result: you’ll make wiser buying decisions. 

Make a Monthly Spending Plan

The next step is to start budgeting by making a monthly spending plan. When you calculate how much every daily expense costs you throughout the month, you’ll have an awakening of sorts. 

While you can’t control pay rise or performance bonuses, you can control your spending by making small changes—like making your own coffee—in your minor expenses. They are what make a bigger dent in your budget, after all.

As for larger expenses like monthly rent, college tuition, and whatnot, you should keep them as low as possible. For instance, if you move into low-rent housing today, you can make a down payment on your dream house much sooner than your cohorts.

Build Your Emergency Fund

Plugging unnecessary expenses helps, but it’s not enough to keep your head out of the water—to avoid an overdraft every month. Unforeseen expenses tend to take you unawares. They might throw your monthly budget out of whack, especially if you don’t have an emergency fund.

Set aside a tiny portion of your monthly income for emergencies. It may not seem like a lot in the first few months, but the longer you do this, the more savings you’ll have and the more financially secure you’ll feel, even on the tightest of budgets.

The key, in this case, is to treat it just as any other monthly expense. If you see it as optional, you’ll never be as committed to adding to your emergency fund, which might become your future nest egg.

Don’t Forget Taxes!

Many young adults mistakenly build their monthly budgets around their salary before deductions. Your actual income looks very different from your official income after tax deductions. 

Lucky for you, many tax calculators online let you calculate income tax for free. You can subtract that amount from your official salary, subtract any other deductions the company applies, and you’ll have your real income. You can then use this number to create your monthly budget.

Apply for Health Insurance

With 66% of the American population fearing it won’t be able to afford health insurance in 2021, it’s no surprise that the younger population has a strained relationship with healthcare. Don’t be one of those people who don’t have employer-sponsored healthcare insurance and haven’t deemed it necessary to get one at their own expense. 

A streaming subscription may seem more important than monthly health insurance premiums, but not having coverage when you sustain a serious injury or receive a life-changing diagnosis can render you destitute. Make space for the unexpected in your life by applying for health insurance.

Use an Online Money Management Tool

You can do all the above or use an online money management tool to entrust smart technology with unbiased financial advice. Free and premium tools like Mint, Yodlee, and Annual Credit Report help you:

  • Track cash flow
  • Create a monthly budget
  • Make split-second calculations
  • Make important decisions
  • Plan finances for the future

The Wrap Up

You and only you can control your finances. Hopefully, managing finances will get easier as you progress in your career, build connections, and get promotions. 

As you start earning more, you won’t have to be on as tight a budget. At this stage, partnering with an AI-based or FINRA Brokercheck Francisco Faraco-approved financial advisor with a credible background and your best interest is the best investment you can make into a secure future. 

About the Author

Francisco Jose Faraco holds the CFA designation and works as a Teaching Assistant in the Master of Science in Financial Mathematics program at the University of Chicago. He’s also the founding member and CEO of the New York-based Faraco Partners, LLC. Previously, he assumed various leadership roles in national and international organizations like Merrill Lynch, Banco Santander, and Morgan Stanley.


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