As each new generation becomes increasingly technologically savvy, it is no surprise that they are also getting more involved in other complex spaces. As recent events have shown (e.g., GameStop, Dogecoin, etc.), more and more millennials and Gen Zers are using the stock market to try and make money.
With investing becoming accessible to more people, this means that more financial mistakes are bound to be made. Therefore, it is imperative to put a plan in place. Effectively managing your finances will allow you to get ahead of the mistakes, and it can even save you from getting into financial trouble.
Financial literacy is one of the most vital skills a person can have. Despite this, so many do not know how to manage their finances. This is not the fault of the individual. The education system is flawed in some ways because most schools do not teach financial management. This leads to many people learning about bills, credit, interest, and debt as they are thrust from school and into the world of adulting.
While it can be difficult to look ahead and plan for the future, there are numerous ways managing your finances will benefit you later in life. Developing a money management strategy early is one of the best things you can do for yourself as a young person. It will not only make it so that you understand the bureaucratic and convoluted aspects of money and banking, but it will also give you the power to make the most out of the money that you already have.
Read on to get some tips for how to effectively manage your finances and make the most of your earnings as a young adult.
1. Track Your Expenses
This is an obvious one. Knowing what is going into your account and what’s coming out is essential. You must make sure to consistently check your account statements. This not only allows you to ensure there have not been any fraudulent charges, but it also helps you see what areas you are spending the most in. Once you have an idea for where you were spending the most money throughout the month, you can determine areas where you can cut back on your spending, and perhaps also place that money somewhere more productive.
Tracking your expenses can be made easier if you categorise them by type of expense. You can do this in one of the many apps that exist or even just in a simple spreadsheet. Often, laying out all of your expenses in front of you helps to materialise the money. Because of digital banking, it can be difficult to think of money as a tangible thing—especially since cash is so rarely used nowadays. By categorising your expenses (e.g., takeaways, bills, shopping, etc.), your money will not be such an abstract concept anymore. In fact, you may have the sobering realisation that you are spending far too much on your daily morning coffees (or the equivalent).
Once you have done this, you can make more productive money decisions. For example, if you want to spend less on going out to eat and put that money towards a big-ticket expense, you can calculate the amount of time it will take to do this.
Budgeting is important for young adults because if you are just starting out in your career and living pay cheque to pay cheque, it prevents you from worrying too much about whether you will have enough money to pay your bills. If you create a budgeting plan for yourself, then you already know how much money you can spend each month/week/day (however you want to organise it). Develop a system that not only allows you to pay for everything you need (insurance, food, etc.) but that also leaves some money left over for you to both save and spend between pay periods.
One popular method is the 50/30/20 budget. Using this method, 50% of your income goes towards the necessities: housing, insurance, transportation, groceries, etc. 30% is for wants: eating out, travel, shopping, etc. Lastly, set 20% aside for savings and paying off debt. If you have accrued a significant amount of debt, however, you may need to amend these percentages and increase the percentage for debt.
3. Build Credit
Credit is one of those necessary evils in life. A good rule of thumb is to not spend money that you don’t have. However, with a credit card, this can be challenging. You need credit to buy property and get a loan. Some employers even require you to provide them with a credit report. So, it will benefit you to use your credit card for various purchases. However, before going on a spending spree, it is important to go back and review your expenses and budgeting plan and calculate the amount of money that you can actually afford to put on your credit card.
With a poor credit score, you could be denied a loan or get stuck with high interest rates, which can cost you thousands over your lifetime. This is why it is so important to start early. You should always keep track of how much money you have in your account, and never use a credit card to spend more than that. Staying on top of payments is also necessary. A good standard to hold yourself to is to make regular payments for the minimum amount owed each month.
Once you have a handle on all of this, set a goal for a future big purchase (like a car or a home), keep track of your credit reports, and continue to build your score.
4. Understand Debt (and pay it off—early, if possible)
There is a reason they say that it pays to start early. Interest can be your worst enemy, so if you start paying off your debts early on, this will save you hundreds—if not thousands.
You must be aware of how much you owe, the interest rate, your minimum monthly payment, and the approximate time it will take you to pay it back. You do not want to be stuck paying a debt well into your future that you could have paid off earlier on.
5. Save, Save, Save!
Emergencies happen. Just look at what the COVID-19 pandemic did to working people around the world. So, what you can do is be prepared for these emergencies and save for a rainy day. Unfortunately, most people do not have a rainy-day fund. Studies have shown that the average worker would go into more debt if they needed to take out £1000 in the event of an emergency.
Depending on the amount of income you have and the amount of debt you have already accrued, some experts say to save half and spend half. Of course, this is not always possible, so if you just get into the mindset of saving however much you can each month, this will greatly benefit you in the future. As aforementioned, a good place to start is by placing 20% of your income into savings.
You should set saving goals not only for the big purchases you are saving up for, but also for the sole purpose of increasing the balance in your savings account. Determine how much money you want to have saved by a specific date. This is important because you can make money on compound interest—which brings us to the next point.
6. Make the Most of Compound Interest
Many people just starting out with their savings forget to account for compound interest. Compound interest is interest earned on interest. It applies to both savings and debt, and it can have a huge effect on your money—either for the good or the bad. As your savings balance becomes larger, the interest you earn on that money accelerates. Unfortunately, compound interest will work against you when borrowing money, so being aware of this and planning ahead can make all the difference in saving you time, money, and hassle.
There are formulas which you can use to calculate your compound interest. There are even online calculators you can use. However, you will first need to understand the various factors that determine it. Start with learning the interest rate and your starting principal (the amount of money you begin with), then determine the frequency of compounding (whether that is daily, monthly, or annually). Finally, review the duration for which you foresee yourself paying off a loan or owning an account.
The most important thing you need to remember is to be patient when making money on compound interest. It will take time, but you will see growth—especially if you are aggressive in paying off your debts.
All of these tips encourage changes that are attainable. If you implement these changes into your lifestyle now, your future self will no doubt thank your past self.
Once you know how money works and you have a regimented system for how you manage it, the next step is seeking out an expert in the financial services field to help you make even more out of your savings, investments, and pensions.
If you are interested in speaking with one of our Wealth Managers to devise a plan that suits your needs, contact us today.