How to start managing your finances? Financial planning for young adults.
Photo by Karolina Grabowska
An exciting part of adulthood is earning your own money. However, it has also been a source of anxiety and problems for many adults. For this reason, young adults should prioritize financial planning and get accustomed to managing their finances. The financial planning benefits you can enjoy mostly come from starting early because of compound interest—where your money slowly grows over time. That means there is no better time to start your financial journey than right now, while you’re still young.
Financial planning can be confusing, especially when you have just started working and building your finances. Below are five ways to manage your finances and secure your future.
Track your spending
You may need help managing your finances if you are not sure where your money is going in the first place. A common adage in the adult world, especially in corporations, is “what gets measured gets managed.” It is especially relevant for financial planning.
Back then, tracking one’s expenses was a tedious process that involved pen and paper. However, one of the financial planning benefits that young adults have now is the abundance of expense-tracking apps available on their smartphones. These easy-to-use apps provide a highly accessible overview of expenses over a period.
Aside from having an expense-tracking app, categorize your expenditures to organize your budget better and identify your priorities. For instance, you can classify mortgage or rent, car maintenance, groceries, life insurance, and utilities like electricity and water as essential expenses.
Meanwhile, you can categorize clothes, concerts, and gym memberships as wants. You can remove these expenses from your budget if they overtake your needs.
Create a budget
The foundation of your financial planning efforts is your budget. It will help you know how to allocate your money to meet your financial goals adequately. A popular budgeting method that many follow is the 50/30/20 rule: allocate 50% of your income for bills, food, transportation, and other essentials, 30% for wants, and 20% for savings.
This budgeting style can help you spend money more confidently. It can also help you cover essential expenses while saving for future goals.
Build your emergency fund
An emergency fund is a cash reserve you build every payday to prepare yourself for unexpected expenses. It ensures financial stability regardless of how much you earn.
Emergencies can happen anytime, disrupting your life and requiring immediate solutions. For example, your laptop’s battery stops working. You will need to urgently send it for repair because your job depends on it. If you do not have an emergency fund, you will have to use the money you saved for a vacation or a gift for someone special.
You will also need an emergency fund if you get into an accident or lose your job. Medical expenses can run high, so you should have enough funds to cover necessary treatments and medications. Moreover, landing a job can take weeks or months. You would need enough funds to purchase necessities until you become employed.
Your emergency fund primarily depends on your income. Financial experts recommend having at least three to six months’ worth of your income set aside for emergencies.
Look for other income sources
Financial experts agree that a single income source is insufficient to attain one’s financial goals. Fortunately, it is much easier now for young adults to more money on the side through freelancing or starting an online business.
The problem with having only one income source is that you may lose all your earnings if something happens to you—either your company goes bankrupt or you suddenly become unemployed.
However, if you have another income source—like working as a freelance blogger or tutor— you will at least have a financial safety net if you lose your primary job.
Become more financially literate
Learning does not have to stop once you finish your studies. One of the biggest reasons adults mismanage their money is that they do not understand how finances work. For this reason, the best investment you can make is in yourself. The easiest way to start doing that is to leverage the internet.
The internet has millions of resources you can access in less than a few seconds, a luxury that past generations only fantasized about. You can check many financial websites, educational content, and online courses about financial literacy.
You can also explore topics that can help you maximize your finances, such as budgeting, borrowing, investing, and even applying for your first credit card.
Lastly, the internet can also connect you to people who have struggled with the same financial problems you may have and learn from them.
Financially secure yourself
There is no better time to start financial planning than when you are still young. The finance world can be confusing, so it is best to start tracking your expenses, create a budget, build your emergency fund, look for more income sources, and continue educating yourself.
Once financial planning becomes an irreplaceable part of your life, achieving your life goals will be much easier.