What to do in your 20s to prepare for financial success
“Adultery” is difficult. Budgeting can be more difficult.
As a young adult who is just starting to live independently, it’s easy to make financial decisions, like racking up credit card debt or not saving enough, that come back to haunt you in the long run.
To help young adults who need a crash course in “The Adult”, TODAY is launching a new series, “How to Become an Adult …” where young viewers can get advice on a variety of relevant topics. To kick off the series, Sharon Epperson, CNBC’s senior personal finance correspondent, shared her top tips on budgeting, building credit, and shaping your finances.
Make your first budget
Epperson recommends that anyone who is new to budgeting and doing everything possible to track spending so they can develop healthy financial habits and learn to manage their finances successfully.
1. Stop using cash
Epperson recommends that for at least three months, you stop using cash or mobile payment apps like Venmo and Zelle. Instead, put all your purchases on a debit card or no-charge credit card, so you can record your spending by viewing your statements.
Debit cards ensure that you will only spend the money you have at that time, but a credit card offers better protection against fraud, so figure out what is most important to you and start working on it. use. If you use a credit card, make sure you pay off your balance in full each month to avoid paying interest charges.
2. Make a physical budget
Once you’ve figured out where you’re spending, print an online budget spreadsheet or download one – there are plenty of free options! List all of your expenses as recorded in your debit or credit card history. This will give you an idea of the exact amount you are spending in each category.
3. Make a list of necessary and discretionary expenses
The biggest part of a budget is making sure you have cash for necessities, but it can help give yourself some leeway to indulge yourself if you can afford it.
Necessary expenses include rent, utilities, transportation costs, grocery bills, and other applicable charges such as tuition or telephone bills.
Meanwhile, discretionary spending is the stuff you buy but don’t really need, like going out to eat, taking a cab, buying new clothes, or paying for streaming services.
4. Have a contingency savings plan
We’ve all seen this year how quickly things can escalate – and there doesn’t have to be a global pandemic for your finances to go wrong. Think about the necessary concerns: What if your laptop stops working or your car breaks down?
Try to think about how much a minor emergency like this could cost you and start saving: even a few dollars a month can add up. If you’re just hitting the break-even point each month and have no money to save, try cutting back on some of your discretionary spending to make sure you can save money.
Think carefully about credit cards
Credit is important, but it’s tricky: young adults who have never had their own credit card can quickly gain the upper hand. However, it is important to have one so that you can build up credit, which you will need later in life when making purchases like buying a car or a house.
Epperson said she has “no problem” with credit cards, but there are a few things to keep in mind. There are three advantages of the system, she says:
- Credit cards are a great way to help you build credit
- Credit cards offer better protection against fraud than debit cards
- Many credit cards have rewards programs where you can earn cash on everyday purchases like gas and groceries.
However, there are also three negatives:
- Credit cards can increase your risk of overspending
- Having a monthly balance can add up quickly: Credit cards have high interest rates, potentially more than triple the interest rates on auto loans and mortgages, so a high monthly balance can build up quickly.
- Credit cards can hurt your credit score as easily as they can hurt it: If you miss a payment or use too much of your available credit without making a payment, it can negatively impact your credit score.
What exactly is a credit score?
Credit scores seem everything, but many young adults may not know exactly what they are.
“A credit score is a three-digit number, usually between 300 and 850, that is the result of an analysis of your credit history,” Epperson explained. “This number tells lenders your potential risk and your ability to repay loans.”
Credit scores matter a lot: a good credit score can help you benefit from low rates on credit cards, car loans, and mortgages. Some employers even take them into account, and if you’re a tenant, most landlords will ask to see it. Having a bad credit score can negatively impact all of these things and cost you money in the long run.
“For a lender or potential employer, your credit score and credit report, based on your credit history, indicates whether or not you are responsible and can manage your financial obligations,” Epperson said. “If you’re trying to aim for a good score, you’ll want a number over 700.”
Some tactics can help you increase your credit score: Pay your bills on time and try to use less than 10% of your available credit.
Make saving a habit
Remember this category of savings in your budget? It may seem difficult to put money aside now, but if you get into the habit of doing it early, it will become second nature.
“Make saving a daily, weekly and monthly habit,” Epperson said. “Deposit a certain amount of each paycheck, along with monetary gifts, into an online savings account… You may think your money is right there – and it is. That’s the point. It’s there when you need it. “
While you can start by saving for the occasional emergency expense, you should aim to have six months of spending. It can be a safety net in case you get sick, lose your job, or don’t make money.
Also, don’t forget to save for long-term goals, like a vacation or a new car, or even retirement. However, this emergency fund should be your “immediate savings goal”.
To learn more about “how to grow up” with regards to your finances and get more tips from Sharon Epperson on budgeting and creating credit, click here.