Do you have a resolution to get your finances together in 2019? A lot of people in their 20s are dealing with large amounts of student loan and credit card debt and living paycheck to paycheck, dreaming of days when they can begin to use their money to reach their financial goals. While it’s easy to that think financial planning at this stage in your life is pointless, the truth is there are some basic strategies you can implement, regardless of how much debt you have or how much income you’re earning.
Step 1: Create a budget
The first step towards saving is to create a realistic budget for yourself. Even as a young adult who may not be making that much money yet, budget is capital. We get it, in your 20’s you want to hang out friends and have a good time, all of which you can do on a budget. Getting a system in place that works for you. We’ll include a FREE monthly budget printable at the end of this post.
The basic budget formula for after-tax income is:
50% for fixed expenses, such as housing (25% or less for housing expenses), basic food, insurance premiums, etc.
20% for financial goals. This would include extra debt payments, your cash cushion, retirement, etc.
30% for variable expenses, such as dining out, entertainment, travel, etc.
Step 2: Build a cash cushion for rainy days
The goal of a cash cushion is to have three to nine months of your fixed expenses in a savings account to pay for life’s unexpected incidents. Life always throws curveballs—your car breaks down, your computer crashes or you receive an unexpected medical bill—and having money in the bank to cover those expenses will help you maintain your financial peace of mind. If your fixed expenses are $2,000 per month, you should aim to build a cash cushion of anywhere between $6,000-$12,000, depending on your comfort level, job security, etc. That sounds like a lot, I know. But remember, just start with what you have with where you are. Build your cash cushion over a few years. Again, even if it’s $10 a week, that’s still one step in the right direction.
Step 3: Keep your eye on your credit score
Our credit score affects nearly everything in our financial lives. It affects the interest rate on the car loan we apply for, the mortgage loan, the credit cards—even employers and landlords can reference your credit score when reviewing your application. By monitoring your credit score, you can see where you stand and what you can do to improve it if necessary. Use websites like creditkarma.com to view your credit score (not your actual FICO) regularly for free and then pay to see your actual credit score at least annually using annualcreditreport.com.
Step 4: Create a debt reduction plan
The first step is to make a list of all your debts. This is the moment you have to face the music and write down every single thing you owe. It’s a great way to reflective on your challenges with money, saving and spending. Then review your budget to determine how much you can realistically add toward extra debt payments and start with the debt with the highest interest rate while paying the minimums on the rest. Set up auto-pay for your credit cards and begin putting extra money towards debts over time. Even if it’s as small as $25 every two weeks.
Step 5: Focus on building your earning potential
Income is one of the biggest factors in wealth creation over time. After all, if you don’t make money—or don’t make enough money—it is very difficult to save for your financial future. So if you can’t save as much as you would like to due to your income level, focus on ways to increase your earning potential for the long run. There are a lot of ways to make a second or third stream of income. Below are some popular programs people use to make extra income:
- Driving Uber or Lyft
- Delivery groceries for Instacart or Door Dash
- Collecting motorized scooters like Bird or Lime
- Signing up for affiliate links such as Amazon