I talk with many young adults and have become familiar with a term frequently used – “adulting." It is a verb coined to describe the actions of being an adult in the real world. Those of us who have been there for a while understand that it can be scary. There are lots of challenges and responsibilities that come with being on your own, particularly when it comes to managing your finances.
Kaitlyn Kiernan, writing in The Alert Investor, captures the concept of “adulting” and why money management might be so challenging to young people today. Here is a summary:
"If you are just getting started on your journey as an adult (or even if you are a few years in and need to level-set), here are five things I wish I had known about managing my finances when I first embarked in the real world."
1. Understand Compound Interest
The most important thing to understand as an adult is something called compound interest. Compound interest can either be your best friend when it is working in your favor (think retirement savings accounts) or your worst enemy if it is working against you (think credit card debt).
You either can earn interest in savings accounts or on other investments, or you can owe interest on any sort of debt you carry. That interest becomes compound interest when it is added to your balance and included in future interest calculations.
An easy example of compound interest is your savings account at a bank that earns interest. Say you have $1,000 in a savings account earning 5 percent interest annually (hard to find these days, we know, although rates have begun to rise again). In month one, you would earn $4.17 in interest on the $1,000 in the account. But in month two, you would earn interest on $1,004.17, so the next month you would receive $4.18 in interest. That may not seem like a big difference, but over time, it can really add up.
2. Take Inventory—and Set Goals
What are you making (after taxes)? What are your expenses? Is there anything unnecessary in those expenses? How do your costs compare to how much money you have coming in every month? You need to ask yourself these questions—and more—to get started on the road to managing your money like an adult.
Use this information to set up a realistic spending plan. But don't stop there. Set goals. Setting goals helps you to stay focused on saving and gives meaning to the dollars you put away (or to the luxuries you skip) to make your goal a reality.
3. Set Up Your Retirement Account
When you start your first full-time job, there are plenty of outlays vying for a piece of your new paycheck. You might have student loans to pay, an emergency fund to save for and new furniture to buy for your new apartment. You might think it's impossible, or unnecessary, to set some money aside for retirement now. Let's be honest, it's decades away, and you are just getting started.
But that's no excuse. You need those decades to build up a retirement income you can actually live on, and the earlier you start, the better off you will be. Take advantage of your employer’s 401(k) program, particularly if it comes with a match.
4. Don't Ignore An Emergency Fund
There will always be significant, unexpected expenses in life, whether it is a medical bill, a flat tire, a family emergency that requires a flight home or something else unexpected. An emergency fund prepares you for that inevitability and allows you to tackle the challenge without resorting to your credit card (see above about how quickly compound interest can come to hurt with credit card debt).
Ideally, an emergency fund should be big enough to cover three to six months' worth of expenses, but you can start small—even a few hundred dollars can help give you a buffer as you get started.
5. Consider Other Investments
Let's get one thing straight: You don't need to make a lot of money to invest. It's a common misconception that investing is for rich people, but it isn't—it's for everyone. In fact, investing early could help you become one of those rich people for whom you thought investing was reserved!
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.