With age comes responsibility. When you’re in your 20s or 30s, you’re excited by the opportunities life has to offer — and you’re learning that most of it comes with a price tag. In the financial realm, you might be facing the competitive Denver job market paired with significant student loan debt, auto loan payments and perhaps even a first mortgage on the Front Range. Those mounting obligations can make it difficult to obtain financial stability.
Poor money management leads to debt, unnecessary stress and dependency on others. Fortunately, sound money management skills make it easier for you to accomplish your goals. Become familiar with the basics of financial planning now, and your future self will thank you for being responsible.
Tip 1: Identify your financial goals
Setting intentions is an important part of life, particularly when it comes to your finances. Over time, your monetary goals will change, requiring you to adjust. Start by asking yourself the following questions:
- What are my short-term goals (e.g., new car, vacation)?
- What are my intermediate-term goals (e.g., buying a home)?
- What are my long-term goals (e.g., saving for your child’s education with a 529 College Savings Plan, establishing retirement funds)?
- How important is it for me to achieve each goal? What’s fueling my decisions?
- How much will I need to save for each goal? (Try out our financial calculators to help!)
Once you have a clear picture of your goals, you can establish a budget that will help you target them.
Tip 2: Build a budget
A budget, or estimation of your cash flow, helps you stay on track with your finances. To establish a budget, start by identifying your current monthly income and expenses. This is easier than it sounds: Simply add up all of your sources of income. In addition to your paycheck, do you have a side business or do freelance work? Do you receive spousal support from a divorce settlement? Do you get government payments for disability or other assistance? Now, do the same thing with your expenses, making sure to include discretionary expenses (e.g., entertainment, travel, hobbies) as well as fixed expenses (e.g., housing, food, utilities, transportation).
Compare the totals. Are you spending more than you earn? Do you carry a credit card balance over from month to month and pay interest? This means you’ll need to make adjustments to get back on track. The goal is to spend less than you earn and, preferably, allocate some money for savings, even in your younger years. Look at your discretionary expenses to identify where you can scale back your spending. Can you cancel unused subscriptions? Can you reduce transportation costs by bundling errands? It will take time and self-discipline to get your budget where it needs to be, but you’ll develop healthy financial habits along the way that will serve you well into your life.
On the other hand, you may discover you have extra money you can put toward investing for the future. Pay yourself first by adding to your retirement account, investments (such as stocks, bonds or annuities) or emergency fund. Building up these various savings accounts using extra income ensures that you accomplish your financial goals over the long term — and have money ready for unexpected shifts in life. After all, you know they will happen. You just don’t know when!
Tip 3: Establish an emergency cash fund
It’s an unpleasant thought, but a financial crisis could strike when you least expect it. Protect yourself by setting up a cash reserve so you have funds available in the event you’re confronted with an unexpected expense such as a major car repair or medical bills. Otherwise, you may need to use money that you have earmarked for another purpose — such as a down payment on a home — or go into debt.
You may be familiar with advice that you should have three to six months’ worth of living expenses in your cash reserve. In reality, the amount you should save depends on your particular circumstances. Consider factors like job security, health, income and debts owed when deciding how much money should be in your cash reserve.
A good way to accumulate emergency funds is to allocate a percentage of your paycheck each pay period. You can also save part of holiday bonuses, financial gifts or tax refunds to help pad this account. When you reach your goal, don’t stop adding money — the more you have saved, the better off you’ll be.
Review your cash reserve annually and whenever your financial situation changes. Major milestones like a new baby, change in jobs or home ownership will likely require adjustments to your budget and emergency fund savings.
Tip 4: Be careful with credit cards
Credit cards can be useful, but they can also lead you to buy more than you can afford. Before accepting a credit card offer, evaluate it carefully by:
- Read the terms and conditions closely. Do they change after an introductory period?
- Know what the interest rate is and how it is calculated. Review and understand how much you are paying in interest each time you carry a balance over from the previous billing cycle. This amount can be surprising to new credit card users!
- Understand hidden fees such as late-payment charges and over-limit fees. Learn how these are collected and if you’ll be notified when these happen so you can be aware of your financial habits.
- Look for rewards and/or incentive programs that will be most beneficial to you. Some offer discount programs or cash-back rewards that can be applied to your bill or redeemed for cash.
Contact the credit card issuer if you have questions about the language used in an offer. When deciding between two or more credit card offers, evaluate them to determine which will work best for your budget — and your goals!
Bear in mind that your credit card use affects your credit score. Avoid overspending by setting a balance that you’re able to pay off fully each month. That can help you safely build credit while being financially responsible. Take into account that missed payments of any sort may cause your credit score to suffer. In turn, this could make it more difficult and expensive to borrow money later when getting a personal loan, auto loan or mortgage.
Tip 5: Deal with your existing debt
At this stage in your life, you might be dealing with student loan debt and wondering how you can pay it off. Fortunately, there are many repayment plans that make it easier to pay off student loans.
The Colorado Division of Human Resources shares information about suspension of student loan payments due to the pandemic and the Public Service Loan Forgiveness Program (PSLF) for those employed by a government or nonprofit organization. There’s also a program for educators working in low-income school districts or educational service agencies called the Teacher Loan Forgiveness Program.
A CFS* Financial Advisor at Elevations Credit Union can help you discover additional debt management programs and check to see whether you qualify for income-sensitive repayment options or income-based repayment. Even if you’re not eligible, you may be able to refinance or consolidate your loans to make the repayment schedule easier on your budget.
Tip 6: Beware of new borrowing
As you pay off your existing debt, you might find that you need to borrow more (for example, for graduate school or a car). Think carefully before you borrow. Ask yourself the following questions:
- Is this purchase necessary?
- Have I comparison-shopped to make sure I’m getting the best possible deal?
- How much will this loan or line of credit cost over time?
- Can I afford to add another monthly payment to my budget?
- Will the interest rate change if I miss a payment?
- Are my personal finances in good shape at this time, or should I wait to borrow until I’ve paid off existing debt to borrow more?
Break out the pen and paper to list your current debt obligations against your income to help determine if borrowing more is a wise decision at this point in your life. Waiting a few months for another bill to be paid off or a raise at work to kick in could help make borrowing more financially responsible.
Tip 7: Take advantage of technology
There’s an app or a program for everything, and that includes financial basics. Do your homework to find out which ones could be the most helpful to you. Do you need alerts to remind you to pay bills on time? Do you need help organizing your finances? Are you looking for a program that allows you to examine your bank, credit card, investment and loan account activities all at once?
At Elevations Credit Union, we offer a free money management tool within online banking that helps you see where you’re spending your money across accounts at Elevations and other financial institutions, and then compare your spending to your budget.
Many financial apps offer built-in calculators that simplify tasks that feel overwhelming, such as breaking down a monthly budget or figuring out a loan repayment plan. Experiment with what you find, and you’ll most likely develop skills and insight you can use as a starting point for future planning.
Maybe you learn best by listening to a presentation? At Elevations, we offer free virtual seminars and events to help you understand investing, saving and borrowing. Discover which classes are coming up in the weeks ahead on this online calendar.
Although apps and seminars are great ways to get started, consider working with a financial professional for a more personalized strategy. You face budgeting and savings challenges that are unique to your generation, lifestyle and goals. One of the first steps in overcoming these challenges is to understand basic financial concepts.
For more information on where to begin with financial planning, set up a no-obligation appointment with one of our CFS* Financial Advisors at Elevations Credit Union. Please call us at 303-443-4672 x2240 to learn more.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.