A few of my co-workers have mentioned that they are postponing their retirements so they can “help out” their adult children or soon to be adult children. I think it’s great when a parent can lend a helping hand to their children as they transition to being an adult, although teaching them financial skills is often better than just giving them a handout. I also have no problems with a child living at home with their parents as they settle into adulthood, as long as they use that time to improve their financial circumstances by saving and investing their money. But by taking care of every aspect of a child’s financial life, he or she will never learn these important life skills. Here are a few things that one needs to learn financially as they become adults:
Many people entering adulthood already have credit card debt along with student loan debt. You may think that this is the norm, and it may well be, but don’t treat it as such. Treat it as an emergency! Having high interest credit card debt will set you back financially. If you have credit card debt which was not accrued paying for life essentials like food and shelter or getting to and from work, immediately cease spending on non-essentials until you have paid off that debt. Contrary to what some may say, credit cards are not inherently evil. A credit card is only a tool. If you pay your balance off every month and having a card does not tempt you to spend more than you usually would, it can be a great tool. (If you cannot handle the responsibility of a credit card then I’d definitely recommend using a debit card/cash only) Many smart users of credit cards earn lots of points which can be redeemed for travel or cash.
Another important aspect of having a credit card and using it responsibly is that it builds your credit score. Why is a great credit score important? You want to buy a house? You get the best interest rates with a high credit score. Same goes for financing a car. You have student loan debt like many this generation do? You better have an excellent credit score if you want to refinance your student loan to a lower rate. You will only qualify for credit cards with the best bonuses if you have a high credit score. Many employers will also check a prospective employee’s credit score.
Budget or Anti-Budget
So you’re an adult now and you’ve got bills to pay. You’ve got to make sure that you have enough money to cover your expenses. If your expenses exceed your income, then you’ve got a problem. Making a budget probably isn’t much fun and many people scoff at it. However, with many online budgeting sites, like Personal Capitaland Mint, it makes budgeting easy to do. No need to break out your excel sheets and list out all your expenses. I will be honest though, I don’t really budget, but instead I have an “anti-budget,” which is a term coined by Paula Pant who blogs at Afford Anything. I list out my expenses and figure out how much I should be able to save. I make sure I save that amount each month and don’t stress about my spending. Whether you decide to budget or use an “anti-budget” will be determined by your personality.
Live below your means
I remember many of my friends who graduated from college and immediately went on a spending spree. If you have a full-time steady job, you probably have more discretionary income than at any point in your life and it’s tempting to inflate your lifestyle. However, it’s in your best interest to continue living like a college student. Buying a new car, expensive outfits or even buying a house does not make you an adult! Like I said above, if your expenses exceed your income, you’ve got a problem. You’re young and saving for the future may be the furthest thing from your mind, but this is the best time to start saving and investing. The magic of compounding works if you give it time, which is why it is important to start early.
I was talking to a friend, who is in her 30’s about investing, and she said that her mom handles that for her! And, no, her mother is not an investment advisor. Maybe you don’t have an interest in investing, but it’s in your best interest to learn about it. No one will care more about your money than you do, plus it is something that is important for your future financial health, so you might as well learn about it now. How do you expect to save enough to retire if you don’t have a basic understanding of investing? Living below your means and saving is important, but it is not enough! You want to make your money work for you. Stuffing it underneath your mattress won’t earn you anything. Neither will putting all of it in a savings account earning less than 1%. Spend a few hours learning about investing by reading the Bogleheads website or JL Collins’ stock investing series.
Quick Tip: When it comes to paying bills and investing/saving, make it automatic. It makes life easier. When it comes to bills, you won’t worry about late payments. As to investing and saving, it’s a great way to pay yourself first so you avoid the temptation of spending it. It is also a great way to get into the habit of saving and investing. However, make sure to review your statements to make sure everything is correct.
Wait, I thought we were only talking about finances? Cooking is an important life skill, and it can also save you a lot of money. Cooking your own food at home is not only more affordable, but it is healthier. Cooking is not rocket science, if I can do it, pretty much anyone can too.
Just because you’re out of college, doesn’t mean you should stop learning. Learning life skills is important, but so is learning skills that will help you advance in your career. Learning new skills is very convenient as you can do it online using Coursera or Udemy. For certain courses, you may be able to receive a certification as well.
You’re already working a full-time job, who wants another job? Maybe you want to earn some extra cash to build up your savings or pay off debt. Employees are expendable these days so it’s a good idea to have another source of income. Also, having a side hustle might feed your entrepreneurial spirit or passion and possibly replace your full-time income. Having a side job is a lot more flexible nowadays and often will not require you to take a job with set hours. Here’s a list from The College Investor of 50 ways to make a side income. You can also check out a few more ideas from David Carlson who runs the blog Young Adult Money as well as his book Hustle Away Debt: Eliminate Your Debt by Making More Money.
What other financial skills should young adults learn as they transition into adulthood?