As you start your adult life, you’ll have plenty to think about – and managing your finances might not be top of the list.
It also might not be the most interesting thing on your agenda, but that doesn’t mean it’s not important.
Starting off with the right habits can give you a financial head start for the years ahead, whether that’s knowing how to manage a credit card properly or understanding basic terminology.
Here we run through a few top tips to help you manage your finances as a young adult.
- Tracking your spending
- A rainy-day fund
- Prioritising your debts
- Managing a credit card
- Your credit score
- Financial literacy
- Planning for the future
Budgeting is one of the simplest ways to stay in control of your money – but it’s also one of the most effective.
The concept is straightforward. It involves working out what you’ve got coming in and what’s going out and making sure that you can afford all your commitments.
It also helps you pinpoint where you might be wasting money, where you could save money, and plays an important role in planning for the future.
There are a number of important points to bear in mind when you draw up a budget:
Be honest when writing down what you actually spend. This will allow you to work out where you can make some savings – perhaps by cancelling unused subscriptions or negotiating a cheaper mobile or broadband contract.
Try to include some savings goals if you can. This can be tough, especially if you start your working life on a low income, so making sure you can cover your outgoings should be your priority before committing to a savings goal.
If you are able to put some of your disposable income towards savings, many people subscribe to the 50:30:20 approach. This sees 50% of your monthly income spent on bills, groceries, and other essentials, 30% used for luxuries and treats, and the rest is put into a savings account. The good thing about the percentage strategy is that as your earnings increase, so should the amount you save.
This is something that is closely linked to budgeting. Once you’ve set yourself a budget, try to keep an eye on where you’re spending your money.
If you veer from your budget every once in a while, don’t beat yourself up about it – it’s easily done. But it’s important not to lose all of your financial discipline.
You might find it helpful to use an app or a bank account that allows you to keep track of your spending, with each transaction put into a particular category. You can then quickly and easily see where your money is being spent, and where you might be able to make some savings.
One easy way to save on your monthly outgoings is to look for cheaper tariffs on websites like Money Saving Expert. You may find that you can switch to a less expensive broadband contract or get a better deal on your TV subscription.
After you’ve got your budget pinned down, you can start to put some cash aside for unexpected emergencies.
The idea of an “emergency fund” might seem extreme, but it’s a way of making sure you’ve got some money readily available for an unplanned expense without falling into debt.
Once you have planned your budget, you may find you have more disposable income available than you thought, which means you can save more. Keeping three to six months’ salary in an easily accessible savings account should be your goal.
There are also some financial insurance products that can provide a safety net. For example, purchasing income protection insurance can give you the peace of mind that your bills will be covered if you’re unable to work due to illness or injury. As you get older, you should also consider life insurance to support any financial dependants if you were to die prematurely. Your employer may also provide some benefits, so it’s best to check what these are before purchasing any yourself.
Saving is an important part of managing your finances but, having said that sometimes it is more beneficial to use your spare cash to clear any debts. As generally, the interest you pay for your borrowing will almost certainly be more than the interest you’ll receive from any savings.
You should be keeping up with your minimum monthly repayments, but if you can afford overpayments (and if the lender allows you to do so), consider making them.
If you have several debts, it is best to prioritise paying off the most expensive first. For example, credit card debt is often more expensive than a bank loan, so it would make sense to pay off the credit card first.
It’s also wise to shop around and see what your options are – for example, you may be able to move high-interest credit card debt to a 0% balance transfer credit card. This would allow you to pay off the debt quicker by paying down the amount you have transferred, rather than continuing to accrue interest. Be careful, though – your credit report could be negatively impacted by applying for numerous financial products.
Used sensibly, a credit card is a very handy tool.
If you get a good introductory purchase offer, you can spread the cost of an expensive purchase over a long period – perhaps as much as three years (although make sure you honour your minimum monthly repayments). Credit cards also provide you with additional purchase protection on any item or service you buy with the card that costs £100 or more. Many also give you cashback and other helpful extras.
But it’s important to use them carefully. It’s crucial that you understand that a credit card is “buy now, pay tomorrow” and not “buy now, pay never”.
Make sure you don’t grow your credit card balance to the extent that you can’t afford your monthly repayments – and remember that if you haven’t cleared your balance by the end of any introductory period, you’ll be stung with high-interest charges.
Your credit score will play an important part in the amount lenders will allow you to borrow for things like a mortgage, or finance for a new car.
If you have a low credit score, potential lenders might not want to do business with you – or they’ll charge you more for doing so.
As a young adult, it’s common to have a low credit score as you haven’t got a borrowing history that lenders can use as a way to predict your future behaviour. The easiest way to get a good credit score is to meet your repayment obligations. It’s also useful to have other financial contracts, like a monthly phone contract (which you keep up with the repayments for), as this signals to a lender that you’re reliable.
There are also some other things you can do. Banks and lenders like to know that their customers are stable and traceable, so making sure you’re on the electoral roll and keeping your address up to date can help. You can also ask the credit reference agencies for a copy of your file, and if you see a mistake on there the credit agency is legally obliged to put it right.
Establishing financial literacy early on in our adult lives can help to foster a healthy relationship with money, and a positive financial wellbeing.
One of the key things anyone should understand is how interest works. Compound interest can work to your advantage when you’re saving. Put simply, when you earn interest on your money and you add that interest to your balance, the following year you’ll be earning interest on the original lump sum and the interest you’ve already earned. This might not seem like a lot in the short term, but it can build up significantly.
On the other hand, don’t assume that a low interest rate means borrowing is cheap. While it might mean you don’t have to pay very much back on a monthly basis, a long-term loan spread over many years can be expensive.
Having a grasp of the key concepts around finance can be as important as anything a financial planner can do for you.
It might sound odd talking about retirement when you’re still so young, but it’s never too early to start thinking about your pension.
The money you pay into a pension today will have the chance to grow over the next few decades.
If you’re employed, you’ll probably be automatically enrolled on a pension scheme, and this means your employer will also make monthly payments into your pension pot. The government also tops up your contributions through a tax break, making a pension a very tax efficient way to save for retirement.
It’s important to start paying into a pension as early as possible, if you leave it late to join a pension scheme you’ll end up having to pay much greater contributions in order to achieve the same benefits. Getting into the habit of saving for later life is a good one to start early, as your working life progresses you can look at other savings vehicles, like ISAs and investment options.
This is not a fully comprehensive guide, but following these tips is a good starting point to managing your finances as you navigate the challenges of adult life.
And it’s never too late to learn, so try to keep abreast of how you manage your finances between now and retirement. For further information on financial planning and financial insurance products, contact our Independent Financial Advisers on 01603 967967.
The value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances. Tax laws can change.