When you are a child, someone usually takes care of your finances for you, even if you hate that! That someone is most likely to be mom or dad or a guardian, but whomever it is, they try to make sure you have everything you need until that day comes when you fly away from the nest – so to speak. The hope is, of course, that you don’t try to fly and then crash and burn as you hit the ground, but even with help, you might. That’s the reason that Adulting 101 is so important. It’s time to learn personal finances for yourself now that you are a grown-up (no matter how grown up you may already be)!
Now That You’re on Your Own, What Will You Need?
There is a long list of basics that everyone needs in order to be financially secure, or at least try to be. They’re not new and they’re not complicated, but it seems that so many of us fail to “get it”, that is the real importance of these things. It’s that safety net you’ll need when you do jump from the nest and will continue to need for your entire life.
Adulting 101: 9 Steps of Personal Finances for Grown-Ups
Now, that I have warned you, let’s get into it here:
1. You need a budget
A budget is an estimate of your incoming revenue and outgoing expenses over a specified future time period and is usually recorded and re-evaluated regularly. To make it simple, it’s what money you get, say every month, like your salary, and what your expenses are like for food, rent, car payments, etc. Budgets can be made for a person, a group of people, a business, a government, or just about anything else that makes and spends money.
How you keep the records is totally your call, but you need to do it in some way and look at it regularly to make adjustments and know what is going on with your finances.
Why? It’s to manage your monthly expenses and to prepare for life’s unpredictable events. And if you want to be able to afford big-ticket items without going into debt, budgeting is important.
Keeping track of how much you earn and spend doesn’t have to be drudgery, doesn’t require you to be good at math, and doesn’t mean you can’t buy the things you want. It just means that you’ll know where your money comes from and, more importantly, where it goes. It gives you greater control over your finances.
2. Open checking and savings accounts
Bank accounts are the easy way to have safety and access to your money. You don’t even need to go to the bank in the 21st century and can do all your business online or with an ATM/debit card when you need to.
These days, getting “free” accounts is fairly simple too, so it may never even cost you a cent to have protection and convenience like that and that’s what grown-ups do whenever they can (at least the smart ones do!).
3. Establish your emergency fund
An emergency fund refers to money stashed away for a rainy day (and yes, it should be in a savings account of its own so that you can use that money in times of financial distress). The purpose is to help create a safety net that can be used to meet unanticipated expenses, such as an illness, job loss, or major home repairs. If you lost your job during the pandemic, you know what an emergency fund would have meant.
It’s usually quantified as how many months’ worth of your expenses it will cover. Typical advice is to have three to six months’ worth of expenses, but in times of economic stress, such as during a pandemic or recession, it might be wise to have more.
An emergency fund is usually cash and helps you avoid borrowing and paying high interest debt options, such as credit cards or unsecured loans.
4. Save for retirement
If you’re just starting out in your career, you’re probably not putting too much thought into retirement. But even though it is decades away, it’s never too early to start saving and planning.
My number one rule of thumb and words to live by is this: Begin saving for your retirement as soon as you get your very first job! Find out if your employer offers a 401(k) retirement savings plan and if so, sign up for it and start contributing. If not, you can always put money away on your own in an IRA.
The reason is simple: Time is your best friend when saving for retirement. Your money, the money you put away from your paycheck, will have decades to grow and geometrically increase the longer it can benefit from the interest on its interest. That’s called compounding and those who do it early retire very comfortably when they do.
Unfortunately, most people make retirement a very back burner issue and that is a big mistake.
5. Get insured: health, life, disability, renters/homeowners, and auto insurance
Accidents and disasters can and do happen. If you aren’t flush with cash to handle them, you could face huge financial struggles and setbacks. Insurance is the way to protect your life, health, your ability to earn an income, and to keep a roof over your head when things go wrong. Simply put, it’s a protection plan for you and your finances.
There are lots of different types of insurance and it’s unlikely you’d need them all when you first go out on your own. If you have loved ones or assets that are worth protecting, you probably need at least a few different types of coverages.
When picking any insurance plan, think about how much value it needs to cover. You also need to know what premium you can afford per month.
In many kinds of insurance like auto insurance, choosing a deductible is another factor in picking a plan. A larger deductible means your monthly premiums will be lower. But it also means it does not start paying you for the costs of what it covers until after you cross that threshold of deductibles.
6. Manage your credit
A good credit score is used for more than just getting a credit card or a loan. Credit scores demonstrate your history of paying your debts to any entity that loans you money.
Three credit agencies monitor your credit and rate you. They are TransUnion, Equifax, and Experian. If you go too far in extending yourself and cannot pay your debts, you can ruin your credit rating and score.
At the same time, general cost of living expenses take a toll on people’s paychecks, and businesses have good reason to insist that you have good credit before providing products or services to you on credit. Even employers run credit checks to see whether you can be trusted with company finances or other assets. If you have a history of not being financially responsible, you may run into problems finding work.
You are entitled by law to a free credit report from each of the major credit bureaus once per year. You can request these reports at AnnualCreditReport.com. There are also several credit monitoring apps and services, some of which are free, that allow you to track your credit throughout the year.
It’s easier to start with responsible action and good credit than it is to fix and improve your credit score after you have had a problem. And if you have already found yourself dealing with high-interest debt, it’s best to make a plan to pay it off as soon as possible.
7. Start investing
In order to build your wealth, you will want to invest your money. Investing allows you to use your money so that it has the potential to earn strong rates of return.
Not everyone invests and that is because they may not have the “extra money” beyond their normal bills and everyday costs of living to actually do it. But if you have the funds and don’t invest, you are missing out on opportunities to increase your financial worth.
There is a warning here though. You have the potential to lose your money in investments. But if you do invest wisely, the potential to gain money is higher than if you never invested at all.
8. File your tax returns
When you earn money, whether it’s from an employer or self-employment, you must pay your taxes…it’s the law. If you are self-employed, you need to file quarterly payments which are actually estimates of what you might owe.
The idea is to pay “your fair share” and not more. That means trying to calculate what you owe accurately and not looking forward to a big refund from overpayment at the tax year end. Learning how to do that right means you get to hold on to more of your money all year long instead of giving the government a free loan of your money which they return to you later.
Filing your tax returns can seem daunting, but you can use one of many apps or software programs that will guide you through the process and help you to file electronically. And if your taxes are particularly complicated, you can always hire an accountant.
9. Plan your estate
Being an adult also means thinking about what might happen to you in the future and not always in a good way. That is why you need to do some estate planning, or planning in case of your death or serious injury or illness.
A living will is a formal, legal, written document that you can put in place to ensure your specific desires are known about the types of medical treatments you want in case you can’t communicate that to anyone. A living will is also used to spell out end-of-life medical care wishes. You can also use it to note your preferences about pain management, organ donation, and more.
A power of attorney (POA) is a legal document that grants authority to a named person to act on your behalf should you be unable to act on your own. The power that a POA grants can be limited in nature or it can be sweeping and broad in the amount of authority it grants. The named POA may be charged with making medical, financial, business-related or property decisions on your behalf.
A combined advance directive (or healthcare directive) is essentially a hybrid of a living will and a durable healthcare power of attorney. Together, they make sure your wishes are documented and that you’ve named an advocate to make decisions for you. Whether you have a living will, a POA, or both, you want to be covered.
Finally, if you have assets to go to your loved ones in case of your death (or if need to appoint a guardian for your minor children), you’ll need a will. A will documents your final wishes.
These legal documents can be drawn up by an attorney, or you can use DIY software/websites to create your own. To ensure they are legal, you will need to follow your state’s laws, such as having witnesses and/or a notary for your signature.
When you are at the time of life when all is new and shiny, opportunities are out there to build life, wealth, and happiness. But not every day is roses and sunshine. That’s what facing adulthood means. Knowing how to prepare for those days that are not all fun and games is the key to your success in life. It’s what makes Adulting 101 important.
You still have family and friends to advise you, but ultimately you have to make the grown-up decisions. Read, talk, seek help, and use the internet too to answer questions.
These days, the advancement into adulthood is still very challenging, but the help to get though the transitions are more easily accessed. Make a promise to yourself, no matter the age you are at, to being a responsible adult as you progress though life.
What’s the most important financial lesson you’ve learned as an adult?