Financial Advice for Young Adults

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Financial Advice for Young Adults

The transition to adulthood comes with a number of important milestones. One of the most stressful is financial independence. Once you become a financial contributor to your household, or even move into your own home, it’s time to start getting your financial life in order. One of the most important things you’ll need to do is create a budget.

Why Do I Need a Financial Budget?

A budget is essential because it lets you do a number of things:

  • See how much money is coming in
  • See where your money is going
  • Commit to changing your spending habits

Knowing how much money you have coming in is easy when you are just starting out. As your income diversifies, from things like interest from savings accounts, it will become harder to keep track of. It’s important to know exactly how much money you have coming in so you can know if you are over-spending.

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Seeing where your money is going is critical because you can’t effectively make decisions about your money if you have no idea how much you are spending where. Tracking where your money goes can be as easy as putting your expenses into an excel spreadsheet each month.

The most useful part of having a budget is that it allows you to make changes to your life. Once you know how much money you have coming in and where it goes, you can change it. This allows you to set and accomplish goals. For example, if you want to take a trip to Europe, once you know how much it will cost, you can figure that into your budget.

Let’s say you can save for it in a year by finding another $100 a month in your budget. A great way to do that is to eat out less. It may hurt to stay in eating a grilled cheese when what you really wanted was some tacos from the place down the street, but knowing that you are saving money for a purpose will help ease the pain.

Now that you have a budget, you can start forging the financial life you want. But what should that look like?

What Should My Financial Budget Look Like?

The exact form of a budget will vary, not only person to person but also over the lifetime of a single person. This is because money is usually tight when you are young. You may not be earning much and have student loans to repay. As you get older, your debts go down and your income goes up. As a general rule you can expect your budget to look something like:

  • 50% Necessities – This includes things like rent, which shouldn’t be more than 30% of your total budget, utilities, groceries, etc.
  • 30% Lifestyle – This includes, eating out, hobbies, things that you would be likely be able to stop spending money on in a financial emergency.
  • 20% Savings/Debt Reduction – This includes things like student loan payments and retirement, or even emergency funds.

How Can I Make Changes to My Budget to Achieve My Financial Goals?

Once you’ve written your budget and at least started moving it towards the percentages recommended above, you can start thinking about using your budget as a tool to achieve your financial goals. And this is as simple as committing to that change and then following through. Though that can be more difficult than it sounds. People use a number of different strategies to create follow through. One of the most common ones is sometimes called the all-cash diet.

It’s about what it sounds like. Rather than paying for things directly out of your bank account, you pay cash as much as possible. After you’ve paid all your utilities, rent, etc. you withdraw all the money you’ve budgeted for day-to-day expenses that month, or that two weeks, and that’s all the money you get. Depending on your particular circumstances, it might be easier to divide the money into different envelops, one for each week, rather than keeping it all together.

Studies have shown that the all-cash diet has a number of benefits:

  • Helps cut spending – By holding your money and seeing it leave your hand, you have a more concrete understanding of where your money is going. Additionally, if you only have five dollars at the end of the week to go out, you’re only going to spend five dollars.
  • Reduction of fraud and errors – Cash prevents things like accidental double charges and credit card number theft.
  • Reducing Overdrafts – Because you can’t spend cash that you don’t have. If you are only spending what’s in your wallet, you’ll never be at risk of accidentally spending more than you have.
  • Streamlined Store Returns – If you do decide you don’t need something after all, it’s easier to exchange things you paid cash for. Often, if you want to do a return with a credit card you’ll need to produce the credit card you used for the purchase.

Participating in the “No Spend Challenge”

Have you ever told yourself you weren’t going to spend any money for a few days, but you failed? The “No Spend Challenge”, may be just what you need to be successful in your non-spending.

The “No Spend Challenge” is a challenge going around on social media, where people are deciding not to spend money for a period of time. Some have done the challenge for just one day, some have done it for a week, and some have even committed to an entire month.

The “No Spend Challenge” is a really great way to save money, in the long term. However, in order to have a successful challenge you have to be prepared. Deciding not to spend money for a day, may not require so much preparation, but not spending for a month definitely will.

Before You Commit to the No Spend Challenge:

Decide the Duration of Your Challenge.

Are you committing to one day, three days, a week, two weeks, or a month? Pick what is best for you. If your birthday is coming up in a week, and you’ve planned a nice dinner, you know that starting a two week challenge isn’t going to work very well. You’d still have to buy an outfit, and go to the salon/barbershop. Be practical.

Set a Goal.

Are you doing the challenge specifically to save money? Write your goal savings down and stick it on the refrigerator. Look at it as a reminder of your purpose. Or if you’re doing the challenge to test your will-power, look into the areas where you’re spending too much: eating out, or hitting the bars. Cut back in those specific areas.

Prepare Yourself.

Do you have enough food in your house to not go grocery shopping, or eat out for a month? Or do you have to have fresh fruit, and have to go to the grocery store at least once a week for it? These are the questions you need to ask yourself before jumping into the “No Spend Challenge”. Come up with a plan. Set aside money for your fresh fruit and money for your gas to and from work. It will also be a good idea, for a short term challenge, to just eat all the food in your house, and not eat out.

Avoid Temptation.

The moment you decide that you want to stop spending money for a while, everyone comes up with plans to go out or travel, the shoes you’ve wanted have been marked down 65%, and your favorite restaurant advertises a buy one get one meal deal. You must stay strong.

Make Money.

Ask your boss if you can work overtime/just pick up some extra hours. Have a yard sale during your spending break. Sell some of your unwanted and gently used things on the internet. Sign up for paid, online surveys. Drive for a ridesharing service. There are so many legal ways to make money fast, find one that works for you.

This challenge can be made to fit any lifestyle. There is no specific way that you have to go about not spending money. Choose to do what makes the most sense for you, and stick to it.

Now that you know everything you need to consider before starting the “No Spend Challenge”, there are some rules that you have to follow while participating in the challenge:

Where Will the Money Go?

You have to decide whether or not the money you are saving will go into a shoe box in your closet, your savings account, under your mattress, or wherever. You have to make a decision, and stick to it. You also cannot touch that money once it is put away.

Cash Only.

Hide your debit and credit cards. Using cash only, will help you to avoid overspending.

What Can You Buy?

There will be some things you just have to buy for yourself, and for your family. Figure out what those things are. You can only buy those things.

If you are still undecided on whether or not to participate in the challenge, here’s what you have to gain:

  • A Cleaner Home– Since you won’t be going out, you’ll have plenty of time to clean out the garage, or that closet that has been cluttered for 6 months.
  • New Recipes- Cooking what you already have at home, will have you on google trying to figure out new ways to make dishes and work with what you have.
  • New Friends- There are hundreds of blogs on the internet, filled with people who have done this challenge already. They have posted their successes and their failures. Reading about someone else’s failures, will help you to not make the same ones they did. Get engaged, comment, and share the posts. You never know who you may inspire to do the challenge as well.
  • Independence– You will become less dependent on fast food and takeout, when you make this decision not to spend money. You will re-learn to take advantage of what you already have.
  • More Money- The joy in not spending money, is not watching the money leave your bank account. Saving money in this way, will also help you to no longer live paycheck to paycheck, if that were an issue for you before.

How Can I Find Money in My Financial Budget for Investing?

There are a number of ways you can find money for investing. You can use one of the above methods to shift your budget priorities around. Alternatively, there are apps you can find that will do things like, round up your debit purchases to the next dollar and deposit that money into an investing account. The most effective way to determine what is best for you is to do some research, pick a method, and give it a try. If you decide you don’t like it, you aren’t committed; you can switch to something else. And you can keep switching until you find a method that works for you.

Becoming financially independent doesn’t have to be a stressful process. There are a number of things you can do to make life easier. One of the most important is to make a budget. Once you have a budget, you can start manipulating it to reach your financial goals.

How Can I Pick a Financial Services Provider?

There are a few things you need to do during your search for a financial services provider:

  • Get a general understanding of your level of risk tolerance
  • Understand the different types of financial service providers
  • Understand the various fee structures

How Do I Determine My Level of Risk Tolerance for Investing?

There are a number of ways you can determine your risk tolerance level for investing. For example, if you have a longer period of time before you want to reach your financial goal, you may be more tolerant of risk, because there are more opportunities to recover. That said, if you need to reach your goals in a short amount of time, you might be willing to take on more risk in hopes that it pays off. Your risk tolerance level can change as your life situation changes. For example, as you approach your financial goals and have less time to recover, you may want to switch your investments to lower-risk options.

Even if you only have a vague idea of what your risk tolerance level is, you can use that to determine which sort of financial services provider is best for you.

What Are the Different Types of Financial Service Providers?

There are several different types of financial service providers, for example:

  • Registered Investment Adviser (RIA): They provide their clients with ongoing financial advice. Because they are held to the fiduciary standard of care, they must always act with their clients’ best financial interests in mind. Unlike general financial planners, RIAs can actively manage your money.
  • Brokers: They buy and sell securities for their customers. Unlike some other financial service providers, they are held to the “know your customer” standard, meaning they are required to develop an expectation of your behavior that they modify based on how you actually invest.
  • Financial Planner: This is a generic term for someone who helps develop and implement a comprehensive financial plan.
  • Insurance Agents: State-licensed individuals who offer insurance-related investment products. They are not held to the fiduciary standard of care.

While researching your financial service provider, there are a few other things you want to look for:

  • Certified Financial Planner (CFP): This is regarded as the gold standard of financial planning. Individuals who attain this certification have done extensive coursework on financial planning, passed an exam, accrued three years of experience, and are required to take 30 hours of continuing education every two years.
  • Suitability Standard: Unlike the fiduciary care standard, which requires certain financial advisers to act in the best interest of their clients, individuals held to the suitability standard only need to make recommendations that are suitable for you, not necessarily the best.

What Kind of Questions Should I Ask a Financial Services Provider?

When interviewing a prospective financial services provider, there are a number of different things you’ll want to learn about them. It’s important to have a good understanding of their fee structure. You’ll want to know the total cost, not just their commission or their percentage fee. It’s also important to know what sort of clients they specialize in. If you are looking for high-risk with the potential for rapid growth, you don’t want a financial adviser who specializes in conservative investing.

You should ask to see a sample financial plan. These come in pretty wide variations, so having a look at what your financial services provider considers a financial plan can help determine if they are a good fit for you. Another fit-related piece of information you’ll want to know is how they interact with their clients.

Some investors will want to speak with their advisers regularly. Others don’t mind speaking to their staff. And some may prefer to speak about their financial plan once a year and let their service provider take care of the rest.

What Are the Different Ways Financial Service Providers Get Paid?

There are three main ways financial service providers get paid:

  • Fee-Only: This means you pay a flat fee to them. This can mean you pay an hourly rate or fee based on the specific services you perform. Others may charge you a certain percent of your total portfolio per year, 1% for example.
  • Fee-Based: These service providers take a fee for their work, but they also may receive commissions if they sell certain financial products. Some claim this can create a potential conflict of interest, because why would they try to sell you anything other than the products they are receiving a kickback for?
  • Commission-Based: These service providers receive all of their income from commissions.

There’s a lot to think about when you are picking a financial service provider. The most important thing to do is ask a lot of questions and try and see if the service provider is a good fit for you.

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