“Adulting” is difficult. Budgeting can be more difficult.
As a young adult just beginning to live independently, it’s easy to make financial decisions, like racking up credit card debt or not saving enough, that come back to haunt you in the long run.
To help young adults who need a crash course in “adulthood”, TODAY is launching a new series, “How to Grow Up…”, where young viewers can get advice on a variety of relevant topics. . To kick off the series, Sharon Epperson, CNBC’s senior personal finance correspondent, shared her top tips on creating a budget, building credit and getting your finances in shape.
Make your first budget
Epperson recommends that anyone just starting out set a budget and do all they can to track their spending in order to develop healthy financial habits and learn how to manage their finances successfully.
1. Stop using cash
Epperson recommends that for at least three months you stop using cash or mobile payment apps like Venmo and Zelle. Instead, put all of your purchases on a no-fee debit or credit card, so you can track your spending by looking at your statements.
Debit cards guarantee you’ll only spend the money you have at the time, but a credit card offers better protection against fraud, so figure out what’s most important to you and start spending it. utilize. If you use a credit card, be sure to pay your balance in full each month to avoid incurring interest charges.
2. Make a physical budget
Once you’ve figured out where you’re spending, print out a budget spreadsheet online or download one – there are plenty of free options! List all of your expenses as recorded in your debit or credit card history. This will give you an exact idea of how much you are spending in each category.
3. Make a list of necessary and discretionary expenses
The biggest part of a budget is making sure you’ll have money for necessities, but it can help give you some wiggle room to indulge yourself if you can afford it.
Necessary expenses include rent, utilities, transportation costs, grocery bills, and other applicable fees like tuition or phone bills.
Meanwhile, discretionary spending is the things you buy but don’t really need, like going out to eat, taking a cab, buying new clothes, or paying for streaming services.
4. Have a savings plan for the unexpected
We’ve all seen this year how quickly things can go haywire – and there doesn’t have to be a global pandemic for your finances to go awry. Think about the necessary concerns: what if your laptop stops working or your car breaks down?
Try to think about what a minor emergency like this could cost you and start saving: even a few dollars a month can add up. If you’re just breaking even each month and don’t have money to save, try cutting back on some of your discretionary spending to make sure you can save money.
Think carefully about credit cards
Credit is important, but it’s tricky: young adults who’ve never had a credit card of their own can quickly get in over their heads. However, it’s important to have one so you can build up credit, which you’ll need later in life when you make purchases like buying a car or a house.
Epperson said she had “no problem” with credit cards, but there are a few things you should keep in mind. There are three advantages of the system, she says:
- Credit cards are a great way to help you build credit
- Credit cards offer greater protection against fraud than debit cards
- Many credit cards have rewards programs where you can earn money on everyday purchases like gas and groceries.
However, there are also three negatives:
- Credit cards can increase your risk of overspending
- Having a monthly balance can add up quickly: Credit cards have high interest rates, potentially more than triple the interest rates on car loans and mortgages, so a high monthly balance can add up. accumulate quickly.
- Credit cards can hurt your credit score as easily as they can: If you miss a payment or use too much of your available credit without making a payment, it can negatively impact your credit score.
What, exactly, is a credit score?
Credit scores seem very important, but many young adults may not know exactly what they are.
“A credit score is a three-digit number, usually between 300 and 850, that is the result of an analysis of your credit history,” Epperson explained. “This figure tells lenders your potential risk and your ability to repay your loans.”
Credit scores matter a lot: A good credit score can help you qualify for low rates on credit cards, car loans, and mortgages. Some employers even take this into account, and if you’re a tenant, most landlords will ask to see it. Having a bad credit rating can negatively impact all of these things and cost you dearly in the long run.
“To a potential lender or employer, your credit score and credit report, based on your credit history, tells whether or not you are responsible and can handle your financial obligations,” Epperson said. “If you’re trying to aim for a good score, you’ll want a number above 700.”
Some tactics can help boost your credit score: Pay your bills on time and try to use less than 10% of your available credit.
Make saving a habit
Remember that savings category of your budget? It may seem difficult to save money now, but if you get into the habit of doing it early, it will become second nature.
“Make saving a daily, weekly and monthly habit,” Epperson said. “Deposit a certain amount from each paycheck, plus monetary gifts, into an online savings account…You may think your money is there, and it is. It is the goal. It’s there when you need it.”
Although you can start saving for occasional emergency expenses, you should aim to have six months worth of expenses. It can be a safety net in case you get sick, lose your job, or fail to earn money.
Also, don’t forget to save for long-term goals, like a vacation, a new car, or even retirement. However, this emergency fund should be your “immediate savings goal.”
To learn more about “how to come of age” as it relates to your finances and get more tips from Sharon Epperson on how to create a budget and build your credit, click here.