Turning 18 make legally make you an adult, but that doesn't mean you're ready to live your life as one. Adulting 101 is so important, especially when it comes to managing your personal finances as a “grown-up” (no matter how grown up you may already be)!
On Your Own
There's a long list of basics you need to be financially secure. They're not new concepts, and they're not complicated, but it seems so many of us fail to grasp the true importance of these things. These concepts create the safety net you'll need when jumping from the nest and being in charge of your life.
Adulting 101: 9 Steps of Personal Finances for Grown-Ups
These nine important financial concepts will give you the tools you need to live as a financially sound adult.
1. You Need a Budget
A budget estimates your incoming income and outgoing expenses over a specified future period and is usually adjusted regularly. In essence, budgeting is creating a plan to use the money you earn to pay your bills, spend, and save.
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 manage your budget is a personal decision, but you'll want to find a way that makes it easy for you to enter transactions and check in often.
Managing your monthly expenses prepares you for life's unpredictable events and gives you greater control over your finances.
Budgeting doesn't have to be boring, doesn't require you to be good at math, and doesn't mean you can't buy the things you want. It simply means that you'll know where your money comes from and, more importantly, where it goes.
2. Checking and Savings Accounts
Bank accounts are an easy way to safely access your money. You don't need to go to the bank in the 21st century and can do all your business online or with an ATM/debit card when needed.
Getting “free” accounts is relatively simple, too, so you can avoid being riddled with monthly banking fees.
3. Establish Your Emergency Fund
An emergency fund refers to money you stash 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 be prepared to handle unanticipated expenses such as an illness, job loss, or major home repairs.
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. Still, it might be wise to have more in times of economic stress, such as during a pandemic or recession.
You'll want to keep your emergency fund fairly liquid, so you can avoid borrowing and high-interest debt options, such as credit cards or unsecured loans.
4. Save for Retirement
If you're just starting your career, you're probably not putting too much thought into retirement. But, although it is decades away, it's never too early to begin saving and planning.
The number one rule of thumb is to begin saving for retirement as soon as you get your 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 save on your own in an IRA.
Time is your best friend when saving for retirement. The money you put away from your paycheck will grow for decades and benefit from the interest earned on interest. That's called compounding, and those who take advantage of it early typically retire very comfortably.
5. Get Insured
Accidents and disasters will happen. If you aren't flush with cash to handle them, you could face substantial financial setbacks as a result. Insurance is a way to protect your life, health, ability to earn an income and keep a roof over your head when things go wrong. Simply put, it's a protection plan for you and your finances.
There are many types of insurance, and it's unlikely you'll need them all when you first go out alone. However, if you have loved ones or assets worth protecting, you probably need at least a few types of coverage.
When picking any insurance plan, consider how much value it needs to cover. You also need to know how much 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 will decrease your monthly premiums. But it also means you will have a higher out-of-pocket cost per claim until your deductible is met.
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. You can ruin your credit rating if you overextend yourself and cannot pay your debts.
In addition, 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 being financially irresponsible, 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've 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 to potentially make more money at high 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 be comfortable doing so. But if you have the funds and don't invest, you're missing out on opportunities to increase your financial worth.
And while investing is one of the best ways to build wealth over time, it can be risky and it's always possible your investments will lose money.
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 only estimates of the amount you could 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 due to overpayment at the tax year's end. Mastering this skill means you get to hold on to more of your money throughout the year instead of loaning it to the government interest-free.
Filing your tax returns can seem daunting, but there are many available and affordable apps and 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 the future in ways that are not always pleasant. Planning in case of your death or serious injury or illness – or estate planning – is a way to ensure your affairs are in order should something happen to you.
A living will is a formal, legal, written document put in place to ensure your specific desires are known about the types of medical treatments you want in the event you're unable to communicate them. A living will is also used to spell out end-of-life medical care wishes including 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 a POA grants can be limited in nature, or it can be sweeping and broad. 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 you 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 being notarized.
Life is great; unfortunately, not every day is roses and sunshine. Adulting means knowing how to prepare for tough days.
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 to answer questions.
This article was produced and syndicated by Wealth of Geeks.