Getting a head start on planning your finances may not seem like a high priority, but for most people it is the most important thing they can do to ensure that they live a life of financial security. Unfortunately, a lot of people don’t know where to start their financial planning.
Luckily, it is possible to get started on financial planning, even when you don’t have a lot of money to spend. Start by formulating a budget. While this might seem like a relatively simple thing to do, nearly half of Americans don’t have a budget or spending plan. Unsurprisingly, nearly the same percentage of Americans have outstanding balances on their credit cards according to a survey by the American Consumer Foundation. Start by tracking your expenses for at least one month. Then, develop a plan that accounts for your necessary expenses such as rent and utilities, minimum debt payments and some money for entertainment.
Next, think about where you want your finances to be over the next several years. Do you want to buy a home? Start a business? Stay at home with kids? Don’t worry if you only have vague ideas of your goals. In fact, many people find that their goals change several times while they settle on a career and make lifestyle choices. By starting to save money towards a goal however, you’ll know that you’ll have a head start on saving if you change your mind and pick a new goal. People who have a goal for their savings are able to save three times more (on average) than people who just deposit money into an account.
Before you put everything towards your new goal, it’s a good idea to review your debt situation. While some people are tempted to simply accrue debt while they are young, multiple studies have shown that people who start planning for their debt early are able to pay it off faster, pay less in interest and are less likely to file for bankruptcy than people who wait until they are older. Look at the extra money you have in your budget and make a plan to pay off debt that has a high interest rate. At the very least, plan to eliminate your credit card debt. Many young people also choose to tackle their student debt before moving on to other goals. This allows them to improve their credit score and have a lot more flexibility in their budget.
Finally, it is critical for young people to take control of their retirement savings. By starting to save in your 20s, it is possible to retire comfortably by saving just 10 percent of your salary. If you wait until your 40s to start, you’ll have to save at least 25 percent in order to have a chance at replacing 70 percent of your salary. Just getting into the habit of saving means that increasing your retirement savings down the road will be a lot easier. Start by signing up for the retirement plan at your job.