Your early 20s are a time of change and excitement. For some, it involves enjoying your senior year of college, and making memories that will last you the rest of your life. However, you are also starting to plan for the “real world” that is quickly approaching after graduation. It is no easy task, that often involves considering many variables. The goal of this article is to address common concerns young adults often have and highlight ways to build a strong financial foundation early in life for long-term financial success.
It’s never too early to start practicing what your post-grad financial life will look like.
- Set aside time to do your research.
- You can use career websites such as CareerOneStop, O*NET, and the Bureau of Labor Statistics to help you gain a better understanding of the type of salary you can expect, the different jobs that are available in your desired field, and the cost of living in the areas you are interested in moving to.
- Take some time to not only consider your salary, but how much you will actually receive after deductions.
- Calculate common costs such as deductions, taxes, benefits, and insurance to help create your mock budget. For assistance on how to calculate this total, see the IRS Tax Withholding Estimator. By doing this, when graduation rolls around, you will not be caught underprepared.
What Are Your Goals?
Before creating a financial plan, it’s essential to first identify why you’re doing so by setting realistic financial goals. A helpful tip I’ve received—and one that has worked well for me—is to always write down the goals you set. Dr. Gail Matthews, a psychology professor at Dominican University in California, did a study on goal setting with 267 participants. Research showed that you are 42 percent more likely to achieve your goals just by doing this simple action. When setting your goals, consider not just what you want to achieve, but also why and how. One of the more popular methods for setting goals is the SMART method. This acronym stands for Specific, Measurable, Achievable, Realistic, and Time-Bound. Going through these criteria will ensure that you will have the best probability for success.
Once you have set your financial goals and understand your actual (or predicted) financial situation, you can move on to creating your budget. To set a budget, begin with the following steps.
- Calculate your income. It is better to use your take home pay that you receive after all deductions have taken place, as mentioned previously.
- Calculate your expenses. These can include both fixed expenses, such as rent, utilities, and other forms of debt and variable expenses like personal care and entertainment.
- Make a plan. Use your newfound knowledge to make a future spending plan. There are several methods for budgeting, but one of the most popular ones is the 50/30/20 rule. In this strategy, spend:
- 50% of your income on needs such as housing, groceries, utilities, and transportation
- 30% on wants such as your personal hobbies, social life, or gym memberships.
- 20% on savings/debt. You should save enough to make the minimum payment on all debt each month, and you should aim to build savings that covers 3 months of living expenses for emergencies.
For more information on budgeting, cash flow management, and saving, see the articles below written by Mac Frasier, CFP®, CEPA, the Director of Planning at Oakworth Capital Bank.
There are several different strategies to budgeting, and these are just the basics. Make sure you continue to monitor your financial situation and customize your budgeting plan to work the best for you. In the digital age, you don’t have to do it all on your own. There are several apps and website services that you download that vary in cost and methods applied. You can even start with an excel sheet if you are experimenting with the basics of budgeting. To research the top budgeting apps, start with Investopedia’s top recommendations by clicking here!
What is Credit?
Another financial tool that is crucial for young adults to understand as we navigate the early stages of independence is credit cards. By learning about the terms, rewards, and healthy habits of credit cards and selecting your first one with care, you can start to build a positive credit history. Your credit history is a key factor in your expenses on loans in the future. If you are interested in learning more about that, click here for information on improving your score and reading your report.
First, it’s important to understand what credit is. Credit is a vehicle of borrowing money. Credit cards draw on a line of credit, which is an agreement between the consumer and the bank that outlines the terms of borrowing money using your selected credit card. This includes your credit limit (how much you can borrow), your annual percentage rate (APR), and sometimes the additional fees that are involved. By charging purchases to a credit card, you are required to make at least the minimum payment to your account. A healthy habit of credit cards is to pay off your balance in full at least once a month to avoid paying excess interest and fees. To choose the right credit card for you, there are several factors to consider:
- Find a low fixed APR. This will allow you to predict the amount of interest that you will owe on purchases over time.
- Consider choosing a card with a grace period. Grace periods enable you to adjust your payment schedule to align with your pay schedule and budget to avoid late fees and interest charges.
- Weigh the cost of any annual membership or participation fees. Watch for cards that carry annual fees. Be sure to carefully review these and weigh the benefits that come with it to decide whether this card is worth the cost of paying for them.
- Look for cards with rewards and benefits that suit your lifestyle. Credit cards often come with rewards for using them. When choosing your credit card, be sure to examine the types and terms of the rewards offered to make sure they make sense for you.
Budgeting and planning are both no easy task, and making mistakes is inevitable. However, it is still important to start your financial literacy journey as early as you can. Doing this will make it easier to recover and learn from your missteps, whether that be overspending, poor budgeting, or an incorrect selection of a credit card. After all, if you never make mistakes, do you ever really learn? Although nothing is guaranteed, gaining as much knowledge as you can will make you more fiscally conscious as years go on, and allow you to face the complicated decisions of life with peace and confidence (hopefully), which is what we are all aiming for. For more resources for your financial literacy journey, I have linked some articles and programs to get you started.
Happy planning!
About the Authors:
This article is co-written by Mac Frasier, CFP®, CEPA with Annelise Sutherland, a 2024 Oakworth Intern. Sutherland is studying finance at Auburn University.
More about the Oakworth Interns:
Oakworth’s internship program supports our core purpose: Helping People Succeed. The initiative of our internship program is to provide motivated students a thorough understanding and hands-on experience in the various functions within Oakworth Capital Bank. To learn more from our most recent group of Oakworth Interns click here.