Earning your first real paycheck is exciting. That feeling may stay with you for a while at the start of your career, until reality sets in. Then you have to get serious about money.
It may be because you've run up some debt and the bills are coming due. Perhaps its time to figure out how to afford a better place to live. Maybe you've just come across a medical expense you know will be difficult to pay or you can't see how you'll ever be able to retire.
These are all examples of things that force young adults to get serious about money. This happens to different people at different times; but when you are ready, here's how to gain the upper hand and get down to business.
What to do when you get serious about money
At first glance, this list may seem like a collection of simple tips - but don't underestimate them. Each of these steps is important in its own right. If you're serious about your money, these are serious steps to take.
- Set up a budget rather than living paycheck to paycheck
Pretty soon, people find that spending each paycheck just before the next one comes is a difficult way to live. It means getting caught short at times -- and most of all, it creates the feeling of being on a treadmill getting nowhere.
Setting up a budget can help make sure you have money set aside for the things that are most important to you, and it can give your finances a sense of direction. Start by tracking what you spend money on, then figure out what is most important to you and how much you can afford to spend. It takes some trial and error; but if you keep trying, you should find a plan that works.
- Separate savings from your checking account
A person's first bank account is often a checking account, but having all your money immediately available has a downside. You may find it easier to save if you set up a separate savings account to make some of your money less accessible.
This has the added benefit of allowing you to earn more interest on your savings -- but don't choose these bank accounts at random. You can save a lot of money if you find a free checking account, and you'll earn more interest if you find a savings account with one of the highest rates. Online bank accounts are a great place to look for the best deals in banking.
- Arrange for direct deposits into your savings account
If your paycheck is directly deposited into your checking account, direct that money into your savings account rather than into your checking account.
Why? For the same reason you set up a separate savings account in the first place, to make it a little less easy to immediately spend all the money -- or, split your direct deposit into checking and savings accounts. Your budget can guide you on how much to deposit into each.
- Start an emergency fund
One of your first savings goals should be to build an emergency fund. Common financial emergencies can be anything from an unexpected car repair to a period between jobs.
Of course, the nature of emergencies is that they are unpredictable, so you never know quite how much money you'll need to cover them. A good rule of thumb is to try to save up enough to cover at least three to six months of essential expenses.
- Get serious about health insurance
Speaking of emergencies, expensive healthcare expenses can crop up, even when you are young and healthy. Though the federal mandate requiring healthcare insurance has been removed, guard against the unexpected by getting healthcare insurance and contributing to a health savings account, if possible.
As regulations surrounding health insurance have been relaxed, it is more important than ever to shop carefully for the right policy. Don't just focus on the cost of the premium -- also consider the terms of the policy such as deductibles, annual ceilings and coverage of preexisting conditions.
- Formulate a smart debt strategy
Getting your first credit card is a great convenience, but it can also make it too easy to spend. If you run up credit card bills you can't pay off from month to month, then you are not using credit card debt in the smartest way. Know where you stand -- use a credit card interest calculator to form a plan to pay off your debt.
Credit card debt is one of the most expensive forms of debt, and is designed for short-term use. Debt designed for longer-term use, such as mortgage debt or student loans, typically has much lower interest rates. So, save yourself a lot of money and trouble and restrict credit card purchases to things you can pay off within a month.
- Participate in your company 401(k)
Once you've built an emergency fund, it is time to start saving for long-term needs like retirement.
A 401(k) is an excellent vehicle for retirement savings. It defers taxes on your contributions and investment earnings, and it provides a choice of professionally managed investment options. Take advantage of any employer match for your 401(k) contributions and accelerate your savings.
- Set up an IRA if your company doesn't offer a retirement plan
If your company does not have a retirement plan, you should set up an IRA for yourself to start saving for retirement.
You may be able to set up an IRA through your bank. You will probably be offered a choice between a traditional IRA and a Roth IRA. You should make sure you understand the difference. Many people lean toward a Roth if they are in a low tax bracket, while a traditional IRA might suit you better if you are in a higher tax bracket.
- Do some preliminary planning on a retirement calculator
Once you've gotten into the habit of saving, it's time to formulate a plan for those savings.
A retirement calculator can help you understand what your future needs may be, and set goals for how much you'll have to save to meet those needs.
You don't have to get serious about money all at once. It's generally more of an evolution, where you acquire a variety of beneficial habits over time. Still, the sooner you get serious about your money, the more you should be able to enjoy it in the future.