Why is financial success as a young adult so important? Because those who take charge of their financial situation are more confident, comfortable and happier than those who do not. The ones who do not have control of their finances dig themselves deeper and deeper, so that it becomes difficult or impossible to achieve the things they would like for themselves and their families. This might include putting children through college, having more free time, owning a home, taking vacations, starting a business, or funding a comfortable retirement.
You have two options – you either control your finances or let them control you.
The “70-20-10 Plan”
You have your own unique set of financial circumstances at the moment. You may find yourself with significant student loans, credit card debt that continues to grow, spending more money than you are making, or simply not feeling as in control as you would like over your finances. Regardless of your situation, chances are there is some room for improvement in your current financial program, if one even exists.
That is where the “70-20-10 Plan” comes into play. This system is not exclusively for young adults; you will start using this now and continue to use it for the rest of your life. Here is how it works (percentages are for after-tax earnings):
70% – Living Expenses
20% – Debt Reduction
10% – Long Term Savings
This simple plan will work whether your income is $30,000 per year or $300,000 per year. This plan will become a lasting habit, and you will build a disciplined financial program that you can follow as your income continues to grow.
Living expenses are the expenses you incur to live your lifestyle. These items include rent/mortgage, car payment, electric, cable, groceries and many other items. You should be spending no more than 70% of your after-tax income on living expenses. Track all of these expenses on a monthly basis. You have one goal each month – do your best to come in under budget. Keep track of each expense by keeping every one of your receipts and by monitoring any debit or credit card accounts online. You should enter all expenses into your spreadsheet in the middle and at the end of each month.
Young adults can be faced with a variety of debts, such as student loans and credit cards. The goal is to consistently make payments towards all debt, paying down the highest interest rate debt first. If your student loans are at 3% and your credit card is at 15%, make your regular monthly payment on the student loan and put the rest towards the credit card debt.
If you have no debt, congratulations! This will give you an opportunity to contribute the entire 20% of your after-tax income towards long-term savings. If you do have debt, just continue to contribute 20% of your after-tax income towards it, and it will be gone before you know it!
Long Term Savings
The final 10% of your after-tax income should go towards long term savings. Long term savings could include retirement, education for your children, a second home at the beach, or the funding of a start-up business. Even if you don’t know exactly what it is for, put it away now so that you will have options in the future.
You should have six months of living expenses set aside as an emergency fund in your bank savings account. If you have expenses of $2,000 per month, make sure to build a $12,000 emergency fund. If you have not built up that six month cushion, place your final 10% into your bank savings account.
A great long-term savings vehicle is a Roth IRA, which has great tax benefits. For specific recommendations on where to direct these funds, consult a Certified Financial Planner or another advisor who comes recommended to you by someone you trust.
A Final Word
This simple approach to gaining financial security will give you peace of mind to do the things you want in life. Forming effective financial habits as a young adult will make your life less complicated and allow you to focus on accomplishing your goals and dreams.
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