Understand Your Finances
10 ways you can "grow up" your finances
Here are 10 things to do to treat your financial life like a real adult.
You may have finished college and had a real world job or two, but you still may feel like you're faking it when it comes to being an adult. Managing your money and credit is a part of being a grown up that you don't always learn about in school.
Here are 10 things to do to treat your financial life like a bona fide adult:
1. You need to understand credit
There's more to credit than just having a credit card. Your credit history is the foundation of your adult financial life. Want to purchase a home? Buy a car? Rent an apartment? Apply for a job? Your credit history will be there, right beside you, in the form of a credit score.
"Your credit score is a measure of your credit worthiness and is calculated based on the information on your credit report," explains Mical Jeanlys, general manager of the Chase Slate credit card.
2. Learn your credit score
FICO® Score ranges are poor: 300–579, fair: 580–669, good: 670–739, very good: 740–799, and exceptional: 800+.
If you don't know your score, Jeanlys has good news: "Financial services companies are increasingly offering consumers their credit scores."
3. Stop using your debit card to pay for everything, and start building credit
This may seem counterintuitive, but you need to use credit to build credit. Using a credit card instead of a debit card allows you to establish and build a record of credit usage.
4. Get serious about saving
You know you should save. Maybe you even make a point to move a little bit of money into your savings account every month. But if you want to grow up your finances, you're going to need to grow up your savings.
"In general, you should strive to save at least 15 percent of your income per month," says Jeanlys. But if you need to build up to that amount over time, that's fine— just pick an amount that works for your budget and stick to it.
5. Replace haphazard spending habits with an actual budget
Sure, budgeting is scary, but if you've ever been unable to pay a bill on time or been hit with an overdraft fee, you know ignorance isn't bliss. It's time to take stock of your spending and begin setting limits.
"Subtract your estimated expenses from your monthly take-home pay," advises Jeanlys. "If the number is negative, identify areas where you can make cuts." If cutting back feels uncomfortable or limiting in the short-term, remember: Real grown-ups take the long view and make difficult decisions.
6. Shift from making decisions based on your gross income, and start making decisions based on your net income.
You've got a grown-up job, and maybe you even have a grown-up title, but are you thinking about your salary like a grown-up? Are you budgeting based on your "take-home pay"?
Take-home pay (or net income) is the amount of money you make after subtracting federal income tax, Social Security and Medicare contributions, any state or local income taxes, monthly health and dental insurance premiums, and 401(k) contributions. That's the amount you actually have to spend each month, so make sure you're using it to budget.
7. Stop treating all bills the same, and learn the difference between fixed and flexible expenses
Fixed expenses are regular bills that cannot be easily changed like rent, student loan payments, or monthly insurance premiums.
Flexible expenses are more discretionary and are likely to change from month to month. When you're creating a budget, you need to prioritize fixed expenses and be prepared to cut back on flexible ones.
8. Make sure your emergency fund can actually fund an emergency
An emergency fund should be able to cover your expenses in the event of an emergency, but what does that actually mean? If you've got a paycheck or two stashed away in a savings account and consider yourself covered, think again.
"An emergency fund typically includes enough to cover three to six months of expenses," says Jeanlys. "Don't stop funding your retirement account or paying down credit cards, but do start contributing something."
Jeanlys also urges people to "focus on costs, not income." In the event of an emergency, you're going to cut back on discretionary expenses, so "all you need is a bare-bones calculation of items you absolutely need to pay"—such as rent, car payments, utilities, transportation, and child care.
9. Set real financial goals that have timelines and require specific commitments
You want to buy a home..someday. You want to pay off your student loans...someday. You want to have an emergency fund...someday. An important part of budgeting is setting financial goals.
"Once you've identified a financial goal, create a target date and determine how much money you need to save every month in order to reach your goal by your target date," says Jeanlys. If you stick to your plan, "someday" will come sooner than you think.
10. Start thinking of financial health as a journey, not a destination
When you finally achieve your goals, you won't be set for life—you'll be in a position to set new goals. Your situation will change. So will your needs. But if you've upgraded to a grown-up state of mind, that won't be a source of fear.