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Lots of people become adults without learning how to manage their money.
Money management is an important skill to have as money will have a big impact on your life. If you are an adult that doesn’t know how to manage your money this post is for you.
Please keep in mind that I am not a professional financial planner so nothing in the post below is considered professional advice.
So without further ado here are 5 steps for taking control of your finances.
Find out your net worth
Before you can improve your financial situation you need to know where you are right now. There are lots of numbers involved with money and right now we are going to focus on one. What is your net worth?
Your net worth is simply everything you own minus everything you owe.
So add up every dollar you have, what in the bank, in your retirement account even the spare change you have in your car. Next figure out how much you owe so student loans, credit card debt and anyone you owe money to.
Once you have these two numbers all you have to do is subtract what you owe from what you own. Voila, the answer is your net worth. This number is a great way, to sum up your financial position.
Now in an ideal world, your net worth would always be positive. If it’s not don’t stress out. We’re are going to work on it. And honestly, most people are in the negative.
This doesn’t give you an excuse to ignore it, take a good hard look at your net worth. Is it something you’re happy with? Are you surprised by that number? What would you like your net worth to be at?
Keep that number nearby as you work on improving your finances. We are going to improve that number so think of it as your starting point. As you make start learning how to manage your money this number will go up.
Make a budget
The second step to managing your money like an adult is making a budget. I know most people don’t like budgets. They seem scary and restrictive and some budgets are that way.
But that not the kind of budget we are going to be making today. Think of the budget as a spending plan that makes you be intentional with your money.
We are going to create a zero based budget today which means you’re going to budget all your money.
Something to keep in mind when you start is you don’t need a million categories. That may be helpful for some but for most of us it’s a lot of hassle. So do yourself a favour and only set categories you need. At the bare minimum, you should have a category for savings, a category for bills and another one for spending.
Of course, if you want to you can break down the categories further. Savings can be an emergency fund and retirement account.
You can have every bill separate in your budget your rent, phone bill and utilities. You can also break down your spending into eating out, clothes and entertainment.
How much you want to break it down is for you do decide. Just remember to keep it doable.
Once you have a basic idea of what you what to include in your budget you need to find a place to keep it. This is something that has to work for you so keep that in mind when you pick.
You can do a budget on paper in a spreadsheet, you can use an app or even separate your bank accounts. Personally, I use YNAB which I love. It simple to use and they also track your net worth for you.
Now that you decide where to keep your money its time to put it all together. Set up the categories using whatever system you prefer. Then put all your money into your budget.
The best practice is to pay yourself first so budget for savings then bills and the rest is spending money.
As for how much money to put into each category for you to decide.
It recommends to save at least 10% of your income. How much money you spend on bills will be determined by how much your bills cost. You could try to lower that number by negotiating or switching providers.
And then your spending money is whatever is left over. That money you can spend on whatever you want guilt free.
Something that important to remember is your budget needs to work for you.
So stay flexible try out different things but don’t feel like you need to do everything. And don’t make your budget overly complicated. It will make budgeting much harder than it needs to be.
Need help with setting up your budget? Here everything you need to set up your budget.
Come up with a financial plan
Now that you know where you at and taken some steps to manage your money in the present it time to think about the future.
I’m talking about financial planning. It’s a great thing to do as it makes you think what do I want my finances to look like in a year or five years from now.
Sit down and think through everything you want to accomplish with your money. Make a list. Once you have a list figure out what most important to you. Then make a plan for accomplishing those things.
I would recommend you make a five year financial plan. I think it’s a good time frame to accomplish a long term goal while still being short enough to keep you on track. If you’re not ready to make that big of a commitment yet you can set goals on a monthly basis or try the 1 4 4 rule.
No matter the time frame for your goals remember to keep them doable. It is pointless to set goals if you aren’t able to reach them.
If you are an adult you should have some sort of investment. It might be hard to do if you are currently in debt. And it might be worth focusing on paying that back first.
Half Banked has a great post here about whether you should save or pay off your debt first. There is one exception to this if you have high interest credit card debt you need to pay that off before you start investing.
The first thing to think about when investing is where are you going to hold this in.
If you don’t have anything I would recommend a retirement account. The reason for this is they are often tax shelter and you need to start saving for retirement. Depending on the account there may be tax benefits as well as contribution limits.
Now if you have access to an employee match retirement account at work take it and skip ahead to the next point. Employee matches are great for you. Your company is the one who will set up the account and invest it for you. They even take it straight off your paycheck which is a good way to save without putting in the effort.
Plus did I mention most places with match your contribution? You should invest enough to take advantage of that match.
Investing can seem like a very scary thing. There is a lot of advice out there and it can be hard to filter out the good from the bad.
There are three main things to keep in mind while investing. First, what are the fees? Secondly what the risk? And thirdly what the return you will be getting?
The last step to managing your money as an adult is to keep learning. As time goes by different issues will crop up that you need to deal with. You are going have to change things and as an adult its all your responsibly.
If you are struggling with budgeting do some research and try to find ways to fix it.
Or if you want to pay off debt find out the best way to make that happen. It might be debt snowball, maybe it being aware of how much debt you have.
As an adult your in charge of your money. How good you are at it will impact your life. So don’t let a lack of knowledge stop you from managing your money well.
Take advantage of all the knowledge that is out there. Do the research to see if something works and then tailor it to your situation. Keep learning and growing your money management skills.
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