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Successful personal financial management relies on a varied skill set, including competency in math, organization and long-term planning. The subject isn't typically taught in school, though some educators are turning their attention to practical lessons, like managing money. Without a structured education in personal finance, however, it is up to young people to acquire the knowledge and skills necessary to navigate the sometimes challenging world of individual finance.
Fortunately for inexperienced young adults, finding financial security follows a proven roadmap of time-tested personal financial strategies. And though each person's circumstances are unique, the following tips apply to most young households.
Master Spending Discipline
Long-term financial stability requires a balanced household budget. Though spending may ebb and flow, depending upon monthly needs, incoming resources must ultimately match or exceed the amount of money going out the door. When equilibrium falters, there are only two ways to get back on track - either increase your income or reduce household spending.
To achieve short-term financial relief and ongoing stability, it is often easier to curb spending than it is to increase personal income. Unfortunately, however, credit cards, online shopping and other consumer conveniences make it easier than ever to part with your hard-earned money. To give yourself the best chance for financial success, make it difficult to spend money - especially ill-advised discretionary purchases, which quickly undermine even the best budgets. Impose a waiting period of 48 hours, for instance, before following-through with a prospective purchase. And save ahead for planned purchases, paying cash once you've set-aside enough to cover the cost. Using these and other methods to maintain spending discipline reduces the pressure to increase household income.
From day to day purchases, to major financial commitments, knowing the cost of consumer goods and services helps stretch your financial resources. Although this tip applies at any age, young consumers are accustomed to instant access, brought about by hyper-convenient retail marketplaces. Relying on same-day delivery of items purchased online, for example, does not leave enough time for buyers to properly vet purchases, resulting in overspending. By planning ahead and comparing prices, young shoppers save money and reinforce disciplined spending habits.
Similarly, jumping-in to loan commitments without comparing rates and terms may leave money on the table. To protect consumer interests, online resources help prospective borrowers compare and contrast loan terms, drawing from dozens of published lender rates. Using these resources gives young borrowers up-to-date information, despite their inexperience with consumer lending.
Follow the Money
Without an accurate sense of where your money goes, it is hard to make meaningful spending adjustments. It is particularly important for young people to track spending, helping them tune-in to the way money moves through their hands. In fact, practicing formal budgeting is recommended for young adults, getting financially established.
Although it may be an unfamiliar concept for young people without budgeting experience, the process entails little more than tracking income and spending over time. With an accurate snapshot of your cash flow, it is then possible to alter bad spending habits and direct your income where it will do the most good. Start today with a basic ledger, broken-down into categories, tracking money you spend and deposits you make. Within weeks, your financial log will start showing spending patterns, and may highlight unhealthy conditions you can change.
Save for a Rainy Day
With demands pulling from all directions, saving is among the most difficult financial disciplines to carry-out. An emergency fund, or back-up savings are key to financial security, so it pays to start early, setting-aside resources. Even small amounts, deducted automatically from your paycheck, create the fallback funds you need, preparing you for financial setbacks like:
- Short-term unemployment
- Home or auto repairs
- Medical costs
- Appliance failure
- Unanticipated cost of living increases
Savings can also be directed toward specific financial goals, like a home purchase, new car, or family vacation. Whenever possible, as you prepare for expenses you anticipate, keep some of your savings earmarked for unexpected financial stresses.
Personal financial skills are earned through experience, putting young people at a disadvantage. Fortunately, tried and true financial strategies give even inexperienced money managers a blueprint for success. By budgeting, saving, and making responsible consumer choices, young people set the stage for a healthy financial life.
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