Becoming a Financial Grown Up
I’ve noticed a few trends in my 20– and 30-something clients and friends that are looking to get their financial footing. There are a series of steps to take and (arguably more important) pitfalls to avoid as you make the journey to becoming financially independent of your parents. Here is my ever-growing list.
Steps to take:
- Learn how to read your paystub. Understand where your money is going on a pre-tax and post-tax basis.
- Create goals for your future. Maybe it’s a savings goal, or a debt reduction goal, or even a plan to remain 5 payments ahead on your car loan. One thing is clear – you’ll find it easier to make smart decisions today if you have your eyes on the prize!
- Establish your own banking. Remove transfer links associated with your parent’s account. The same goes for the credit card.
- Understand your spending. If you have a detailed budget then you’re ahead of the game! At the very least, know where your dollars are going rather than feeling blindsided by your account balance each time you log in.
- Invest in your future. Be mature enough to understand the importance of delayed gratification, compound interest, and why you want to start saving for retirement today. Have an investment account outside of your checking/savings accounts (i.e. 401k, Roth IRA, brokerage account, etc.).
- Become the primary account holder. Take the lead on your bills. Know the username and password to each account. Take charge of your money.
- Know the details of your debt. Understand the difference between a private and federal student loan. Read your car loan statement to see how much money you’re spending on interest each month. Discover how long it will take you to off your credit card debt if you only stick with minimum payments.
Pitfalls to avoid:
- Using your parent’s money to live above your means. Your goal is to find a way to spend less than you make. You won’t make progress if you cover some or most of your expenses on your own, then use your parent’s cash to cover the extras (grocery delivery, out-of-your-budget labels, concert tickets, etc.).
- Comparing yourself to your siblings or friends re: parental help. Don’t justify cashing checks from mom and dad because your older sister is still getting help from them. You want to learn to stand on your own two feet, and that kind of thinking will only slow you down in your journey to independence.
- Staying on the family plan forever. Cutting this cord is typically one of the last steps young adults take in their pursuit of independence. I know the temptation of the cell phone family plan and cheaper car insurance, but it’s important that you learn to navigate these areas on your own. Negotiate your cell phone and cable bill. Call your insurance agent to understand your current coverage. These are great learning opportunities.
- If you’re currently getting extra cash from your parents and you’re deciding on an apartment or car, make sure you can cover the entire monthly payment yourself. Don’t make a long-term decision based off of a short-term expectation like your parent’s willingness to help you out for a few months while you get your feet underneath you.
I recognize how challenging this process can be. I graduated in the heart of the Great Recession and felt a ton of pressure to stand on my own two feet. You can do this. I know you can. Now commit to the change and learn to take pride in your new role as a financial grown up!