About 70% of students graduate college having significant student debt, with the average student owing $37,000. This is a huge burden to bear as you enter the workforce and start your professional life.
College graduates who enter the workforce with a proactive mindset towards their finances are more likely to enjoy financial freedom, including paying off debt, better credit scores, and access to cheaper credit facilities.
As a young person, time is on your side; what’s left to do is to implement these 5 tips for planning your financial future.
- Set your goals and budget
The first step in financial planning is setting your goals. What do you envision your financial future as? What financial goals do you have for the next 7 to 10 years? These goals include clearing student debt, contributing to a savings account or retirement scheme, and investing.
Once you have your goals, it’s time to create a budget, which begins by listing your financial obligations, student debt, rent, credit card debt, and monthly or weekly spending on food, utilities, and transportation.
Having a plan and a budget will direct and ground you and give you a reference point on your progress and areas that need improvement. Couple this with regular reviews, tracking, and readjustments towards reducing your spending and increasing your investments, and you are on the path to financial freedom.
- Reduce credit card debt
Mounting credit card debt is an easy road to financial destruction. While credit card debt is easily accessible, it comes at the additional cost of compounding interest, which means your debt will grow so fast within a short time.
If you already have credit card debt, start by contributing every month to clear your debt. Find reasonable ways to cut back debt, such as cooking your food vs. eating out, and sending the extra money towards reducing your debt.
Do your best to repay your debt every month until it’s cleared. Avoid late payments or defaulting as these will result in a bad credit history – a bad credit history remains on your credit report for seven years!
- Save more
Even as you pay off debt, dedicate a percentage of your income towards a savings goal and an emergency fund. Set an amount you want to save every month or that year, and then identify ways to reduce your spending to meet your savings goals. Identify areas where you are wasting money, for example, subscriptions to services or products you do not use.
In addition to a savings account, set aside an emergency fund with about three to six months of living expenses. An emergency fund will cushion you in unexpected circumstances such as a medical expense or job loss.
You can start your savings by committing small amounts every week or month and increase your savings amounts as you progress.
- Increase your income
Increasing your income increases the money you have to meet your basic needs, pay off debt, and save or invest for your financial security.
You could increase your income by working a part-time job, putting in extra billable hours at work, seeking a promotion or raise, and starting a side hustle. Start by deciding the number of extra hours you can put into earning more income and identify what you can do to bring in more money.
Another income stream can come from investments you make with extra income. Instead of blowing the extra cash on lavish vacations, put the money into investment vehicles such as stocks, cryptocurrencies, and real estate to grow your savings.
Mutual funds are a great way to safely invest for the long term. These should make up a large portion of your investments, but since you are starting to invest young you can afford to invest in riskier investment classes such as cryptocurrencies. Crypto prices, like Bitcoin, shot up from around $18K in early December 2020 to $31K in mid-June 2021. Trading on a Bitcoin exchange like OKEx, Coinbase or Paxful can easily create significant wealth, but it also has the chances of losing money during a downturn.
- Live below your means
Spending less than you earn leaves you with the extra money you can dedicate towards your savings, retirement, or investments. You are also less likely to take on bad debt, which builds good credit history.
With a good credit history, you can access affordable credit to purchase a home or car.
Secure your finances Securing your financial future is a lifelong process. As a young working person, you have the time to build your credit and investment/savings portfolio to lead you towards financial security. Since this is a lifelong process, consider working with a financial advisor early on to prioritize goals and plans that will help you clear debt faster and dedicate more of your income to growth.
For more articles, visit OD Blog.
