According to the National Financial Educators Council, only 16% of young Americans are optimistic about their financial future. 1/2 of millennial participants expressed concern about not being able to pay back student loans. A different study found that 62% of millennials live paycheck to paycheck.
Financial illiteracy among young people is an epidemic that needs addressing. And it’s not limited to young adults, too—another study found that even in advanced economies, financial literacy rates are lower for adults older than 50, with rates being lowest among those older than 65.
Whatever generation you fall in, it’s never too late to start being financially responsible. Being financially literate means being able to spend, budget, and invest your money wisely. Even if you’re starting now, it’s still better than starting tomorrow.
Here are the basics of being financially responsible.
Understand and implement budgeting.
Budgeting is simply the act of planning how much money you will spend over a given period. These are the essential components of budgeting:
- Total monthly income is the amount of money you will receive every month after taxes and other deductions. That may come from your salary, business profits, social security benefits, investment returns, and others.
- Fixed expenses are the bills and fees that stay the same from month to month, like rent.
- Flexible expenses are monthly expenses that can change from month to month, like utility bills and gas expenses.
- Total expenses are your overall expenses, including fixed and flexible expenditures.
- Disposable income is the money you have left after your total expenses.
Now here’s a rule of thumb: The 50-30-20 rule. 50% of your total monthly income should go to necessities, 30% should be the maximum for non-obligatory expenses, like your wants and luxuries, and no less than 20% of your income should go to your savings.
Live within or below your means.
Living within or below your means is the ability to differentiate between needs and wants. If having a car is a necessity, you don’t need to buy a Lamborghini. You can opt for a much less expensive model that can still get the job done excellently. Having a car is a need, a luxury car, not so much.
Lessen your social media intake, too, especially when you find yourself coveting what others have. If you don’t have their monthly income, then you can’t afford their lifestyle. Instagram is not real life, and we can’t find joy in excess or material things.
Have a separate set of savings for emergencies and the future.
Unless you’ve been living under a rock, you probably know that we’re currently in the middle of an economic downturn. But recession or not, you need to make a habit of saving up for a rainy day, especially in a pandemic. Having an emergency savings fund can save you the worry of being blindsided by unexpected expenses, like a sudden hospital stay or an accident.
Being financially responsible also entails having a separate set of savings for your future. You never know what’s in the cards for you—it could be marriage and a family, or a job that requires you to travel all over the world. Knowing that you also have enough money saved up for the future can give you financial freedom, reduce your anxiety, and shield you from a dwindling economy.
Consult with experts.
It’s okay to admit when you don’t know everything; that’s why experts exist. Consider hiring a financial planner to help you go over your financial history and your plans for the future. They can help point you in the right direction, make wise investments, and support your financial goals. They’re able to see and understand things about your financial situation that you may not necessarily see yourself.
Use credit cards wisely.
The holy trinity of using credit cards wisely is this: 1) Pay your bills on time, 2) don’t exceed your credit limit, and 3) don’t use more than you can afford to pay for. Following these three basic rules can help you maintain good credit and avoid an overwhelming amount of debt.
Understand how taxes work.
A financially literate person must understand the difference between local, state, and federal taxes. You should know how much is taken out of your paycheck every month. Learn when and how to file for your taxes.
It’s okay if you’re only starting on your financial journey today. We all need to start somewhere. No matter your age, you can start being responsible for the income you receive. Be smart about your financial choices, and see how much it can improve your life.