Critical Spending and Saving Tips to Achieve Financial Independence
Achieving financial independence is a process for young adults. For those of you in the midst of building this foundation, focus on three goals:
- manage your spending
- build up your savings
- improve your credit score
Here are some DOs and DON’Ts to get you on the path.
1. DO know where your money is going.
Avoid using cash and use debit or credit instead so you can track your spending.
2. DO develop strategies to curb “social spending.”
Peer pressure, FOMO, and YOLO are powerful social pressures to spend. Fight them or they’ll eat you alive. Try socializing your concerns about overspending to your peer group. You may be pleasantly surprised to find out that others are feeling the same pressure and glad you raised the issue. This challenge is more easily addressed together, rather than alone.
3. DON’T go into debt for furniture, vacations, weddings, or other everyday living expenses.
If you cannot pay in full for these items, you cannot afford them now. If these are goals of yours, create separate savings accounts and a goal for each of them and begin saving the money.
4. DON’T let your spending grow with your income.
Avoid the hedonic treadmill as it will be harder to jump off later. Otherwise, you’ll drive yourself crazy and never get ahead. As your income grows, keep saving more money. One way to do this is to increase your 401K payroll deduction each time you get a raise.
5. DON’T use credit cards unless you have the discipline to pay your balance in full every month.
Credit cards have great benefits as I’ve described elsewhere, but they’re dangerous if you’re unable to restrain your spending. If that’s you, then stick with debit. Either tear up your credit cards or put them in a drawer for emergencies.
6. DO understand your obligations if you co-sign a loan or a lease.
Make sure you trust your co-signer’s commitment to repay before you move forward or you could be stuck with an unpleasant surprise for which you are fully responsible. Don’t co-sign for any obligation unless you really have no other choice.
7. DO save for retirement.
Use payroll deductions to contribute 10+% of your income to your workplace 401K plan and/or a Roth IRA. You’ll be “paying yourself first.” Payroll deductions are the best way to consistently and effectively save.
8. DO save for emergencies.
Sh*t happens in life and you need to be prepared. Your target should be saving 3 to 6 months of your living expenses. Until you’ve reached that level of emergency savings, you should be very wary of all discretionary saving. This should be a high priority for you to achieve.
9. DO keep the money out of your checking account.
Money in your checking account is too easily spent. Trick your brain by moving it into your savings account where you don’t view it the same way. Either set-up an additional payroll deduction at work to divert the money to your savings account or set up an automatic debit at your bank that moves the money from your checking to your savings on a regular basis.
10. DO have bills and/or loans in your name.
Credit card bills and student loan payments are good examples of payments that will help improve your credit score. Paying utility bills and the rent are other good examples.
11. DO pay your bills on time and in full every month.
With online banking and automatic bill pay, it should be easy to manage these payments. Late and missed payments will really ding your score. Put these payments on automatic pilot.
12. DON’T default on your student loans.
This will set back your credit score significantly, you will find it difficult to take out any other loans, and landlords will be more reluctant to rent to you. These loans are not dischargeable in a bankruptcy so if you don’t keep current with them, they will come back to haunt you.
13. DO align with your partner.
If you’re in a relationship, all these points are doubly true. Have some occasional conversations about these issues and make sure you’re on the same page. It won’t be the most romantic part of your day but you’ll be grateful later.
Be an active participant in your journey to achieving financial independence.