While there are no "one-size-fits-all" financial plans, certain experiences are common to particular phases of life. As you read the following scenarios, don't get discouraged if you feel "behind." The point is not to provide benchmarks of how far along you should be, but rather to provide guardrails to keep you on track and to help you think through issues common to each phase. Your situation will probably differ somewhat from what's here, so make sure to personalize these to your individual circumstances.
The Young Person/Couple
For many young people these days, youth translates financially into "easy credit and lots of debt." More than likely, the first decade out of school is spent paying off school loans, car loans, and credit card bills. Outfitting an apartment or first home can really pack on the debt, especially if you aren't following a spending plan in those early years. Throw in trying to save for a wedding, the down payment on a first home, building a savings reserve, and paying for the arrival and growing up of your little bundle(s) of joy. And just about the time your education is paid off, it's time to start saving for college for the kids.
Sound bleak? It doesn't have to be. Unfortunately, many young couples waste the most productive financial years they'll have for a while: those early marriage years when both spouses are likely working and there are no kids in the picture yet. This is a golden opportunity to make serious headway financially, but all too often it isn't seized due to lack of planning (and because there's so much fun stuff to buy!). The sense of urgency that arrives with those two exciting words-"I'm pregnant"- often comes too late. Here's what's needed:
1. Make a budget, relying on your current spending to establish realistic initial estimates in each category. Usually this requires a period of tracking your expenses carefully to ensure your budget is using realistic figures. Establish your short and medium term financial goals. Then look at your budget again. Does your available surplus put you in position to realize your goals? If not, it's not unusual to go through several rounds of belt-tightening before finally settling on a workable budget. Consider these to be normal growing pains-chances are, it's your first experience setting and living on a serious budget.
2. Attack your debt, while avoiding further debt. This is tougher than it sounds, since most young people have yet to establish a savings reserve from which to absorb unexpected expenses. Couples considering having children are wise to attempt budgeting all living expenses from one income, while applying the other entirely to debt reduction and saving. Sure that may reduce the money you have for "fun stuff" now, but you'll sure appreciate the flexibility later when your expenses soar and income potentially drops in half.
List all of your debts, including balances and interest rates. There are two main debt-payment strategies to choose between. If you are highly disciplined, you will save the most money in interest expense by paying off your highest interest rate debts first. But a more motivating strategy for many is the "debt snowball" approach, in which you pay off the debt with the lowest balance first, then the next lowest, and so forth. Don't underestimate the value of this psychologically; if seeing your debts fall one after another keeps you motivated, it's worth paying a little extra interest.
3. Start building your emergency fund by opening a money market account and having money automatically deposited into it each month. For most people, it's a good idea to start saving a small amount even before they've finished paying off their debt. Some of this depends on the interest rate of your loans, but having a small savings account will help keep you from slipping back to your credit cards when unexpected expenses arise. A savings account balance of three to six months living expenses is routinely recommended by financial planners. That may seem like a lot, but you'll have plenty of use for it if buying a house or having children are on the horizon.
