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4 Financial Tips for Young Adults Overloaded with Debt

Never has it been more expensive to be a young adult living in America. These days, the average 20-something is living paycheck to paycheck while dealing with massive debts in the form of student loans and credit cards.

With a busy schedule that can include jobs, family and school, folks in their 20s frequently put off planning for their financial future. But your actions today are essential to building a financial foundation that will help you reach your money goals tomorrow, from buying a home to retiring comfortably.

No matter how much debt you have, here are a few basic financial strategies that can set the stage for a debt-free – and stress-free – financial future.

1. Build a Budget

We know you’ve heard it before, but budgeting is critical to strengthening your finances. You probably have a vague idea of how much money is going in and out of your bank account every month, but without a budget, you don’t know how much of those expenses are necessary – not to mention affordable. Think you aren’t earning enough to warrant a budget? Living on a small paycheck is all the more reason to keep track of spending. You may be surprised to see just how much of your income is going to expenses you can live without.

Once you’ve reviewed where your money is going, you can determine which expenses you need and which you can cut to start saving money. In general, the formula for an after-tax budget is 50 percent of your earnings allocated for fixed costs like housing, food, gas and insurance; 30 percent for extras like eating out, entertainment and travel; and 20 percent for your financial goals. In other words, you should plan to put at least one-fifth of each paycheck toward debt repayments, an emergency fund, retirement savings and – if you’re hoping to buy a home – saving for that mortgage. Make it a habit to check in with your budget periodically to assess your progress.

2. Make It Automatic

The top reason people don’t save money isn’t because they can’t afford it; it’s because they simply don’t get around to it. One of the worst things you can do is wait until you earn more money to start saving. Sure, saving 20 percent of your income is ideal. But if you sock away even a fraction of your paycheck – let’s say $10 or $20 each month - you’ll still be in stronger financial shape than your peers who have been saving nothing.

If you’re a procrastinator – as many of us are when it comes to finances – your best bet is to make saving automatic. Set up an automatic transfer from your checking account into your savings each month. Think of it as paying yourself. As your earnings increase, you can always increase your contribution. Having a cash cushion will also help you make it through any unexpected financial crises that pop up, such as a big medical bill or temporary unemployment. With cash to cover surprises, you won’t be forced to take on large credit card debt. And if you find that you have trouble keeping up with the bills, you may want to make your bill payments automatic as well.

3. Take Care of Credit

If you aren’t applying for a loan or new credit card, you may not give much thought to your credit score. But that little number will impact everything in your financial life, from the interest rate you pay on your car to your ability to get hired for a job or approved to rent an apartment.

If you’re making late bill payments, charging more than one-third of your credit limit each month or not using credit at all, you’re most likely hurting your credit score. Another common mistake: not checking to see if everything on your credit report is accurate. Keeping tabs on your credit by obtaining your free annual FICO score from Annualcreditreport.com and checking on your credit health at Creditkarma.com will help you understand where you stand, what (if any) errors need to be fixed, and what adjustments you need to make.

4. Reduce Debt

Of course, all that hard work you put into saving money and improving credit will be for naught if you’re mired in debt.  When you have too much debt, a growing portion of your paycheck goes to interest and fees each month. Not only can this be discouraging when you’re trying to save money, but it also means that - if you’re making minimum payments - you’re probably not even making a dent in your balance. Even if you can’t avoid student debt, try not to accumulate too much consumer debt. The more debt you have, the longer it will take you to pay it off.

If consumer debt like credit card debt is running your life, you may need more than a new budget to get your finances back under control. In certain situations, bankruptcy can be the most effective tool for wiping out overwhelming debts, allowing you to begin rebuilding your finances – and your credit. While bankruptcy can’t erase student debt, it can ease the burden of education loans by relieving other forms of unsecured debt. If you have more debt than you can handle, consider speaking with a bankruptcy attorney about your options.

Resources:

Financial Strategies for 20-Somethings, Brittney Castro, CNBC

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