Preventing Debt: How Young Adults Can Better Manage Finances for Life’s Big Moments

When you look at the cost of buying a house, purchasing a new car, or planning a wedding, it’s no wonder so many young adults are in debt: Life’s biggest moments are also the most expensive!

But while taking on debt with each of life’s major milestones has become the American way, it’s not necessarily the smartest way. Debt may buy you time, but it comes at a cost. Eventually it will come back to haunt you (if it hasn’t already) when mortgage payments, car payments and credit card bills start to pile up.

But what if you could achieve your goals without falling into the debt trap? With a little foresight, it’s possible to build the life you want without the debt.

Preparing to Save

Saving doesn’t happen automatically; it takes effort and planning. But once you figure out what works for you, you’ll be well on your way to building a solid financial foundation. And the good news is that the sooner you start saving, the more you’ll save in the long run.

The first step for young adults is to simply set a goal. Saving takes discipline and if you’re in the habit of spending freely with little or no budget, it can be a challenge to change your ways. Keeping your eye on the prize – be it a new car, your first home or tying the knot – increases motivation and makes it easier to sock away that cash.

If you’re not sure how much you can afford to save, take a closer look at your spending habits. Track your expenditures for a few months and identify which ones are necessary and which can be adjusted. Cutting out just a few monthly costs – whether it’s reducing your cable package or packing your lunch instead of eating out – can significantly increase your ability to save.

Once you determine an amount, make it automatic: Use direct deposit to put your paycheck in the bank, and set up an automatic transfer to deposit a portion of each check into your savings account.

Taking Out Loans

When you’re in over your head in expenses, it’s tempting to turn to debt. Charging costs to your card or taking out personal loans certainly buys time. But is putting off the pain really worth it? Do you really want to spend the next few decades of your life toiling to pay off today’s purchases?

When deciding whether to borrow, prioritize expenses that lead to long-term value. For instance, taking out a mortgage to buy a home is a no-brainer – though you’ll still need to make sure you choose a house and loan terms in line with your income.

Taking out a personal loan for your wedding, on the other hand, might not be the wisest use of funds. While loans typically come with lower APRs than credit cards, they can still be expensive – especially if your credit is less-than-perfect. Most young adults are already dealing with student loans and credit cards – a wedding loan is just another debt you’ll have to struggle with. You may be better off budgeting, adjusting your expectations, and/or borrowing from family to cover costs.

Cars are a little trickier. On the plus side, cars provide useful transportation. On the downside, new cars don’t hold value well. Taking out a car loan makes more financial sense than leasing because you’ll (eventually) own your vehicle free and clear. But make sure you choose a vehicle you can afford and financing terms you can manage. If financing might put you in a tight spot, consider paying cash for a pre-owned vehicle – or choosing a car without all the bells and whistles.

Put Your Money to Work

Getting your money into your savings account is the first step toward reaching your life goals, but it’s only half the battle. Now you’ve got to grow that money.

Today’s interest rates are so low that you might as well be stashing cash under your mattress. Diverting money to a higher-interest savings account like SmartyPig or to a money market fund is a good way to improve your earnings. Ideally, though, you’ll still want to diversify.

Don’t worry, you don’t have to go too high-risk. In general, your risk level should correspond with your time horizon, or the amount of time you have before you’ll need the money. So if you’re saving for retirement, then it may be worth it to invest in multiple stocks or real estate. However, if you’re hoping to buy a house, own a luxury car, or start a family within a few years, you want a form of investment that’s fairly predictable and liquid.

If you can commit your money for a set period of time – say, anywhere from three months to a year or two – certificates of deposit (CDs) are a good way to go because they provide a guaranteed return on investment when they mature. If your timeframe is a little longer, like three to nine years, you can take on a bit more risk with bond mutual funds such as municipal bonds or high-yield bonds.

Reducing Existing Debt

Of course, if you have lots of debt, you’re shooting yourself in the foot when it comes to saving. What’s the point of putting a hundred bucks from each paycheck into a savings account when you’re forking out five hundred bucks, plus interest, to creditors? From credit cards to car loans, your money isn’t really yours until you’ve paid off debts.

By eliminating debt and the interest and fees that go with it, you’ll free up significantly more of your hard-earned dollars in the long run. Less debt means more savings.

If debt is standing in the way of your dreams, bankruptcy may be able to help. The right bankruptcy plan can eliminate unsecured debt, sometimes in just a few months. Meanwhile, it can stop foreclosure, wage garnishment and bill collector harassment.

If you believe bankruptcy may be right for your financial situation, contact DebtStoppers today to schedule your complimentary debt analysis with a DebtStoppers bankruptcy attorney.

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