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Out of the many indicators of adulthood, perhaps the most significant is achieving financial independence from your parents. While this might seem daunting, with it comes the feeling of freedom that many consider the true mark of growing up. Becoming independent means all of your decisions are your own to make, and with that comes a level of responsibility.
That being said, it is not easy to achieve and there is no one size fits all method to get there, but we’ll help get you started on the right path. If you ever find yourself unsure of what to do next, give us a call or stop by a branch, tell us where you want to go and we’ll help you get there.
Achieving financial independence can bring numerous benefits to your life simply by allowing you to take control of your own finances and make decisions based on your own priorities and goals. You can make purchases, and invest in your future without relying on your others for financial support. This independence can also boost your confidence as you become more self-sufficient and capable of managing your own finances.
While the comfort of relying on your parents may be difficult to step away from, it’s difficult to progress in life when you don’t have full control over your financial decisions. Keep in mind, this is a process and likely won’t happen overnight. Talk to your parents about your intentions, and work together with them to develop a plan.
One of the first tasks you’ll need to focus on is taking stock of your current finances. How much money do you have coming in every month, and how much is being spent? Write out all of your regular expenses that are paid every month, be sure to include all monthly subscriptions, bills and medical costs.
For example, let’s say you have an after-tax monthly income of $1,000 and the following monthly expenses:
– Movie Nights (Once per week, 4x/month) – Total: $80
– Gas for Car (Fill up 2x/month) – Total: $100
– Cell Phone Bill – Total: $100
– Car Insurance – $150
– Streaming Subscriptions (Netflix, Hulu, Disney+) – Total: $36
– Entertainment – $100
Your monthly expenses total $566. You can use this information to find your income to expense ratio using the formula: Expense Total/Income Total. In this case your ratio would be 566/1000 which we can simplify to 51/91 or roughly 56%. This means that your expenses make up 56% of your total income.
Based on your results, determine if you need to make adjustments. If you are spending more than 80% of your monthly income, consider reducing or cutting out unnecessary costs. It may be a mild inconvenience in the moment, but you’ll appreciate every dollar when you get out on your own. Consider the above example. By canceling one streaming service, and reducing movie nights to every other week, you’d save over $600 every year.
Everyone has a different method for budgeting their money, whether they use envelopes or our Money Management tool. Regardless of the method you choose, the most important thing to remember is to be honest with yourself about your spending. It’s easy to “overlook” expenses like bar tabs and take-out/delivery costs.
One of the most common mistakes people make when creating their budget is being overly optimistic about their level of self discipline. Allocating $20 a week for take-out when you know that realistically you spend closer to $50 is only going to stress you out, and mess up next month’s spending every time you go overbudget.
Your credit report will determine your ability to make large purchases, get approved for loans and more. While credit cards can be intimidating, they are the fastest and easiest way to build up your credit score. That being said, they can also be the quickest way to ruin it if not used responsibly. If you are concerned about using credit, consider looking into a secured credit card to improve your credit score with minimal risk.
Other factors that can affect your credit report include:
– hard-credit checks
– late/missed payments
– credit utilization
– length of credit history
If you have any monthly bills in your name (cell phone, car insurance, etc.) these may also impact your credit either positively or negatively depending on your payment history, so be sure to make payments on time and in full whenever possible.
Perhaps the most important step in reaching financial independence is saving enough money to ensure that if and when the unexpected occurs, you won’t have to resort to using credit or borrowing money. You’ll enjoy a sense of stability, and security knowing that you have that safety net.
Depending on your situation and spending habits, the amount of your savings will vary. Aim to have an emergency fund with at minimum, enough saved to cover 3-6 months of expenses. If you lose your job or are otherwise unable to work, this will give you time to get back on your feet.
Establishing financial independence takes time and effort, but is a crucial step towards achieving long-term financial stability and success. Wherever you are on your financial journey, we’re always here to help.
If you have any questions, email us at info@bankgloucester.com or call (978) 283-8200 to speak with a bank representative.
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NerdWallet – https://rb.gy/fpodn
Equifax – https://rb.gy/ixa51