"Adulting" is hard. Budgeting can be harder.
To help young adults in need of a crash course in "adulting," TODAY is launching a new series, "How to Adult..." where younger viewers can get advice about various relevant topics. To start the series, Sharon Epperson, CNBC's senior personal finance correspondent, shared her best advice about creating a budget, building credit, and getting your finances in shape.
Epperson recommends that anyone who is just starting out make a budget and do everything they can to track their spending so they can develop healthy money habits and learn how to successfully manage their finances.
Epperson recommends that for at least three months, you stop using cash or mobile payment apps like Venmo and Zelle. Instead, put all your purchases on a debit card or no-fee credit card, so you can record your spending by looking at your statements.
Debit cards ensure you'll only spend the money you have at the time, but a credit card offers better fraud protection, so determine what's most important from you and start using that. If you do use a credit card, make sure you pay your balance in full each month to avoid paying interest charges.
After you've figured out where you're spending, print out a budget worksheet online or download one — there are plenty of free options! List out all of your expenses as recorded in your debit or credit card history. This will give you a sense of exactly how much you are spending in each category.
The biggest part of a budget is making sure you'll have money for the necessities, but it can help to leave yourself some wiggle room to treat yourself if you can afford it.
Necessary expenses include rent, utilities, transportation costs, grocery bills and other applicable costs like school fees or phone bills.
Meanwhile, discretionary expenses are the things you buy but don't really need, like going out to eat, taking a cab, buying new clothes, or paying for streaming services.
We all saw this year how quickly things can go haywire — and there doesn't have to be a global pandemic for your finances to go awry. Think about necessary concerns: What if your laptop stops working, or your car breaks down?
Try to think about how much a minor emergency like that could cost you, and start saving: Even a few dollars a month can add up. If you're just breaking even each month and don't find yourself with any money to save, try to cut some of your discretionary expenses to make sure you can establish some savings.
Credit is important, but it's tricky: Young adults who have never had a credit card of their own may quickly get in over their heads. However, it's important to have one so that you can build credit, which you'll need later in life when making purchases like buying a car or house.
Epperson said that she has "no problem" with credit cards, but you have to keep a few things in mind. There are three pros of the system, she said:
- Credit cards are a great way to help you build credit
- Credit cards have greater fraud protections than debit cards
- Many credit cards have rewards programs where you can earn cash back on everyday purchases like gasoline and groceries
However, there are also three negative points:
- Credit cards can increase your chances of overspending
- Carrying a monthly balance can add up quickly: Credit cards have high interest rates, potentially more than triple the interest rates on car loans and mortgages, so a high monthly balance can add up quickly.
- Credit cards can hurt your credit score as easily as they can hurt it: If you miss a payment or use too much of your available credit without making a payment, that can negatively impact your credit score.
What, exactly, is a credit score?
Credit scores seem all-important — but many young adults may not know exactly what they are.
"A credit score is a three digit number, usually between 300 and 850, that is the result of an analysis of your credit history," Epperson explained. "That number tells lenders your potential risk and ability to pay loans."
Credit scores matter a lot: A good credit score can help you qualify for low rates on credit cards, car loans and home mortgages. Some employers even take them into account, and if you're renting, most landlords will ask to see it. Having a bad credit score can negatively impact all of those things and cost you in the long run.
"To a potential lender or employer, your credit score and your credit report, based on your credit history, indicate whether or not you are responsible and can handle your financial obligations," Epperson said. "If you're trying to aim for a good score, you'll want a number that's above 700."
There are some tactics that can help you boost your credit score: Pay your bills on time, and try to use less than 10% of your available credit.
Remember that savings category of your budget? It may seem hard to put money aside now, but if you get in the habit of doing it early, it'll become second nature.
"Make saving a daily, weekly, monthly habit," Epperson said. "Deposit a certain amount of each paycheck, and monetary gifts too, in an online savings account ... You may think your money is just sitting there — and it is. That's the point. It's there when you need it."
While you might start out saving up for the occasional emergency expense, you should be working towards having six months worth of expenses. That can be a safety net in case you get sick, lose your job, or otherwise aren't making money.
Don't forget to save for long-term goals, too, like a vacation or a new car, or even retirement. However, that emergency fund should be your "immediate savings goal."
To find out more about "how to adult" when it comes to your finances and get more of Sharon Epperson's tips on how to create budget and build credit, click here.