Updated: Mar 18, 2019
Peter Drucker, the famous man who is considered ‘father of the MBA program’, has a quote that I often use when talking with young adults about finances: “What gets measured gets managed.” This simple quote states that you can’t make changes in any part of your life unless you know all the details. When it comes to finances, I find that many people starting out their independent lives simply don’t know where their money is coming from or how it’s getting spent. This makes it impossible for them to develop a system that will help them maximize their income and reduce their debt. Fortunately, monitoring and managing is not that difficult once you get started. Here’s a quick overview of what young adults should be monitoring with their finances and how to put a system in place for money management.
What to Monitor
Cash Flow - How much money is coming in and how much is being spent on a regular basis is the backbone of any monitoring system. When you start paying attention to these numbers, you can see where your time is best spent (especially if you are working several jobs), and where you can make changes to spending habits to keep more in the bank each month. Sometimes you don’t realize that your part-time bartender job actually pays more per hour than your ‘real’ job or that you’re spending hundreds of dollars a month on specialty coffee drinks until you actually start monitoring your cash flow.
Taxes - When you get out into the ‘real world’, you have to start paying attention to taxes. If you’re a contracted employee or have started your own business, you’ll need to take a crash course in how to set aside money to pay your taxes, so you don’t get yourself into a heap of trouble. If you’re on payroll, you should still pay attention to how much money is coming out of your check each month, so you can be prepared for tax time. I always encourage young people to adjust their withholding numbers, so they get more on their check each month instead of a big return, so they can put that extra money away in an interest-bearing account or investment.
Reserves - There will always be unforeseen expenses in your life ranging from your car needing a new transmission to an ER stay. Even things you should be planning for, like buying Christmas gifts, can sneak up on you if you don’t prepare for them. This is why you need to start putting money away each paycheck to build up your cash reserve. That way, when big expenses crop up, you can get them taken care of without going into debt and with the least possible amount of stress.
Strategies to Monitor and Manage
Now that you see what you need to manage, it’s time to take a look at how to do so.
Use a system Choosing a system, whether it’s a simple page in a notebook, a Google doc, or an intuitive budgeting app like YNAB, is the core of money management. It really doesn’t matter which system you choose as long as it works for you and you’re using it on a regular basis. I recommend young people plug numbers into their system either bi-weekly (or when they get their paychecks) or on a monthly basis.
Learn from mistakes - No one expects you to be perfect at money management. You might make a rash decision to buy that expensive watch or blow your budget on a night out with friends and that’s okay. Learn from your mistakes, give yourself a break, and trust the system you put in place.
Make better decisions - The goal of money monitoring and management is to get progressively better at making good decisions. Once you see the numbers in black and white, you can more easily resist temptations and take pride in watching your accounts grow.
Starting off on the right financial foot as you begin your journey as an adult will put you miles ahead of most young people in your situation. By monitoring your income and spending and putting a system in place to ensure you’re on the right path, you’ll be well on your way to financial freedom.
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