When you finally have your very own space, be it an apartment, studio, or even just a room, it is one of the biggest milestones of young adulthood. There is something so liberating about having your own ‘domain’, being able to walk around in your underwear or even just having no one to tell you what to eat for dinner. Sure, being independent is something to be celebrated, and the idea of not having to deal with your parents and their nagging is more than enough to motivate most people to get their own place as soon as possible. However, there are also many responsibilities that come with having your own place, which many people don’t immediately realize. Yes, it’s exciting having your own space and doing your own thing, but before you start packing all your boxes and starting to look for apartments, there are a few things that you might want to learn first.
So, what’s the catch?
Independence comes with a set of quiet, heavy responsibilities that can catch you completely off guard if you aren’t prepared.
It’s hard to describe to someone who hasn’t done it yet, but the weight of opening a bill with your name on it. But to give you an idea, once you open up that envelope or click on that digital bill, you realize that every daily decision you make affects your bank account in small ways. Managing the monthly costs of living, dealing with random expenses here and there, and even tracking where your money is going on a weekly basis is more work than it seems.
Mastering a few core financial skills before moving will help you to ensure a smoother transition to your new home. Here’s what you need to know to get started.
Understanding Your Real Net Income
Most people first think of their gross income (the amount of money before any taxes or other deductions) and then how much they can afford to spend from that. But this is not how to figure out your net income. Your gross income is the amount of money you bring home before any taxes or other money is taken out. Your net income is the amount of money that actually does get taken home after all the taxes and other money have been taken out. So, you need to look at your last pay stub to figure out your net income for the month. This is the amount of money that you will have available to spend each month. It is the basis for any of your monthly budget calculations.
It isn’t. Not even close.
Gross pay is how much you earn in a year before any money is taken out for taxes, health insurance, or 401(k), but net pay is how much you actually take home. Knowing your net pay is important to knowing how much you can afford to spend each month.
When planning your living costs for your new place of residence, calculate them based on your net income. Most people know their gross salary, but then they forget about all the taxes, health insurance, and retirement savings that are taken out of it to arrive at their net salary. Take a look at your pay stub every time you receive your pay and know how much money you really have. If you know how much money you have for living costs, you will avoid spending too much on rent or other living costs.
Crafting a Realistic Monthly Budget
Make a budget – a roadmap for your money, which you can follow throughout the months and also check throughout the year, to see whether you are sticking to it.
A simple framework to start with is to split your net income into three buckets: mandatory needs, personal wants, and savings/debt repayment.
Here is a rough outline of how you can divide your money: Mandatory needs: rent and basic services (utilities, etc.), food, and other personal needs (transportation, health insurance, etc.). Personal wants: cover things you like to do (dining out, watching movies, playing video games, going out on weekend trips with friends, hobbies, etc.). Savings: cover your needs for the future (for example, your retirement savings; if your employer offers a matching contribution, you should contribute at least enough to get the match; otherwise, you can start with a very small percentage of your income and increase it over time).
Tracking your expenses during your first few months of living on your own is a huge undertaking and allows for the greatest of flexibility in making changes to your budget as quickly as possible. During this time of great fluctuation with such things as utility bills and the cost of grocery items, monitoring the spending of money on the very basic needs as well as tracking of daily purchases allows for great change to save money before the money is all spent.
Setting Up and Managing Cash Flow Modernly
Having a solid financial routine requires a reliable place to store, manage, and transfer your funds. Managing cash flow effectively means separating money meant for bills from money reserved for daily expenses or long-term goals.
Setting up a flexible checking account online allows you to monitor incoming deposits, send fast transfers, and schedule automatic bill payments directly from your phone. Modern digital access makes it easy to check your available balance before making purchases, reducing the risk of accidental overdrafts.
Automating your fixed payments, such as rent, utility charges, and phone bills, protects your credit score and helps you avoid late fees. And yet, automation still requires regular check-ins. Make a habit of auditing your account weekly to ensure your balances remain healthy and that there are no unauthorized charges.
Building an Emergency Reserve
No one can predict every unexpected event, such as getting a flat tire, becoming ill, or having an appliance break. That’s why, even with a solid budget, it’s crucial to have money saved up for unexpected, urgent events. In the event of an unexpected expense, individuals without a financial cushion can be forced into using high-interest credit cards or loans to cover the cost of the event.
Even unexpected minor repairs require payment. If you haven’t saved an emergency fund, you may turn to a high-interest credit card or even a loan to pay for these types of expenses.
An emergency fund is a pool of money put aside for unexpected events that require immediate attention and expenditure, such as car repairs or a broken appliance, to name a few. It is highly recommended that you move out of your parents’ house to start saving for an emergency fund. Ideally, the emergency fund should hold three to six months of your living expenses.
So, how do you actually start?
When saving for emergencies, start with a goal of saving the first $1,000. Once you have reached that goal, continue to add the same amount to your emergency savings each pay period until you have reached your multi-month goal. The money in your emergency fund should be easily accessible but kept separate from your checking account, where you are tempted to use it for non-emergency purposes.
Navigating Grocery Shopping and Meal Planning
One of the biggest expenses young adults may not expect when moving out of the family home for the first time is food. Eating out at restaurants, cafes, or taking food home from shops and eating in front of the TV can quickly eat into a person’s finances and should be avoided.
Learning to shop for groceries to eat at home and to cook simple, nutritious meals for yourself is one of the best ways to keep costs down as a young adult.
Plan your meals for the week ahead of time. From this plan, make a list of exactly what you need to buy. Wait until you are not hungry to go to the store. Only then can you avoid buying loads of useless rubbish that is only in your interest to buy because you feel ravenous at the time. Then try to purchase as many of your needed goods as possible from seasonal produce to get the best prices. Next, check the price per unit on the supermarket shelves. That is the price per kilogram or per 100g, etc. Also, try working out whether buying staples in bulk is cheaper for you, as it is for many people (however, don’t go buying loads of worthless junk just because it is cheap and in bulk; this would defeat the object).
When buying produce, look for what is in season. Also, make sure you are getting the best deal by comparing the unit price of the products you are buying. Some things are better to buy in bulk if you use them a lot in your daily meals. Also, don’t throw away leftovers! Use them for lunch the next day to save time and money. By making a few simple meals that are healthy for you, you can save money in the long run.
Grasping Credit Scores and Smart Borrowing
Your credit score is a measure of how well you have handled your borrowing in the past. This is why many landlords check your credit score before letting you sign a tenancy agreement. Similarly, some utility providers will check your credit score before agreeing to provide you with a service and may even require a security deposit if you have a poor credit history.
One thing people don’t realize is that it takes a long time to build a good credit score, which affects your ability to rent an apartment or get approved for utilities in your name. Paying your bills on time is the single most important thing for your credit score. Late payments can hurt your score for 6-12 months! Therefore, making sure you pay all of your bills on time is key to having a good credit score.
You would use a credit card to make purchases, but you would only be spending money that you have in your bank account. The credit card would only be used as a convenience for you. you would pay off the entire balance of your credit card each month to avoid any interest on your card. As long as you are using very little of your available credit and are paying your bills on time you will have very good credit, and this will help you out in the future with your leasing applications and with your interest rate on any future lines of credit.
Managing Utilities and Household Contracts
Living on your own means taking responsibility for variable home operational expenses. Utilities like electricity, water, gas, and internet service are recurring monthly costs that require active management.
When renting an apartment, as a new renter, ask the landlord or previous tenants what are the average monthly utility bills for that apartment. Keep in mind that heating and cooling in apartments greatly vary by season. So in the winter months, your bills may be higher than in the summer months. The same applies to other utility bills such as water and gas bills. Also, practice energy efficiency at home to keep your bills low. For example, unplug appliances when not in use, lower the heating/cooling temperature when you are not home, turn off lights when not in use, etc. As for services such as internet, phone, and cable, always shop around and look for the best promotions from different providers. Mark your calendar so you can renegotiate the contract before rates jump up.
Be mindful of your home’s energy consumption and save money by keeping an eye on your usage. Make sure to turn off devices when not in use, and try to keep your thermostat lower when you’re not home. Keep an eye on promos for basic services such as internet and mark your calendar for when rates are due to increase so you can renegotiate for the best price.
