Since financial freedom is getting more recognized as a substantial goal of young adults nowadays, finance experts and successful entrepreneurs have been publishing their own stories and providing advice for people who are looking to be financially independent. The famous methods include FIRE, ISA, Envelope Budgeting among countless other alternatives you can choose to go about your income and expense.
What these methods have in common is that they show you how you can make money and save up to reach a state where you can freely spend how your heart desires without any fatal consequences.
However, as a finance and business expert with over a decade of experience working with multiple clients from different backgrounds and diverse industries, I believe the other way around is just as effective. Smart financial management, especially for young adults who are starting their financial journey, begins with managing your usual expenses.
How to manage your finance to achieve financial autonomy
#1 Understand your consuming habits
The first step in effective financial management is understanding your real situation and what your consuming habits are. This means you have to be aware of how much you are making monthly, your financial goal in at least two to three years, how you are spending and what you are spending on everyday.
Research has shown that young people’s lifestyles and spending habits do not reflect their financial realities. They spend more than they earn, or even when they have debts, their spending habits do not change much.
There are several factors influencing these attitudes. First and foremost, people focus on instant gratification. As the world is going through a huge crisis, the traditional institutions no longer apply for today’s generation. Financial and health insecurity, employees being laid off left, right and center, banks cheating people, and so many more issues. Most of all, the global pandemic has made young people believe that they can no longer live for tomorrow because it might never come, so “why not treat myself?”
Then, the perception of luxury in young people has shifted, as well as their need to own luxury goods.
“Older generations define luxury based on the price tag. The younger generation bases [the definition of luxury] more on functionality. There are some things they just can’t live without,” says Sabino of the Luxury Institute.
While older adults prioritized family-focused expenditures while in their 20s, such as buying a house, automobile, and building a savings portfolio, today’s young people spend their money on themselves, primarily on technology and travel.
Lastly, social media and pop culture also influence their lifestyle decisions. In the past, individuals just had to keep with up the neighbors, but now social media have taken this competition to a global level. A non-stop feed of updates tells Facebook and Instagram users what their friends are buying and doing. Hauls on YouTube drive people into conspicuous consumption, or purchasing what you don’t need for the sake of showing off.
What people have forgot is that finance or financial management in its core, is personal. One needn’t follow trends to be considered financially successful or independent. As a matter of fact, one should never look at other people for comparison. Your journey is yours alone, and it’s distinctive. Understand your spending habits and being aware of your financial goal will guarantee your success, not paying for what you don’t need for some likes.
So that’s your first step, list out honestly what you spend on in a month. That includes rent, food, clothes, beauty, utilities bills, hangouts and get-togethers, entertainment activities like watching movies or going to bars, etc. Leave no stones unturned.
#2 Spend with a plan
I am convinced that having a suitable spending plan means you are already 80% successful. There’s nothing more unstable and riskier than overspending and not knowing that you are overspending.
Therefore, the second step is staying on top of your expense.
To do this, compare your spending habits to your monthly income. If the expense amounts to only 30% of your income, you’re good to go.
For example, you earn $500 per month. If the total amount of your spending in a month is $150, you’ll have a high chance of achieving financial freedom soon.
With the remaining 70%, my advice is to invest them. There are many ways to invest but the most profitable investment is in yourself. Take online and offline courses, do physical activities to build your strength and stamina, attend seminars and workshops to develop your skills, and so on. Another investment I have been making is in money, which I will explain in detail in the next post.
But there you have it, the formula you should keep in mind to manage your finance well:
Income = 30% in necessities + 70% in investment
#3 Have multiple income sources
“Don't put all your eggs in one basket.”
That is one timeless saying!
In this day and age when you cannot predict anything too far into the future, it is necessary to be well-prepared financially. The past two years have proved that it is no longer safe and stable to work one job for the rest of your life. Knowing that the only constant is change, it is high time you created many opportunities for yourself.
A traditional and common side source of income that people for decades have been opting for is investing. While it has many advantages, there is a certain amount of risk when it comes to investing. Therefore, I advise you to look at side jobs where you can proactively earn money.
Today there are many side hustles you can choose depending on your expertise and availability. You can be a freelancer for companies that are outsourcing assistance. You can dropship, which sells a product directly to the customer without having to buy any inventory. Affiliate marketing is also an option that many are going for. If you are good at photography, you can sell your photos to local newspapers or blogs. There are even apps and websites catering to trading original photos. The opportunity is limitless!
The bottom line is you cannot be content with where you are. The false sense of security is the enemy of your financial freedom. The moment you stop pushing forward is the moment you are in a dangerous position.
It’s important to note that I am speaking from my experience and observation. The aforementioned tips are not one-size-fits-all and are applicable to certain individuals. Therefore, take it with a grain of salt. Yet, if this approach fits your vision and values, why not give it a try?
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