A typical 15-year-old might spend £25 a week. The annual salary of the average 20-year-old is £20,000 or more. Adjusting from one to the other is a big part of becoming an independent adult.
You can do it. Keep calm, and use this guide. It outlines the skills you will need to acquire over time. As with all skills, you improve with practice. What might seem daunting will soon become natural and effortless
Making ends meet
Living within your means is the core skill of money management. As you master it, you’re setting yourself up to achieve more and turn your hopes into reality. If you consistently struggle you’re putting a drag on your happiness, causing anxiety and limiting your own options and opportunities.
Young people are more likely than other age group to struggle with making ends meet. One reason is obvious - entry-level jobs pay less. The national minimum wage is lower for workers aged 24 and under, and even less for under 21s. Low pay rates is only one explanation though. Other causes of living beyond your means are:
- your income is too low
- you’re spending too much on things you don’t need
- you have no idea how much you are spending or where it goes
- any combination of the above
There’s no point in desperately cutting your spending if what you really need to do is increase your income. Discovering which is relevant to you is a skill in itself. Begin by thinking about your income.
How much does a young adult need to live on?
A single adult living in their own flat needs annual earnings of around £18,400 to have an acceptable standard of living. If you live in shared accommodation, the income you need drops to £16,400.
The cheapest option is living with parents, which you can manage on under £9,000 even after contributing £100 a month for your keep.
You won't earn enough to live in your own flat if you are being paid the minimum wage, even if you're working full time. That is why many young people continue to live at home into their 20s.
They can contribute to the household running costs, so parents are not out of pocket, and still have a chance of saving. Someone aged 21 to 24 can earn enough for this - £9,000 a year - on the minimum wage by working just under 24 hours a week.
Sharing with parents provides savings on major items such as rent, council tax, fuel, water rates, insurance, decoration, broadband and TV licence.
Note, though, that one or two things can be more expensive than when you have your own place. Young people living at home tend to spend more on socialising, and eating out, for instance. That's because having friends round for a cheap night is not so easy when it’s your parents’ home.
Tracking where your money goes
Do you know how much money is in your bank account right now? How accurately? Do you know how much you owe on credit cards?
Being able to answer such questions with reasonable accuracy is a great skill to develop. It is a sign that you are in touch with your finances. Dodging the reality, choosing not to see your balance at a cash machine or hiding letters from the bank, means you won’t know what state your finances are in and it can make things far more difficult.
Experiment with different ways to keep on top of your balance until you find one that suits you. As well as checking online, you may be able to use your bank's phone app, or set up regular texts. Or keep a rough running total in a notebook or diary.
But tracking isn't just about your current balance, which just gives you a snapshot in time. You need to know where your money is going, and what bills you have to pay coming up.
The only people who don’t need to track are those whose incomes or savings are so large they just know by intuition that they are living within their means. Everyone else has to track it. You can’t do it by guesswork or memory.
You may know some basic things, such as how much your phone contract costs you. But few people, including adults who are good money managers, could answer questions like these without checking their records:
- How much do you spend a year on haircuts compared with takeaways?
- Do you spend more on going out than your fuel bill - or the total amount you pay in insurance?
- Would you save more if you cut back on holidays or on alcohol?
No one memorises scores of expenditure items. So to get a useful idea of where your money will be going, you need a bit of detective work. You need to track it.
You can download statements from your bank account and credit card accounts, sort each purchase, known as a transaction, into a category such as eating out or sports.
You can train an app that links to your accounts to do the same thing. If you don’t want to use apps at all you can check your paper bank statements manually. One way or another, you have to look at the list of your transactions, and make a record of the different spending categories.
For your cash spending, you’ll need to keep your own tally in a notebook. Keep receipts, which will make it easier at the end of each day, and remind you where you were and what you were doing. This will jog your memory for spending for which you don't have receipts.
Some people do this for a few weeks or more and get an idea of their typical behaviour. Some people develop a lifetime habit of noting down all spending. Do what suits you.
If you need to cut down spending, you can use your categories to see what your options are. Look first at the major items. Cutting these gives greatest opportunity. But don't forget the frequent smaller items too. They all add up.
Checking your accounts also alerts you to fraud, and to potential mistakes or double charging.
Keeping track of finances is a major life skill that you can hone and develop over time. You can experiment, try different methods and find what works for you now. Then change it for a new system when you need to.
Try not to be critical of yourself when doing your financial records. Keep emotions out of it.
If you now think that certain spending was a mistake you can reflect on why you did, and try not to repeat it. That's fine. But there's little point in getting exasperated with yourself, and none at all in telling yourself that you a poor money manager.
You will also need to be aware of the more expert skills—involving planning ahead and knowing about financial products.