Personal Finance For Young Adults In 2023: ExpensesFeb 22, 2023
When we hear this word our energy often goes down. It is one of the staples for personal finance though, especially for young adults. Our energy goes down likely because we see expenses as a necessary evil. Money has to go here, otherwise life is going to get harder.
While you’re not wrong, take a second to think how life would be without what the expense is paying for. What would life be like without your car? What would it be like without a place to stay? You would have to walk or ride a bike everywhere. You would have to find other means to convince the real estate owner that it’s in his interest to let you stay there.
What if you had to give him or her something every month instead of money? This month I had to give my PS4. A month before that, my old computer. Before that, I had to give my favorite dining room set! What would life be like without your gym membership? Would you get fat because you couldn’t go to the gym anymore?
I could fill the rest of this article with examples of how life would be without expenses. This is brought up, so we can realize the role they play in our lives.
Ultimately, expenses need to be looked at from a form of appreciation. It’s either looking at them like that or be stuck with that necessary evil feeling. I don’t know about you, but I’d take that appreciation feeling over the other one any day of the week.
What is an expense though? The dictionary definition is the cost required for something. I’d take that a step further and apply that definition when it comes to things we need. I wouldn’t consider me buying a new video game that month an expense, although it technically fits the textbook definition.
There are 2 types of expenses when it comes to personal finance. The first type is something that you pay for once, and it’s done. If I take the toll road for an hour, a bill comes in the mail. I pay it, and it’s done, unless I decide to take the toll road routinely, which I certainly will not! The second type of expense is the reoccurring expense.
This type of expense keeps showing up for payment at a regular interval. You might be thinking these are monthly expenses. While monthly expenses are a type of reoccurring expense, they are not just limited to just monthly ones. The biggest example of this is paying taxes. For most people, this is an annual expense, and for some, it is a quarterly one. Some common examples of reoccurring expenses are as follows:
- Mortgage or rent payment
- Car note
- Internet bill
- Phone bill
- Car insurance
- Health insurance
- Homeowner’s insurance
These are just a few examples of many expenses, and while each person’s expenses will vary depending on their situation, there are some universal expenses that most if not everyone has.
Once you leave home and are on your own, you will likely have some kind of overall living expense to make each month. In most cases, this will be a mortgage or rent payment. Regardless of what it is, it’s in your best interest to research, and be informed on how what you are paying for is in your best interest at the time.
For example, renting and owning, while both are a living expense are different and have very different pros and cons. A person financing a house with a 30-year mortgage will slowly build equity in the house as they make their payments. This means that if they decide to sell in the future, they can get money out of the deal. If the house is paid off, they will no longer have that living expense to deal with.
They could even rent the house out and make rental income if they wanted to. On the flip side, the house is theirs, so when something goes wrong with the property, they are responsible for fixing it. That 30-year mortgage also ties their hands.
If they break that agreement for whatever reason, it will affect their credit report, which can inhibit their buying decisions going forward. Is owning a home worth the pros and cons of it?
Turning it around a bit, a person who rents a house has no long-term strings attached. If they get a better job offer in a new city, it is relatively easy to move on from that property and move to their new work location. The landlord is responsible for the upkeep of much of the property, leaving these tasks off the person’s mind.
On the other side, the payments they are making contribute no long-term value since they do not own the property, and if they wanted to make changes to the place, they couldn’t. Renting also has its pros and cons.
These personal finance examples are simple and don’t go into the details, but they are used to illustrate the point that a living expense is necessary. But, which one is best? Someone who is somewhat of a nomad, putting in applications for a job in their field, is ready to get up and relocate their whole life if the right job offer comes may find more value in renting.
Someone who is more stable and looking to raise a family may find owning more valuable. The key is that thought is put into how this needed expense serves your interests. We often overlook doing this because we dread expenses so much. Once you look at expenses from the perspective mentioned above, you start to see how this expense is serving you.
This also paves the foundation for you to see how the same type of expense that serves a purpose may serve your needs better in a different form and sometimes for around the same price.
Buying a car in cash is fantastic, but in many cases, it has to be financed. Or does it? Is it more practical to save the money and buy a cash car? Does it make more sense to finance the car? These are the questions you should be asking yourself.
If you do finance a car, should it be a new or used car? How will that decision affect other expenses down the line (oil changes, maintenance, replacing brakes, etc.)? These things may be a more significant factor in a used car, but more times than not, a used car is cheaper than a new one.
Is the $$$ difference between the new and used one going to make up for the depreciation of the used car? On top of these, what will the interest be if you do finance? Only you can decide this, but these questions have to be on your mind for you to make an informed decision.
All of these questions lead to this word if they haven’t been mostly positive. The popularized definition of a liability is something that takes cash out of your pocket. Some see liabilities as reoccurring expenses.
They technically are and feel free to label them as such. Since by definition, a liability is an expense, you will hear me referring to them as reoccurring expenses or just expenses for the duration of this book. The thing to remember here is that there are needed expenses and unneeded expenses.
This is not saying you should not have unnecessary expenses. You just want to keep them manageable and to a minimum until your income increases enough to justify expanding your means. It is that very behavior that creates an imbalance in a person’s earnings to spending ratio, likewise causing financial problems.
Paying for an expensive golf club membership when you can barely make rent payments is a visual of this scenario. On the flip side, if you are doing well for yourself, with steady cash flow every month meeting your monthly expenses, you have a savings and modest investments, then something like that isn’t bad. It’s just expanding your means and may even serve as motivation to maintain it.
There is nothing wrong with getting things that allow you to enjoy life. These should be obtained after you’ve acquired the income stream that can pay for these things.
Depending on what type of income you make, the approach for paying for something can be different. That’s another book in itself. Will it be better to pay these things off in payments or save and buy in cash? These are the questions you should be asking yourself.
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In a nutshell, expenses are needed to live in today’s society. We have the freedom to choose which ones we want, and since we do, it’s in our best interest to educate ourselves about the ones that are best for our situation.
To do this, we have to be familiar with the dynamics of our situation, and how these needed expenses affect it–for better or worse. While there are different types of expenses, they all fall into one of these categories: Survival expenses, luxury expenses, and investor expenses.
If you’re looking for more information on personal finance for young adults, you can checkout my free E-book/Audiobook, Steal my financial blueprint. In it, I lay the blueprint that all young people need to implement to ensure that their money is going in all the appropriate places to take care of them, both today and later in life. You can get the book here.