Budgeting Tips For Beginners: Increase Personal Cash Flow

Updated: Aug 18, 2020

4 Great Tips Young People Should Focus On

It’s sad that, in America at least, personal finance is not a topic that’s required in high school. Many teens enter college without knowing personal finance basics. Later on as young adults, their mistakes have come back to haunt them.

One of the biggest downfalls comes from not knowing how to properly budget, aside from “I owe $x on bills which means I can spend $x on whatever else I want until the next paycheck.” A proper budgeting strategy goes way beyond what to spend on bills and what to spend on yourself.

We recommend any young adults or college students reading this article as it means you’re taking the initiative to better yourself and learn more about taking control of your personal finances. Here are 4 game-winning personal finance budgeting strategies.

1. The Strategy Behind Debt Consolidation & Restructuring

The idea behind debt restructuring is simple. You take all of your high-interest debt and roll it into a low-interest payment. Putting this idea into practice and having the discipline to properly follow through with it isn’t always so simple.

How do you consolidate debt?

There are multiple options available, but college students and young adults are often limited with which of these options they can use. As you get older you can use other methods, such as those that involve tapping into the equity of your home. But for the youngsters who are just taking control of the personal finances, here’s what we recommend:

Low-Interest Credit Card Balance Transfers - If you have a lot of high-interest credit card debt, you might want to consider looking for some great balance-transfer deals on new credit cards.

This way you can transfer your high-interest debt to a new card. It’s not uncommon to find balance-transfer deals that are 0% interest for the first 12 months. The key to making this work is to not use the old credit cards once the balance is transferred.

Personal Loan Debt Consolidation - If you have a lot of high-interest debt and debt with monthly payments that are swallowing you whole, consider checking with your bank about getting a personal loan.

A personal loan is usually only available to those who don’t have delinquencies on their credit. Ideally you would get a personal loan from a local credit union (they usually have lower interest rates) and would use that loan to pay off your other debts, whether it be anything from credit cards to student loans, thus getting you down to just one monthly payment and a fixed interest rate.

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Secured / Collateral Loan - If you’ve got some money in savings and the bank or credit union doesn’t feel comfortable giving you a personal loan, you should ask them about a secured loan. Oftentimes they will make you a loan and use your savings account balance as collateral. It’s a great option for those who have cash on hand but don’t have the best credit history.

Refinance Current Debt - If, for example, you got a car loan when you were a freshman in college working 20 hours a week at Starbucks, they probably hit you with an extremely high interest rate and high monthly payments.

If you’ve been making timely payments on the loan, and your credit is in good shape, you can refinance that car loan for a lower interest rate and lower monthly payments. The car loan is just an example, many different types of collateralized loans can be refinanced.

2. The Strategy Behind Expenditure Control

Expenditure control is an important skill to learn. It should be practiced every single day until it becomes a new personality trait of yours. The idea is that you need to cut out unnecessary spending in order to save and invest more.

Delaying Gratification is something that should be taught to every single teen and young adult as it is 100% necessary in order to take control of your personal finances. It feels good to take your hard-earned money and spend it on something that makes you happy, especially if you’re young. That’s normal human behavior.

It also feels good to buy stuff and put it on a credit card since, after all, you don’t even need the money for it at the moment. These habits and behaviors snowball into issues that will slowly chip away at you for the next decade or two if you’re not careful.

But do you really want to be paying interest on some new shoes or some sushi? Something that could’ve cost $25 can run you $100’s of dollars in the long run if you’re drowning in credit card debt and interest payments.

Learn Self Control and you will have no problem getting your finances in order. Self control and expenditure control go way beyond delaying gratification. Let’s say your car runs you $500 per month and your paychecks cover that payment no problem at all.

But what if you downsized and found a nice, but used, car that only runs you $275 per month. You now have an extra $2,700 per year that can be saved or invested. Do you know how many people would love to get an annual raise of $2,700 in today’s economic climate?

Use the Investor.gov Compound Interest Calculator to see why that $2,700 means so much more in your younger years than it will in a decade or two.

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3. The Strategy Behind Paying Less In Taxes With A Child

Just because you’re a young adult doesn’t mean you’re immune to being a parent. In fact, by ages 25-27, an estimated 55% of the people reading this article will become a parent. It’s important to make smart financial decisions early on to reduce the expenses related to raising a child and to take advantage of tax breaks offered by the government.

Whether you’re saving for your child’s future college expenses, want to kick off their retirement account early on, or simply want to just create an emergency fund, then there are plenty of tax breaks to take advantage of.

Custodial Account - Set up by a parent or relative, a custodial account is a way for someone to make a financial “gift” to a child or minor. It’s a great way to teach your child some financial responsibility and to help them learn the power of compound interest.

Any account that’s set up for a minor and managed by an adult is a custodial account, this can be anything from a savings account to a brokerage account. How does this save you from taxes? When the child is no longer a minor the funds can be transferred to a Roth IRA or to a 529 college savings plan and no taxes will be owed on the interest earned.

529 plans and certain IRAs have maximum contribution limits and other fees that are involved. Transferring over from a custodial account when the child is no longer a minor allows parents to legally circumvent the maximum contribution limits and most other fees involved, while still legally avoiding owing any federal income tax on the interest.

Tax Breaks - Maximizing your income tax return and, hopefully, not owing anything to the IRS is an absolute must for new parents. If you are a first-time parent then it would be in your favor to thoroughly research as many tax breaks as possible for your child.

Using free e-filing software like TurboTax or H&R Block is a great way to make sure you didn’t overlook anything. Depending on the age of your child and your expenses for caring for them, you can deduct up to $8,000 per year per child!

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4. The Strategy Behind Getting The Most Out Of A Whole Life Insurance Policy

“But I’m so young, why do I need a life insurance policy?” Well, we’re about to blow your mind. Yes, life insurance policies were traditionally created as a way to help pay for the final preparations of the deceased, as well as to provide a little bit of support for their family.

A whole life insurance policy is guaranteed until the insured’s death. These policies are different from term-life insurance policies because they build up a cash value that can be used in your advantage while you’re still alive.

The cash value of a whole life insurance policy, which is based on how long you’ve had the policy, what your premiums are, and a few other variables within the terms of your policy. You are able to take out a loan against this cash value.

Getting approved for a loan against the cash-value of your whole life policy is much easier than getting a loan from a bank or credit union as you are using the value of your policy for collateral, thus, poor credit doesn’t really matter.

The interest rate of borrowing against a whole life policy is oftentimes many percentage points lower than that of a personal loan and lower than any credit card you'll find. Because the interest rates are so low, it makes it a wonderful option for consolidating and restructuring your debt.

Depending on the value of your policy, you could theoretically get a loan that would pay off your credit cards, your student loans, and your car loan. You would then have just one monthly payment that covers everything at a super low interest rate.

Taking control of your finances at a young age is so important.

You can use the power of compound interest to work for you, and you can avoid having high interest rates work against you. The best time to start getting your finances in order was yesterday. The second best time to get started is today!

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