How to Adult

1. Interest: The Double-Edged Sword of Personal Finance

Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.

Interest defined. Interest is the cost of borrowing money, or the reward for lending it. It's a fundamental concept in personal finance, influencing everything from loans and credit cards to investments and savings. Understanding how interest works is crucial for making informed financial decisions.

Awful interest. When you borrow money, you pay interest on top of the principal (the original amount borrowed). High interest rates, especially on credit cards and loans, can quickly lead to debt accumulation. The Annual Percentage Rate (APR) determines the annual interest charged on your outstanding balance. Amortization is the process where your payments are split between principal and interest, with more going towards interest in the beginning.

Incredible interest. Interest can also work in your favor. When you deposit money into a savings account or invest, you earn interest on your principal. Compound interest is particularly powerful, as you earn interest not only on your initial investment but also on the accumulated interest. This can lead to significant wealth growth over time.

2. Banking Basics: Organize and Grow Your Wealth

Stop hiding your money in your sock drawer.

Banking benefits. A bank account is essential for managing your finances. It provides a safe place to store your money, allows for easy transactions, and offers online banking for tracking your spending. Banks are typically insured by the FDIC, protecting your deposits up to $250,000.

Checking vs. savings. Checking accounts are for everyday transactions, while savings accounts are for building an emergency fund or saving for future goals. Savings accounts typically offer higher interest rates than checking accounts. Certificates of Deposit (CDs) offer even higher rates but require you to lock up your money for a specific period.

Choosing a bank. Consider online banks, traditional banks, and credit unions. Online banks often offer better interest rates and lower fees, but lack physical branches. Credit unions are non-profit, member-owned institutions that may offer better customer service and rates. Avoid overdraft protection, which can lead to costly fees.

3. College Costs: Make Informed Choices

You need to weigh your future salary against the cost of school.

College costs. College is a significant investment, and it's crucial to choose the right school and manage your finances wisely. The Free Application for Federal Student Aid (FAFSA) determines your eligibility for financial aid. Grants and scholarships are free money that you don't have to pay back.

Student loans. Student loans can be a necessary evil, but it's important to borrow responsibly. Direct subsidized loans are preferable, as the government pays the interest while you're in school. Avoid private loans, which often have higher interest rates and less flexible repayment options.

Community college. Community colleges offer a more affordable path to higher education. They can provide a chance to explore your interests, earn credits that transfer to a four-year university, and gain valuable skills without accumulating excessive debt.

4. Budgeting: Control Your Finances

The best way to lose money is to not keep track of it.

Budgeting benefits. Budgeting is essential for achieving financial success. It involves creating a detailed spending plan based on your income and expenses. A budget helps you monitor your money, avoid debt, and invest in your future.

Price vs. value. Consider the value of every purchase, not just the price. Frugality means getting the most value for your money, not simply buying the cheapest option. Avoid overspending on housing, transportation, and food, which are the biggest budget killers.

Budgeting methods. There are various budgeting methods, including the 50/30/20 rule (50% needs, 30% wants, 20% debt/savings) and more detailed budgets with specific categories. Build an emergency fund before investing or aggressively paying off debt. As your income increases, avoid increasing your spending proportionally.

5. Credit Reports and Scores: Report Cards for Adults

A credit score seems unfair. I think the lenders would trust me if they just got to know me.

Credit reports. A credit report is a record of your borrowing history, including your payment history on loans and credit cards. It's essential to maintain a positive credit history by paying your bills on time. Late payments can significantly damage your credit score.

Credit scores. A credit score (FICO score) is a numerical representation of your creditworthiness, ranging from 300 to 850. It's used by lenders to determine your interest rates and loan terms. Factors that influence your credit score include payment history, amounts owed, length of credit history, new credit, and types of credit in use.

Credit score importance. A good credit score can save you thousands of dollars in interest over your lifetime. It's crucial to protect your credit score by paying your bills on time and avoiding excessive debt. Ignoring your loans and debts can ruin your credit for years.

6. Credit Cards: Use Responsibly or Get Burned

They're fun until they're not.

Credit card basics. A credit card is a revolving line of credit that allows you to make purchases and pay them back later. Your credit limit is the maximum amount you can borrow. Credit cards typically have high interest rates, especially if you carry a balance.

Responsible use. To use a credit card responsibly, pay off your entire balance on or before the due date each month. This way, you'll avoid paying interest and build a positive credit history. Treat your credit card like a debit card, only spending what you can afford to pay back immediately.

Credit card benefits. Credit cards can help you build credit and earn rewards, such as cash back or travel points. However, never open a credit card solely for the rewards. Avoid credit card debt at all costs.

7. Taxes: Understand and Minimize Your Burden

Finally find out what old people are complaining about.

Taxable income. Your taxable income is the amount of your income that is subject to taxation. It's calculated by subtracting deductions from your gross income. The standard deduction is a fixed amount that most taxpayers can claim.

Progressive tax system. The U.S. uses a progressive tax system, meaning that higher incomes are taxed at higher rates. Tax brackets determine the percentage of your income that is taxed at each level. Your effective tax rate is the actual percentage of your taxable income that goes toward taxes.

Tax payments. Taxes are typically paid throughout the year through withholdings from your paycheck. Freelance workers are responsible for paying their own taxes, including self-employment tax. File your taxes by April 15 each year.

8. Investing: Turn Money into More Money

How to turn money into more money.

Investing defined. Investing is putting your money into something with the expectation of earning a return. It's a powerful way to grow your wealth over time. The stock market is a market where you can buy and sell shares of stocks.

Conservative investing. Conservative investing involves growing your wealth slowly and steadily over the long term. It requires discipline, commitment, and time in the market. Diversification is key to minimizing risk.

Mutual and index funds. Mutual funds pool your money with other investors to invest in a variety of stocks or bonds. Index funds track a specific market index, such as the S&P 500. Index funds typically have lower expense ratios than actively managed mutual funds.

9. Retirement: Start Saving Early

If you're going to be old, you may as well have money.

Retirement planning. Retirement is the part of your life where you are no longer working. It's crucial to start saving for retirement early to ensure a comfortable future. Social Security provides a monthly check to retirees, but it's often not enough to cover all expenses.

401(k) plans. A 401(k) is a retirement account sponsored by your employer. It offers tax incentives and may include an employer match. Traditional 401(k)s offer tax deductions now, while Roth 401(k)s offer tax-free withdrawals in retirement.

IRAs. An individual retirement account (IRA) is another option for retirement savings. It's not sponsored by an employer, but it offers more investment options. Pensions are less common today, but they guarantee a specified amount of money per year in retirement.

10. Insurance: Protect Yourself from Financial Ruin

Scheduling a doctor's appointment: the ultimate sign of adulthood.

Insurance defined. Insurance helps you pay for unexpected expenses resulting from loss, damage, or accidents. You pay a premium for insurance coverage, and your insurer pays for covered services.

Premiums and deductibles. A premium is the monthly cost of your insurance policy. A deductible is the amount you must pay out of pocket before your insurance company begins to pay. Copays are fixed amounts you pay for specific services, while coinsurance is a percentage of the bill you pay.

Types of insurance. Auto insurance is required in most states. Health insurance protects you from astronomical medical bills. It's crucial to understand your insurance policy and choose a plan that fits your needs.

11. Big Purchases: Cars and Homes Require Careful Planning

Decisions you can’t afford to mess up.

Car buying. Buying a car is a major purchase that requires careful planning. Buying a used car is generally more financially sound than buying a new car, as new cars depreciate quickly. Research the car's history and have it inspected by a mechanic before buying.

Car financing. Consider paying for the car in cash to avoid interest. If you need to finance, compare loan terms from banks and dealerships. Be aware of sales tactics and negotiate the out-the-door price. Consider whether you really need a car at all.

Home buying. Buying a home is the most expensive purchase of your life. It allows you to build equity and potentially profit from appreciation. However, it also comes with significant costs, including property taxes, insurance, and maintenance. Make sure you're financially ready before buying a home and avoid becoming house poor.

Last updated: April 12, 2025