How to avoid credit card debt??
<div class="user-question">Hi Frich! I got my first job earlier this year and at first I was really excited to have a salary. Then I moved out of my parent's place & started to realize that I'm not making nearly as much to live the life I thought I could afford. I guess I'm just trying to figure out how do you even set up a budget & make sure your expenses don't go over with each month? I'm worried I'll get into credit card debt.</div>
So, you landed your first job - congrats! There’s nothing quite like seeing that paycheck hit your account for the first time and finally feel like you are a full-grown adult! It feels like freedom, and the temptation to treat yourself is real. But as exciting as it is, managing this newfound income well is key to building financial confidence and security. Don’t go spending all your paycheck without saving for retirement, having an emergency fund, or preparing for your 401k. And remember - lifestyle creep is REAL.
When I got my first job out of college, I was working at Goldman Sachs making $100k. For a 22 year old, that was a lot, and instead of paying off my student loans, I partied, went on lavish vacations to Monaco with my older friends, and bought myself a very expensive Chanel purse with my bonus.
Don’t get me wrong, it’s not bad to treat yourself, but I definitely overindulged and was living like I was a VP when I was only a mere analyst. Before I knew it, I could barely keep up with my expenses and I got slapped in the face with reality, when I realized I was one of the only people I knew that wasn’t taking their retirement seriously. Here’s what I would do differently if I were you.
Step 1️⃣: Build an Emergency Fund
A key financial goal early on is to create an emergency fund. Aim to save 3-6 months of living expenses.
Given your salary, we'd estimate that your living expenses add up to about $2,500/month. So for you, the goal should be to save up at least $7,500.
This fund will help you stay afloat in case of unexpected expenses or job changes.
<div class="frich-tip">Frich tip: the Frich team loves these because of the high interest you earn!</div>
Step 2️⃣: Assess Your Debt
If you have credit card debt, paying it off should be a top priority, and we’ll factor this into your budget. An honest assessment of your debt is crucial in building a realistic budget.
<div class="frich-tip">Frich tip: Avoid investing if you have high-interest debt since the interest costs often outweigh investment gains over time.</div>
<div class="frich-tip">Take a look here to see if you qualify for any debt relief options.</div>
Step 3️⃣: Follow the 50/30/20 Rule
A practical budgeting method is the 50/30/20 rule:
- 50% of your income goes toward essentials like rent, utilities, groceries, and transportation.
- 30% is set aside for discretionary spending, such as dining out and hobbies.
- 20% goes toward savings and investment including building an emergency fund or investing in your 401(k) through your employer
<div class="frich-tip">Frich tip: If you have high-yield debt and do not have an emergency fund, your 30% for discretionary income should most likely be allocated towards paying that off and creating a good foundation for yourself first! This approach ensures that you cover your needs while allowing room for fun and financial goals.</div>
Step 4️⃣: Set Priorities
Once the basics are covered, set priorities for your goals:
- Essentials like rent, groceries, and transportation come first because you need them to survive.
- Then high yield debt repayment so that you aren’t losing money over time and emergency fund so you always have a good baseline.
- Then, focus on long-term goals, such as saving for retirement or investing.
Step 5️⃣: Set Aside a “Fun” Budget
Enjoying your earnings is important too! Like I mentioned above, I TRULY enjoyed my first few paychecks. My father always told me “All work and no play will make you very sad and gray” but I clearly took that a little too literally haha!
Allocate a percentage of your budget, as we discussed above, for non-essentials like dining out or personal treats. A dedicated “fun” budget lets you enjoy life without overspending. Now, my fun budget is allocated towards vacations with my friends (within reason, of course) and investments into myself like workout classes, spa days, and even my dog.
Step 6️⃣: Get Rid of Wasteful Expenses
Knowing where your money goes is a critical part of budgeting and helps ensure you live within your means.
Many people don’t realize just how much they’re spending on services they don’t even use. In fact, around 42% of people are still paying for subscriptions they’ve forgotten about, and, on average, people underestimate their monthly subscription spending by about $133.
This means that many are unaware of the full extent of their subscription costs, which can quickly add up and drain resources that could be directed towards savings or other priorities.
<div class="frich-tip">Frich tip: To stay on top of your spending, consider using apps like Rocket Money to track your subscriptions and cancel what's not worth it. Another tool, Billshark, can help negotiate your bills for recurring expenses like cable, internet, and phone service, potentially saving you hundreds of dollars a year.</div>
Step 7️⃣: Avoid Credit Card Debt by Having a Plan
Credit cards can help you build credit and earn rewards, but only if used responsibly. Make it a habit to pay off your balance in full each month. Here are a few tips:
- Only charge what you can afford to pay off: Treat your credit card like a debit card. If you can’t pay it off by the end of the month, consider skipping the purchase.
- Set up automatic payments: Avoid missed payments by setting up auto-pay.
- Use it for fixed expenses: Using your credit card for predictable expenses like your phone bill, subscriptions, or even rent, to keep spending manageable.
<div class="frich-tip">Frich tip: I use Bridge Money to help get rewards for paying rent!</div>
Btw - here's how others are doing👀
When it comes to your financial situation, do you feel like you are:
😓30% Lagging behind your friends
🫂26% In the same spot as your friends
👏24% Ahead of your friends
Congratulations on taking your first step into adulthood! Budgeting may seem overwhelming (and boring) at first, but with these foundational steps, you’re setting yourself up for long-term success. Remember, it’s not about restricting yourself but creating a balanced lifestyle where you can enjoy today and still plan for a secure and independent future.
xx,
Kristina
