8 Financial Tips for Young Adults: Building a Solid Foundation | INVESTEDMOM
Entering the world of adulthood comes with its fair share of responsibilities, especially regarding handling finances. Developing strong financial literacy is crucial to securing a stable and prosperous future as a young adult.
Effective money management isn't just about budgeting and saving; it's about making informed decisions that shape your financial journey.
According to Annuity, 64% of American adults report that money is a significant stressor. This article will explore seven essential financial tips curated specifically for young adults like you to make financial literacy easier. These insights will help you build a solid foundation, empowering you to navigate the complexities of personal finance with confidence and ease.
Whether you're about to enter the professional world or eager to enhance your financial know-how, let's embark on this informative journey together.
These tips will pave the way to financial freedom, opening doors to a more secure and rewarding future and giving examples of financial things you should do as a young adult.
Tip 1: Create a Budget and Stick to It
A survey found that over 55% of Americans do not use budgeting techniques to track their hard-earned money.
As you enter adulthood, budgeting is one of the most crucial skills you can cultivate. It might not sound as thrilling as that dream vacation many young adults dream of, but trust me, it's the cornerstone of your ability to manage money effectively.
Budgeting is a compass guiding young adults toward a secure financial future.
Why is budgeting so important? Well, let me break it down for you.
A budget is more than just a bunch of numbers on a spreadsheet. It's a strategic plan that puts you in the driver's seat of your financial journey. By creating a budget, you comprehensively understand your income, expenses, and economic priorities.
Now, you might be wondering how to get started with budgeting. Fear not, for I'm here to walk you through it step-by-step.
Begin by tracking your income from all sources, whether from your regular paycheck or the occasional freelancing gig. Once you have a clear picture of your earnings, it's time to scrutinize your expenses.
For one month, diligently record every expense, whether big or small. From the rent that keeps a roof over your head to that morning coffee that kicks off your day, leave no stone unturned. You can opt for user-friendly budgeting apps to streamline this process and keep it hassle-free. Remember to consider any credit card debt while you're at it.
I'm not going to sugarcoat it – sticking to a budget requires discipline as a consumer trying to save money.
Keep your eyes on your financial future, and watch as your dedication transforms your aspirations into achievements from an early age, helping young adults avoid financial difficulties.
Tip 2: Establish an Emergency Fund
Life has a way of throwing curveballs when we least expect them. From a sudden medical emergency to an unexpected car repair, these unplanned expenses can easily disrupt our financial planning, and young adults are not exempt from this.
Think of your emergency fund as your financial cushion – a pool of money expressly to handle unforeseen circumstances. It is a buffer against the unexpected, allowing you to navigate these challenges without derailing your long-term financial goals.
Having an emergency fund in place means you won't need to rely on credit cards or loans during tough times, saving you from debt burdens.
Some great options are a high-interest savings account with compound interest or even a money market account. As of 2022, about 22% of Americans have no protection for emergency expenses. Don’t be like them.
Experts recommend saving three to six months of living expenses in a separate account. While this may seem like a lofty goal, starting small and remaining consistent is essential.
Set realistic targets and celebrate each milestone you achieve, as they all contribute to your overall financial health. Remember, every dollar saved brings you closer to your financial security and savings goals.
Building an emergency fund can be a manageable task. Implementing simple strategies can make the process more manageable. One practical approach is to automate your savings.
Set up automatic transfers from your paycheck to a dedicated emergency savings account. Treating it as a non-negotiable monthly expense will steadily grow your emergency fund without realizing it and improve your financial situation.
Tip 3: Minimize Debt and Manage Credit
Americans have an accumulated $986 billion worth of credit card debt. That’s a pretty big number.
Understanding the negative impact of high-interest debt is crucial. When you carry balances on credit cards or loans with steep interest rates, you pay more money over time, often surpassing the initial amount borrowed.
This can severely impede your ability to save, invest, and achieve other financial milestones.
Prioritizing repayment based on interest rates is a savvy strategy. Start by tackling debts with the highest interest rates first. Doing so will minimize the overall interest you'll pay in the long run, accelerating your journey to a debt-free life.
Responsible credit card usage is a crucial aspect of managing credit. Credit cards can be valuable tools, offering convenience and the opportunity to build a positive credit history.
Avoid maxing out your credit cards or carrying high balances, as this can negatively impact your credit score and increase your financial burden. Generally speaking, young adults should keep their credit card utilization rate to 30% or less.
Building a positive credit history is vital for your future. A strong credit score can open doors to better interest rates on loans and credit cards, ultimately saving money for you. To achieve this, make timely payments on all your credit accounts, avoid missing due dates, and keep your credit utilization ratio low.
Tip 4: Start Investing Early
Now that we've laid a solid foundation with budgeting, emergency funds, and debt management, it's time to explore the captivating world of investing and more tips for young adults. The average investing age is 33 years, but there's no reason this shouldn't be sooner!
Let's unlock the magic of compound interest together.
Imagine your money growing effortlessly while you sleep, compounding to more incredible wealth. The earlier you embark on your investment journey, the more time your money has to work magic, magnifying your returns and building substantial wealth over the years.
As a young adult, low-cost index and money market funds are your gateway to the investment world. These funds allow you to invest in diverse stocks or bonds, tracking the overall market performance. Not only do they offer stability, but they also come with lower fees compared to actively managed funds, allowing you to maximize your gains.
An Individual Retirement Account (IRA) has tax advantages, allowing your money to grow tax-free or tax-deferred.
An additional way to invest in yourself is by purchasing disability income insurance. This disability income insurance protects you in the case of unemployment or an unprecedented disability.
Time is your greatest ally in investing. The earlier you start, the more opportunity your money has to compound and grow. Even small, consistent contributions can grow into substantial sums over time.
Tip 5: Set Goals
The importance of transparent financial goals must be balanced. Imagine sailing without a destination – you might drift aimlessly, never genuinely reaching the shores of your dreams.
Setting specific, measurable, achievable, relevant, and time-bound (SMART) financial goals provides you with direction and purpose. When you have tangible goals, every financial decision becomes intentional and aligned with your vision.
Now, let's define your financial dreams. What are your aspirations? Do you dream of owning a home, starting a business, or retiring early to embark on new adventures?
Your financial goals can encompass many possibilities, both big and small. The key is to identify what truly matters to you and create a roadmap to achieve it.
Be honest with yourself about what is feasible within your means. Setting overly ambitious goals may lead to frustration and burnout while setting attainable milestones will keep you motivated and encouraged.
Tip 6: Company-Sponsored Retirement Plans
One of the most significant advantages of company-sponsored retirement plans is the enticing employer-matching contributions.
Imagine receiving free money from your employer to invest in your personal finance – it's like an instant return on your savings! So, if your company offers a matching contribution, take full advantage – it's a valuable perk you don't want to miss.
Moreover, these retirement plans come with impressive tax advantages. Contributions to these plans are typically made with pre-tax dollars, reducing your taxable income and lowering your tax burden for the current year. Additionally, your investments in the program grow tax-deferred until withdrawal, allowing your money to compound and grow faster over time.
But what makes these retirement plans truly special is their effortless nature. Contributions are conveniently deducted directly from your paycheck before you see the money, making saving for retirement a painless process.
It's a "pay yourself first" approach that sets you on the path to financial freedom without thinking twice about your money. With various options, company-sponsored plans offer the flexibility to create a well-balanced portfolio that aligns with your tolerance and aspirations.
Tip 7: Continuously Educate Yourself
Financial education is not a one-time event - it's a lifelong pursuit. By staying informed and educated about personal finance matters, you'll be better equipped to navigate through life's financial challenges and seize opportunities.
Ongoing education empowers you to adapt to changing circumstances, make informed choices, and grow your financial knowledge and confidence.
The good news is that the realm of financial knowledge is easily accessible through various resources. Books and online courses offer great insights from financial experts and successful individuals.
Whether you enjoy reading, listening, or interactive learning, there's a resource suited to your learning style.
Tip 8: Seek Professional Guidance
As you continue your quest for financial empowerment, there may come a time when the path ahead seems more complex than you prepared for. This is where seeking professional financial advice can be a game-changer.
Whether you aspire to grow wealth, plan for significant life events, or ensure a comfortable retirement, a financial advisor can be your trusted partner in maximizing your economic potential.
Financial planners and advisors are equipped with a wealth of knowledge and experience, as they stay up-to-date with the ever-changing personal finance landscape, investment opportunities, and tax implications.
Conclusion
Throughout this article, we've talked about valuable strategies young adults can implement to achieve financial success. So, take that next step towards your brightened financial future.
Sign up for my course at Invested Mom and unlock the tools and knowledge you need to achieve financial success and manage your income. Let's work together to make your dreams a reality!
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!