Only 56% of young adults under 35 are financially literate. That’s not great, but what’s scary is it’s better than most older generations. (Ages 65+ ranks lowest.)
When you’re just starting, it’s the best time possible to put your financial life together. These financial tips for young adults will help.
1. Save, Save, Save, Then Keep Saving
You’re finally making money, so you can start to get all that stuff you’ve always wanted. You no longer have to let your rich friends always show you up because their parents buy them whatever they want.
But that’s not the best outlook on your finances. When you’re young, you’re most likely to still be able to squeeze some financial help from your family. Take advantage of this, and use it to save as much money as possible.
You may feel a bit left out when your friends are out getting beauty treatments, or buying the latest tech. But it’ll pay off when they’re still in debt and you just put a 20% down payment on a new house.
Think of all the big-ticket items you want to purchase in the next ten years. A new house, a nice car, a college education, a wedding, a big vacation overseas, a college fund for a potential child.
Do some research and write out how much you expect each of these to cost, and how much time you have between now and then to save up for them.
Here’s an Idea for How Much You Should Save
Let’s say you’re 20 right now. You (think) you’ll want to get married close to age 25. So you have 5 years to save up for that wedding. The average wedding costs $30,000. So if you want a formal wedding, you need to save $500 a month for the next 60 months to have a fully funded wedding fund in time for the big day.
Now let’s say you want a starter house, maybe around age 27. For a 20% down payment for a $150,000 starter house, you need to save $357 a month for the next 84 months.
Then let’s say you want a decent car by the time you’re 23. Nothing new, not too fancy, but better than the secondhand junker you’re currently driving. That’s another $167 a month for the next 26 months for a $6,000 used car.
So just for those three big-ticket items, you should try to save $1024 every single month.
This is just an example to encourage you to think about the big-ticket items you want in the future, and how saving for them now can help you avoid debt.
Do this exercise on your own to see how much you need to save. Hopefully, that will encourage you to save as much as possible now while you can. If you’re struggling to complete the exercise on your own, and can’t make the savings add up, then you might want to consult with a financial advisor.
Financial advisors are not just people that older adults speak to when they want to buy a house. Younger adults can equally benefit from consulting with an expert. Browse financial advisor websites to find someone with affordable rates. If you don’t want to spend money, you can always book a free consultation to see if you can get some help in generating ideas for how best to save.
2. Build an Emergency Fund
On top of your big money goals, you should build up an emergency fund. Emergencies happen, and you need to be ready for it. The current pandemic and economic crisis just show how quickly things can go from great to a crisis.
You should have a minimum of $1000 saved in an emergency fund at all points in time. This will cover most minor emergencies, like a surprise vet bill or mandatory car repair.
As soon as you can, build this up to 3 to 6 months of living expenses in case you lose your job.
3. Avoid Debt
This is something you’ve likely heard before. But people won’t tell you how easy it is to get into debt.
You get a new credit card (you want to build your credit score after all) with an awesome signup bonus if you spend so much money in the first few months. So you do it. You just buy groceries and regular expenses, but one month it’s more than you expected, and that rolls onto the next, and then debt.
That apartment you finally got into turns out to be in a terrible neighborhood with awful neighbors, and you need to move now. There’s a $2,000 lease break fee. Debt.
You get in any sort of legal trouble. DUI, MIP, marijuana possession. It can happen to anyone. So you get a strangling amount of legal fees. Debt.
You fall down a hill while hiking with your friends and cut your leg. It’s not a bad cut, but you do need stitches. Even after your parent’s health insurance kicks in, you still owe a couple hundred to a couple of thousand dollars. Debt.
The point is, it’s shockingly easy to wind up with debt. So even if you can follow DVC financing options or take a loan out on a car, debt will likely catch you somewhere along the line. Avoid as much of it as possible.
4. Start Saving for Retirement
There is nothing more powerful than compound interest. Setting aside money in a Roth(IRA) or another retirement account now will be the best financial decision of your young life.
5. Look out for Lifestyle Inflation
As you make more money, you’ll be able to buy more things. You can get cool subscription packages, a nicer car, or maybe treat yourself to a hair salon every eight weeks instead of cutting your own hair.
That’s all great. Until it’s not. These small little splurges add up. It’s called lifestyle inflation.
Whenever you get a raise or promotion, try to keep living within your current budget as long as possible and save the difference. It’ll pay off.
Follow These Financial Tips for Young Adults for a Bright Financial Future
These financial tips for young adults will help you set yourself up for financial stability throughout the rest of your life. Above all, make more than you spend, save as much as possible, and be patient and proactive with your finances.
You may feel dumb bringing a bagged lunch to work throughout your 20s while your coworkers go out to eat. But it’ll pay off when you can buy a nicer house at a younger age, or whether economic uncertainty while your friends struggle in their 30s.
Our site is here to answer all your money questions. Keep reading to build your financial literacy and stay an informed citizen.