Most young adults in the United States have received little to no financial education. This fact alongside their struggle with massive amounts of student debt is a recipe for disaster. Plenty of young adults want to improve their financial health, but they lack the knowledge required to create a financial plan. Thankfully, the top financial planning tips for young adults are surprisingly simple—properly handle debt, create a budget, and seek out quality advice. These three tips are straightforward ways for young adults to start preparing for a better financial future.
For most young adults, debt is a fact of life. Though it has a negative connotation, not all debt is bad. A house, a car, and an education may all require taking on debt. However, the thing to be aware of is how much it is really costing you, which is largely determined by your interest rate. Interest rates vary, but credit cards often come with some of the highest interest rates out there.
Even though credit cards typically come with far higher interest rates, they are not necessarily bad. When used responsibly, credit cards can help build and improve your credit score. Since your credit score affects everything from your mortgage rate to your credit limit, the higher your credit score, the better. Whenever possible, pay your credit card off in full each month. This helps your credit score, but also saves you money, since you won’t be paying any interest.
Many credit cards come with rewards programs that offer everything from cash back to free flights. The problem with rewards programs is that they can make you feel justified spending more than you would otherwise. For example, let’s say when you use your credit card, you earn 2% cash back at restaurants. That sounds great, but if you use that to justify spending an extra $100 a month, you’re out $98. Responsible credit card use is a personal decision that requires an honest self-assessment. If you find yourself overspending on your credit card, consider switching to a partial or complete cash basis.
Budgeting can also have a negative connotation, but it isn’t about denying yourself. Budgeting is simply knowing where your money is going and prioritizing. Start with tracking everything for one month–Every. Single. Expense. Technology has made it incredibly easy to spend more money than you realize. There are streaming services, food deliveries from your phone, monthly subscription services, etc. that really add up.
After you’ve tracked everything, the next step is to eliminate unnecessary expenses. What’s “unnecessary” will vary drastically from person to person. A good way to look at it is through the lens of what brings you the most joy. Cutting out coffee is the go-to budgeting cliché, but that may not be the right move for you. If your morning stop at the local coffee shop brings you genuine joy, but you pay for five streaming services and only use one, what’s “unnecessary” for you may be the four extra streaming services, not the coffee.
Technology may make it easier to spend money, but it’s also made it easier to save money. If you wait to save until you have leftover money, you’re going to be waiting for a long time. Once you’ve cut out unnecessary expenses from your budget, figure out how much you can afford to save. Then consider setting up an automatic transfer of that amount, so that as soon as you get paid, the money is transferred into your savings. Once the money is in your savings, you’ll be far less likely to spend it.
Seeking Out Quality Advice
Treat your financial health like you would your medical health. You wouldn’t rely on a friend with no medical degree for an annual checkup. If you have a medical issue, you consult a professional. The same should be true for your finances.
When you work with a professional, make sure you understand how they’re making their money. If they work off of commissions, they may be incentivized to suggest you make investments that earn them more money, but aren’t the best choice for you. If they’re not willing to explain how they earn their money in simple terms, then you shouldn’t be working with them.
Work With a Trusted Financial Advisor
Financial planning may feel overwhelming, but taking charge of your finances is an empowering experience. Try implementing these top financial planning tips for young adults today. And, if you need assistance, reach out to Good Life Financial Advisors of NOVA. We’re happy to help you prepare for the future!