As a young adult, you know it’s important to make smart financial choices and form good habits. Yet how can you establish smart financial habits if you don’t know what you don’t know?
If you don’t know much about money, you’re not alone. A recent study by the National Financial Educators Council showed more than 50% of high schoolers failed a national financial literacy test. I connected with financial mentors and studied finance as a young adult, yet there are still important financial lessons I wish I had received earlier.
The following is a list of guidelines and important actions to help you build a foundation and get a strong start in your financial journey. This is the financial wisdom I wish I had listened to and fully understood in my 20s.
Avoid Debt and Be Strategic With Student Loans.
The best way to financial success is to not have debt!
1. Consider using cash, debit cards or prepaid debit cards instead of credit cards. While credit card rewards may be tempting, many young people find themselves paying interest that far exceeds rewards benefits.
2. If its value will go down over time, don’t finance the purchase. Save up and pay cash for cars and similar purchases.
3. Consider every way to minimize education costs rather than taking on student debt. For example, explore the following options to keep college expenses lower:
- In-state versus out-of-state schools and public vs. private institutions.
- College commensurate with desired degree/career. Could trade school or community
college be an option? - Live off-campus.
- Explore all scholarships, grants, work/study programs.
- Side-business ideas.
- Tuition-reimbursement options.
Sponsored Content
Establish a Budget, Stick to It and Pay Yourself First.
Establishing prudent spending and savings habits is vital to long-term financial success. Regardless of career choice or earning potential, anyone who masters spending less than they earn and investing the excess may build significant wealth.
My personal recommendation for some excellent online budgeting tools to help individuals track spending are Mint.com, Empower.com, YNAB.com and EveryDollar.com. All offer a user-friendly, free app, as well as multiple features for managing individual finances.
An important aspect of budgeting is a concept called “pay yourself first.” That means prioritizing saving and investing dollars for the future ahead of any other current expenses and goals. The power of compound growth over a longtime horizon is remarkable for your long-term financial wealth, especially if you start in your 20s.
- Establish an emergency fund. Set aside enough money in an emergency fund to cover six months of living expenses to reserve for an emergency. Put these savings in a separate account so you aren’t tempted to use them! Save as either cash or a liquid money market fund.
- Take advantage of “free money.” If your job offers matching retirement contributions up to a certain percentage, such as a 401(k), contribute at least that percentage. This is a 100% return on investment.
- Save retirement funds in a Roth 401(k) or Roth IRA first. Roth 401(k)s and Roth IRAs allow you to save for retirement in the most tax-advantaged way (zero tax on the growth). Note that there are penalties for early withdrawal, and there are income limitations that impact high earners.
Sponsored Content
Execute Essential Legal Documents.
Once you turn 18, parents and legal guardians have no access to or control over your financial, medical or educational information. Having a plan for the unexpected will alleviate stress and expensive repercussions during potential emergencies. The following legal documents must be drafted and executed by an attorney, so a trusted person can step in to assist in case of incapacity.
- Will. This document outlines how property should be divided at your death and designates a person responsible for handling the details; without one, courts will make decisions according to state law.
- Living will, aka advanced or health care directive. This document outlines preferences for treatment if you face a serious medical situation.
- Medical/health care power of attorney. Often part of a living will, it designates a person to make medical decisions for you if you are incapacitated.
- Durable financial power of attorney. This document designates a person to make financial decisions on your behalf if you are unable during your lifetime.
Sponsored Content
Review Insurance Coverage.
Property and casualty insurance. It’s a good idea for young adults to consider talking with an insurance professional to decide whether to obtain their own car insurance or whether an umbrella policy is needed. Renters should purchase renter’s insurance, as it can limit the renter’s liability if someone sues due to a personal injury or damaged property.
Life insurance. In general, life insurance gets more expensive with age. Term insurance for a young, healthy person is relatively inexpensive. Additionally, it is prudent for parents to consider obtaining coverage for their child before cosigning a loan so the obligations would be covered if their child dies before the loan is paid. Finally, insurance needs should be evaluated at major life events, including a home purchase, marriage or having children.
Establishing good financial habits early in life can create a solid path toward financial success. You can approach this list yourself or ask a financial adviser for assistance. The time to build good financial habits is now!
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Sponsored Content
-
Stocks Slide to Start September: Stock Market TodaySeasonal trends suggest tough times for the stock market as we round into the end of the third quarter.
-
Here's What You'd Have If You Invested $1,000 Into Sherwin-Williams 20 Years AgoSherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
The Unsung Hero of Aisle 5: A Tale of Forgotten Change and Compassion at the SupermarketThis supermarket manager went above and beyond to help when a child forgot her change at the checkout counter. You might be surprised at some of the complications that supermarkets face when it comes to customers' forgotten change.
-
Train, Integrate, Retain: A Strategic Playbook for Adviser OnboardingsBuild a thriving practice by training new advisers with clear goals, structured processes and consistent mentorship for strong team growth.
-
I'm a Financial Professional: Here Are Four Ways You Can Use Debt to Build WealthUsing debt strategically, such as for homeownership, education and more, can lead to greater financial stability and growth.
-
Five Key Wake-Up Calls for Ambitious Business Owners, From a Biz SpecialistYour personal financial plan needs to include a formal exit strategy for your business, or you could be in trouble.
-
I'm a Retirement Psychologist: Here's Why Doing What You 'Ought' in Retirement Beats Doing Whatever You WantTrue retirement freedom isn't about simply doing whatever you want, but about finding purpose and direction through commitments that align with your deepest values and allow you to contribute meaningfully.
-
Tactical Roth Conversions: Why 2025-2028 Is a Critical Window for RetireesThe One Big Beautiful Bill (OBBB) extended today's low tax brackets, but they may not last. Here's how smart planning now can prevent costly tax surprises later.
-
Ready to Retire? It's Not Too Late to Convert to a Roth IRAMillions of Americans are turning 65 this year. If you're retiring soon, don't dismiss the idea of a Roth conversion — it could still be a smart move even now.
-
I'm a Financial Adviser: Three Things You Will Wish You Did Before the Fed Cuts Interest RatesWith potential interest rate cuts on the horizon, you might want to lock in today's higher yields and consider adjusting your asset allocation.
