Welcome to our indepth guide on Financial TIPS for Young Adults. Money is a topic that we don’t learn enough about as children, which is why I feel the educational system has failed our kids. Money matters in this world, not in a way that it should define you, but you need money to get the most out of life. In addition, if you find a way to build a lot of wealth you can solve real world problems with your wealth and/or you can help others in ways that only money can solve. It’s time for an education in money health.
Financial TIPS for Young Adults
If you’re reading this, then young adulthood may not be as bling as you might have imagined. Maybe you’ve entered a Sam Smith/ Lil Wayne phase and you’ve got money on your mind. Maybe you’re leaving the nest and realizing that the real world necessitates something other than your parents’ credit cards. Maybe you’re emerging from the unique period of contemporary young adulthood and beginning to wonder, how am I going to pay for my future? There are many reasons why we’re motivated by money, but much of it revolves around one concept: How can I live the life I want to live?
Money is a concern that everyone has at some point in their lives, but it doesn’t need to be a concern that you have for the rest of your life. Whether you follow tried and true methods for building personal wealth or capitalize on recent market developments while riding the wave of technology, building wealth is about sound principles that you follow consistently. Below, we’ll review some financial tips for young adults to help you make the most of your money.
VIDEO | 5 Money Mistakes To Avoid In Your 20s
The power of youth and compounding interest / Financial tips for young adults:
What is a young adult? This is an ambiguous term as it is typically used to describe those between the years of 18-25 but has also been applied to humans as old as 30 or 40. Unfortunately, generation determination is not a precise assessment but a general guideline. For the sake of arguing, those presently deemed as young adults would be those in generations Y (millennials) and Z, specifically those born after 1980.
Determining what a young adult is is not as critical as what youth allows: growth. Financial stability is based on the premise that you are trying to live as long as possible. If you are really trying to live the YOLO (you only live once) life and burn out in a flame of glory, then making, saving and investing your money is probably going to detract from the inferno of your dreams. But, if you are trying to get married, have a family and hopefully be a grandparent without having to work until you are 75+, then you need to start planning for your future.
One of the liberties you have when you are younger is that you have a greater capacity to recover from loss. Now, I’m not saying that you need to go whole hog and bet all of your savings on oil futures. Over-investing and making senseless, risky investments is a big mistake many young investors make. However, when you are younger, you can reap more rewards while handling more risk from investments such as stocks and ETFs (exchange trade funds) than when you are older and trying to retire. So, in short, if you are a young adult, the best time to start investing is now.
VIDEO | SIX Basic Rules of Investing / Robert Kiyosaki
Ultimately, the guiding principle to investing, earning and growing your money comfortably is the power of compounding interest. Let’s do some simple math. Let’s say you have a hundred dollars and you receive 10% interest per year (this is really theoretical if you’ve ever looked at your bank statements…). At the end of the year you have $110. If you maintain the same interest rate, at the end of 2 years you have $121. At the end of 10 years you have $ 259.37. At the end of 20 years you have $ 672.75. Why is this important?
If you just held onto that $100 bones and stashed it under your pillow, you would have that $100 but nothing more. If you added your own ten dollars to that $100, after 10 years you would have 200 (10 * 10 + 100 = 200). Just by compounding the interest added yearly, you earned an extra 59.37. If you compare to 20 years, the results amplify even more with an extra 372.75 added due to compounding interest. As you might imagine, if you have even more money saved, you have even more interest earned. More importantly, the longer it compounds, the more money you have from interest alone. Now, this is a really great interest rate, however, a fair interest rate for many investments, such as bonds and index funds, can easily earn anywhere from 3-8% interest yearly. If you are investing 1,5,10k or more yearly, you can see how that can add up to a nice nest egg.
The moral of the story? If you’re a young adult, regardless of your investment or financial improvement strategy, the time to start is…NOW!
Creating goals for the life you want to live / Financial tips for young adults:
While it’s great to start investing at a young age, goal setting is a critical component of how you are going to invest, save and live your life. It’s like anything, whether you’re playing sports, playing an instrument or studying for a class: what are you trying to achieve? When it comes to saving, the key questions are the following: What kind of life are you trying and willing to live now? What kind of life are you trying to live in the future?
These are important questions, but they’re also kind of vague. More specific questions might be as such:
- Are you trying to raise a family?
- Do you want to live in an apartment or a house?
- Do you want to live in a city, suburbs or rural setting?
- Do you want to eat out and how often?
- Are you trying to travel and how often?
- How important are material goods to you? How important are experiences to you?
- What kind of a community are you trying to experience?
The list can go on, but these questions will help to guide you into how to manage your money. It might not seem like it, but many people who are affluent today did not start out that way. Richard Kiyosaki’s “Rich dad, poor dad” gives a good background on his motives for earning and what he went through to become what he is; in short, you have to be willing to live in your car for a bit. But, if you don’t want to make that kind of sacrifice, or want to live a simpler lifestyle, then this will influence how you save your money. You may want to save so all of your kids can go to college, or you may want to retire at 35 and spend all of your time traveling. You may want to live off-grid in a tiny home, buy a house boat, or start a non-profit. Whatever your reason, everything and anything is doable if you have a goal, create a plan and stick to the plan. Now, we’ll start to delve into the tips and tricks to financial freedom.
Work hard, play hard, save hard / Financial tips for young adults:
Yes, I know, my millennial friends. You don’t really want to work hard. The 9-5, suit-and-tie, office-bound (or office space) lifestyle is not cutting it. But, wherever you work, however you work, you need to incorporate one thing to ensure financial health: saving.
Money, as we all know, doesn’t grow from trees (or come from them…). If you want to invest and grow your money, you need to have money to grow with. If you make money and then spend it all, then you have no money to grow. So, you might be asking, how can I save?
If you are in a position that offers an automatic payroll deduction that can then be set into a separate account, directly inserted into your bank account or invested into a 401(k) or Individual Retirement Account, then you are in good stead. You don’t even have to worry about squirreling the money away. Better yet, if the money is invested into retirement accounts like a 401(k) or an IRA, you will already begin to reap the benefits of a larger return on compound interest, since most bank accounts currently offer relatively low interest rates.
If you don’t have the luxury of having an automatic payroll deduction, then you can just do it the ol’fashioned way. Let’s say that you make 100 dollars a day. First, you want to make sure that you take care of all of the necessities: food, rent, utilities, clothing and gas for your car. This might eat up at least 50% of your expenses, but you still have 50% left. Then, before you spend any of that 50 dollars, take 10 dollars out and put it in your bank account. If you do this for 5 days a week and 50 weeks out of the year (for simple math…), you will then have $2500 at the end of the year. That’s 2500 dollars that you can then invest in your future life.
If you don’t already, it’s always good to either make a budget or do an inventory of your spending habits. A budget will allow you to visualize where your money is actually going and identify how to improve your spending habits. Do you spend $5 a day on a fancy, syrup-laden coffee? If you have that coffee 5 times a week for 50 weeks, that’s $1250 dollars a year spent on a fancy coffee. What if you only have that coffee once a week as a treat? You just saved $1000. What if you brew your own cup daily and dress it up for a cost of max 2$ a day? You just saved $750. A budget will allow you to identify what money is coming in and what is going out so that you can make the most out of your spending, saving and investing habits. Remember, though, saving is a habit. Whether you choose to set aside money daily, weekly or monthly, a regular commitment to saving will pay dividends (literally) down the road.
Cut that credit card debt / Financial tips for young adults
When it comes to avoiding debt, aside from exorbitant medical bills and losing your job, credit cards are the biggest cause of draining your finances. Credit card Annual percentage rates (APR) on interest can range from 15 to almost 30%. That means that even if you have a low APR and you save 100 dollars that compounds with 10% interest, giving you $110 at the end of the year, if you owe 100 dollars in interest and are charged 15%, you will then owe $115 at the end of the year and lose $5! That may not seem like a lot, but if you aren’t saving, and your interest is going into the thousands, you’re dropping into the rabbit hole big time. How can you avoid owing interest on a credit card?
VIDEO | Credit Card Debt Hitting Millennials Extra Hard (CBS)
First, don’t owe interest. If you don’t spend what you don’t have, then you won’t owe what you don’t have. If you do occasionally go over your spending limit, pay it off ASAP. The longer you wait, the more you will owe.
If you can’t say no to your credit card, consult your credit card provider to try and negotiate a lower rate. Quite often, they will be amenable to lowering the rates, especially if you started at an introductory rate that was arbitrarily bumped up or if you consistently make your payments but it’s at a higher rate.
If you find yourself spending compulsively and failing to check and pay your credit card payments, then you should switch to a debit card. It’s the same mechanism, but instead of going over what you have based on credit, you are automatically debited the expense of the purchase from your checking account. You therefore cannot spend what you don’t have. This may be restrictive if you like pretending to buy fancy things that you otherwise can’t afford, but would you rather spend what you have to hopefully buy these things later or would you rather buy it now, go bankrupt and then spend years trying to restore your credit? Hopefully, you’ll agree with the former option.
Start investing / Financial tips for young adults
Let’s take a break from lifestyle tips and talk investing. You’ve cut down your debt. You’ve been stashing away your chips and putting it into a savings account. You look at the yearly statement and notice not much has changed. That’s what happens when the average bank interest rate is .06%. Now what’s a youth to do?
Fret not, my friend. Your financial future is still promising. Whether you realize it or not, if you are saving money, then you have something that is valuable at any level: money. Investing is simply turning money that you set aside into more money.
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But what if I don’t have that much money? That’s not any issue. Regardless of how much money you have, as long as you have some extra cash that you’re saving, you can earn more than the bank savings rate.
Let’s say you want to start simple and stay loyal to your bank. Investing in a certificate of deposit (CD) can earn at least .6% interest, which is 10 times what you earn with your bank (and many banks offer close to 1%). You will need to keep your money in the CD for a specific period of time or risk a withdrawal penalty, many require a minimum bank account (but some are as low as $250) and you will need to purchase a specific value of the CD, starting from 50$ and up. But, at the end of 6 months to a year, you will earn more interest than if you stick with your bank. If you’re still trying to start out slow and make low risk investments, treasury bonds are backed by the United States government (and we don’t want them going under any time soon…). The yield, or interest, on the bond will vary based on the purchase date and how long you wish to wait for the bond to mature. On average, a 5 year treasury bond will earn you .75% interest while a 30 year bond will earn upwards of 2%.
Okay, let’s say I want to make it a little riskier but I’m still working with a little less than I want. A new way to earn and even borrow money that takes advantage of digital connectivity is person-to-person (P2P) lending. Essentially, if you have money that you are willing to lend, you act as a financial institution that can then earn interest on the money you lend. There are a variety of different lending sites that offer different return rates depending on how risky the loan is you are making (note: how likely a borrower will pay you back), but you can expect a minimum of 5% in interest based on your loan, which isn’t too shabby. Some will offer a flat rate, and some only require you to provide as little as $25 to get started, which is a great way for a young investor to start seeing returns.
Investing in with stocks, bonds, and funds / Financial tips for young adults
You’ve stacked your G’s and now you’re ready for the big leagues. Where do you put your money now? Well, there’s a whole world of investing waiting for you. Let’s touch on some of the main concepts, since investing in securities (stocks, bonds and funds) is a lesson in itself.
The core concept that guides most investing strategies is this: the longer you wait, the more money you make. True, you can be a hedge fund manager or a day trader and track the markets but, if you’re just getting into the game or just trying to earn a consistent return on your investment, long-term investing is the way to go. With that in mind, you can break down investing into 3 strategies.
The first strategy is investing in the bond market. A bond will pay you an interest regularly or, in the case of zero coupon bonds, you will earn your interest when the bond reaches its date of maturation. Bonds can vary in interest rates, with riskier bonds that are more likely to default earning more interest; bonds that take longer to mature will also earn more interest. Bonds are generally considered less risky than stocks which means that they might not earn as much over the same period of time but they are also less likely to default.
VIDEO : Small Cap vs Large Cap Stocks
Stocks are slightly different than bonds in that stocks provide partial ownership of a company. In some cases, a company may actually offer dividends as a regular incentive for investing. Stocks are riskier than bonds, but where there is greater risk, there is greater reward. There are a variety of different stocks to choose from, such as small-cap, mid-cap and large-cap stocks; usually, the larger the cap(italization), the more expensive the share, the larger the return. Without going into the nuances of how to choose the right stock, a tried and true investment strategy is investing in an index fund, which is essentially a broad-based portfolio that includes as many different, reliable stocks from as many different companies and is held for as long as possible. The theory is that, despite market volatility, given market rebounds, the long-term interest outweighs constantly selling and buying stocks, especially when you factor in capital gains tax. A financial advisor or investment advisor can always help to guide you in your stock purchasing, but if you want to go it alone (to save some dough) and start out small, you can open a free account with a variety of trading platforms, such as TDAmeritrade; for those who like mobile accessibility, platforms such as Robinhood offer greater flexibility.
If all of this is starting to make your headspin, fear not, for there are funds to help you earn some fun money. Mutual funds, ETFs and retirement funds such as a 401(k) all operate under the premise of grouping together specific types of stocks that are then bought and sold over periods of time by a fund manager. If you don’t have the fortune of working for a company that offers a 401(k), then you can still consult various financial institutions, such as Vanguard or Schwab, to create a 401(k) or an IRA. There are different IRAs that differ regarding when you are taxed on your contribution and when you can take it out. Do your research to determine whether you prefer to be taxed now and not have to be taxed when you retire or to defer paying taxes and then pay taxes when you start withdrawing. Either way, the key concept is that you are putting your money away and then earning compound interest at a higher rate than a bank based on collective market performance. Not a bad way to make your money work for you.
Managing riskier investing / Financial tips for young adults
Just because you’re young doesn’t mean you have to be young, dumb & broke! Choosing investments wisely means investing a portion of your earnings (not all of it) in investments that will earn a consistent return over time. That being said, you may have an itch to play the ponies and earn a little bit more than what the stock market offers.
The hot investment now is in cryptocurrency. The problem with cryptocurrency is that it is not a widely accepted means of currency and it is still liable to cyberattacks and theft. Will this change? That’s what investors are hoping. At present, the high costs of cryptocurrency such as bitcoin are mostly due to speculation that is not immune to market volatility. If you’re willing to make the investment, you could earn a considerable sum if blockchain and digital payment makes cryptocurrency the default payment mechanism. You could also lose a lot. That’s the risk of the market for you.
VIDEO | Cryptocurrency for Beginners / Explained
For those who want other tried, but not always true, high-risk-high-yield investment strategies, currency trading (similar to cryptocurrency but with foreign currency), options (selling and buying stocks based on project future prices), high yield bonds (for high risk companies) and real estate investment trusts offer higher than normal interest (10-15% at least) per investment. Then again, the risk of defaulting or losing is vastly increased. If you’re trying to be the next “Wolf of Wall street” then this might be the avenue for you. If you prefer steadily approaching retirement, the aforementioned suggestions have a much more proven track record.
To buy a house or not to buy a house? / Financial tips for young adults
More likely than not, owning a house is probably one of your investment goals. You may also be piqued by entering the real estate market, whether to flip homes or purchase rental properties.
Buying a home is a sound investment strategy with a strong caveat: a home requires a lot invested into it. There are a variety of factors that will influence whether you recoup your initial investment and how much you will gain.
- Are you taking out a mortgage to pay for your home and what is the interest rate?
- How much work needs to go into the home?
- What taxes and home insurance are you paying?
- How long are you planning on living in the home?
- What is the market like when you sell your home?
- What real estate fees will you be paying?
All of these considerations will influence whether buying a home is right for you and whether you will make any money off of your investment. If you like owning a property and don’t mind being responsible for the maintenance and bills, then ownership is a sound decision. If taking care of breaks and disruptions sounds like more of a headache than an indulgence, you might be losing more than what you gain.
For those looking to invest in real estate, similar principles apply though differ slightly. If you have the means, then investing in commercial real estate may offer some of the larger returns but requires a greater initial investment. You may also consider owning a rental property, whether as an apartment or a vacation home, but you will be responsible for upkeep and any tenant concerns (as well as dealing with tenants). For those looking for short term gains who enjoy being hands on or overseeing a project, flipping homes can generate a sizable return given the market; you usually want to find the worst-conditioned home in the nicest market in order to make the most money. If you own your home or even want to make some money from unused apartment space, subletting or renting space through platforms such as VRBO and AirBnB can generate some extra income that you can invest elsewhere.
Investing in your education, network, & community / Financial tips for young adults
Whether you’re trying to start your own business or move up the company ladder, earning more money is a logical means of trying to increase future financial freedom. While entrepreneurship and career advancement differ in approach, risk and return, they both incorporate some key elements for success.
First, you need to invest in your education. The more you know, the more you can do, the more you can earn. Many people are sold on going to college to earn a 4 year degree, but this is not necessarily the path to career advancement, particularly if you have a heavy debt load and no job or a low-wage job waiting for you. If your goal is to make money, whether as an entrepreneur or as an employee, then you need to have a specific professional goal. When you have a specific learning target, then you can find the means of learning and pay accordingly. Learning job skills does not necessarily require you to invest in formal education either. If a skill does not require a certification or prerequisite, you can take on a hobby, volunteer or even shadow someone else to gain the skills you need. These are all valuable ways of gaining experience and gaining knowledge that can translate to higher earnings.
Gaining skills often entails and often requires developing a network which can facilitate further earnings. Networking is a vital skill if you’re an entrepreneur as it can help generate contacts for suppliers as well as customers. Networking is a great way to get advice or gain skills from other people senior to you. It is also a great way to “get your foot in the door” if there happens to be a vacancy at your company; those in the know often recommend those they know for vacant positions. It never hurts to be friendly, polite and sociable, especially if you are trying to increase your net worth.
Integrating yourself into a community can lead to a great financial future as well. It might not seem intuitive, especially if you happen to have friends who like to borrow more than they lend. However, among mature adults, community can pay dividends. Need a babysitter so you can go out to an interview or enjoy an evening dinner? Why not ask a neighbor? Need to borrow a tile cutter to remodel your kitchen but you don’t want to buy or rent one? Why not ask a friend? Community involvement can even extend into lending opportunities where you invest in local businesses, potentially earning supplemental revenue from interest or repayment, and if you choose to invest in, or even start, a non-profit, volunteer organization or charity, you can benefit from tax deductions while providing a valuable service to your community.
Keep it Simple / Financial tips for young adults
Here’s a crazy concept. Intermittent fasting has come into vogue as a health and weight-loss strategy. It makes sense that if you don’t eat as much (or at all), then you can lose weight and rest your innards. What if you intermittently-fast in your spending as well?
It might sound like you can’t have any fun while not spending money, but if that’s the case, then you’ve never heard of the reduce, reuse, recycle. You probably haven’t heard of the staycation, either. Macklemore & Lewis already made us aware of how wonderful thrift stores are; if you’re throwing things away without reusing them until they aren’t usable, you’re throwing away money, too. And when it comes to entertainment, you may think that you can only enjoy life when you’re traveling the world (when it’s not shut down to traveling…), but it’s not always a day at the beach when it’s raining, you get sick or you realize what a tourist trap is. A walk in the park, a ride on a bike, a visit to a museum or even checking out a local nature preserve are great ways to enjoy free or low-cost entertainment while enjoying your natural environs. You may even be compelled to volunteer and increase the local cheer while expanding your network. Everyone wins!
In the end, strengthening your finances comes down to one simple principle: bring in more than you spend. If you wish to expand your knowledge of personal finance, various books such as
- A Random Walk down Wall Street / Burton G. Malkiel
- The Psychology of Money: Timeless lessons on wealth, greed, and happiness / Morgan Housel
- MONEY : Master the Game: 7 Simple Steps to Financial Freedom / Tony Robbins
All of these books are acclaimed for their simple financial advice. Saving, budgeting, decreasing debt and investing what you earn are the core of any sound financial management strategy, whether you’re 18 or 80. Hopefully, you’ll get started earlier rather than later and follow these financial tips for young adults so that you can start investing in your future to enjoy the fruits of your financial labor.