- Become Financially Literate ➞
- Eliminate Debts ➞
- Create a Budget ➞
- Find a Healthy Balance ➞
- Earn More ➞
- Understand the Magic of Compounding Interest ➞
- Make Intelligent Financial Decisions ➞
- Max Out Your Retirement Accounts ➞
- Invest, Invest, Invest ➞
- Marry Wisely ➞
- In Conclusion ➞
(Photo by Tezos/Unsplash)
“You must gain control over your money or the lack of it will forever control you.”
Dave Ramsey
You’re never too young and it’s never too early to plan your finances. Even teenagers can start building a good credit score by getting a credit card and using it wisely.
Parents who add their children as authorized users on their cards and pay their bills in full and on time will be building an excellent credit score for their child in future.
But you can only do this IF you know what to do.
Most people don’t know much about financial planning and never proactively study the subject. They’re doing themselves a disservice without even realizing it.
That’s exactly why young adults need to be financially savvy and know the basics of personal finance. Here we’ll explain 10 pointers to help guide you. Adhere to them and you’ll be financially ahead of most people.
Become Financially Literate
In order to understand money and how it works, you MUST study it seriously like a student. Unfortunately, this subject is usually not covered in school.
You’ve probably never been taught about 401(k) plans, reducing taxes, budgeting, etc. Instead, your mind is more likely clogged up with random irrelevant facts you’ve overheard here and there that will never be of any substantial use to you.
So, when you set out into the real world, you’ll naturally be clueless about money unless you studied finance in college or took a related course.
The best way to remedy this problem is to study this subject on your own. Borrow a book or two from the library and aspire to understand what budgeting, investing, and other concepts are all about.
There’s no denying the fact that finance is a dry topic and you’ll need to go through it slowly – but there’s no rush. Take your time, but be consistent in your learning.
Your takeaway: Read more books on finance and improve your financial literacy.
Eliminate Debts
There’s an old proverb that states: “Better to go to bed hungry than to wake up in debt.”
This is 100% true. Debt will ruin your financial future. Millions of Americans are up to their eyeballs in debt – credit card debt, student loan debt, car payments, mortgage payments, etc.
It never seems to end.
Debt (especially revolving credit) must be anathema to you. You must hate it with a passion and eliminate it.
Avoid making purchases on your credit card if you’ll not be able to pay the bill in full.
You’re better off saving the money first and then buying it with your credit card (to build your credit score).
Then when the bill comes, you can pay it on time with the cash you’ve saved up.
Going into debt to buy a house or start a new business is fine. This type of debt is not bad. The latter comes with some risk, but that’s par for the course.
Debt that’s incurred to pay for entertainment (hitting the clubs, alcohol, vacations), or to buy branded products to show off is NOT the type of debt you want to incur.
You must understand the difference. Avoid bad debt.
Your takeaway: Eliminate debt and avoid owing anything to credit card issuers. This tip alone will save you a lot of financial stress.
Create a Budget
Many people dislike creating a budget or even having a routine for their day. They feel like such ‘structure’ restricts them. They want to feel free and uncontrolled.
However, what they fail to realize is that routine and structure actually give you more freedom. After all, you’re the one creating a budget for yourself.
For example, if you have a budget and you follow it, you’ll be debt-free. But if you fritter away your money willy-nilly and end up owing the banks, will you have freedom?
Of course not! You’ll be in financial servitude to them. You’ll find yourself working to pay off the high interest rates on your outstanding balances. You’ll barely have money for yourself.
There’s no freedom here! Only stress.
Following a sensible budget may sound boring, but the benefits are priceless – more money saved, peace of mind, and better control over your spending habits.
Your takeaway: Create a budget for yourself and follow it closely.
Find a Healthy Balance
There’s no denying the fact that “all work and no play makes Jack a dull boy.”
Having a budget is not about being overly restrictive. It’s about making sure you don’t slide down the slippery slope of debt into financial ruin.
That said, as a young adult, you’ll want to have fun too. That’s perfectly fine. You must find the balance here between spending and saving.
Save your money first and spend what you have. The key to making it all work is MODERATION.
Instead of hitting the clubs every weekend, just go once or twice a month. You’ll still have fun without going into debt.
If you wish to go on a vacation, take a trip to somewhere affordable where you will have fun instead of racking up a huge bill on your credit cards just because a trip to Europe sounds cooler.
You can still have fun while being on a budget… and if you feel like you can’t, that only means one thing – you need a higher income.
Your takeaway: Find the balance between making responsible financial decisions and having fun.
Earn More
The best way to save more, spend more and invest more will be to EARN MORE!
As simple as it sounds, so many people miss this fact. The more you earn, the more options you’ll have. In fact, your earning capacity will make the single biggest difference to your financial situation.
Many people who earn a lot still go broke because they manage their money poorly. But if they manage it well, they’ll do a lot better than someone who’s earning less.
Since you’re young, your goal should be to earn as much as you can. Even if you’re currently in a dead-end job, you can still learn valuable skills that will be rewarded well in the marketplace.
Too often, we’re led to believe that a college education will lean to better paying jobs – but this is only true if your degree is valued in the marketplace. If it’s not, you’ll be stuck at a low-paying job but be saddled with a mountain of student debt.
If you’re in this position, you’ll want to assess your situation and options. Ask yourself what you can do to earn more money.
Instead of working longer and harder, see if you can learn skills or trades that will earn you more money in the same amount of time expended at work.
The internet is replete with opportunities for you to make a side income which can turn into a solid full-time income. Capitalize on these opportunities to skyrocket your income.
When you’re earning more, you’ll be able to afford the finer things in life and save more too.
Your takeaway: Find ways to increase your income.
Understand the Magic of Compounding Interest
You may have heard this ad nauseam, but it’s true. Since you are young, you have the most powerful ally on your side to grow your money – you have TIME.
Never underestimate just how powerful time is when it comes to increasing your wealth.
Albert Einstein once said, “Compound interest is the eighth natural wonder of the world and the most powerful thing I have ever encountered.”
It’s far better to save small when you’re young than larger amounts when you’re older. Aim to save about 6-12 months’ worth of income in a savings account. Once you have this sum, place it in a time deposit at the bank so that it earns a higher interest rate.
Let this sum keep getting renewed and let the interest compound. You’ll be amazed at how much money you have by the time you’re 50 or 60 years old. You can even top up the amount you have as your income increases.
Your takeaway: Leverage the power of compound interest and start saving early. It’s the best way to grow your money over time.
Make Intelligent Financial Decisions
No matter how wise or astute you think you are, it’s inevitable to make mistakes. However, by thinking carefully before spending your money, you’ll limit your mistakes considerably.
Once you start working, you may find yourself renting a place to stay. Now, you could rent indefinitely and move from place to place once your lease is up – OR you could look at your finances and see if you should buy a home.
With a bit of research, you’ll know whether a home is in an emerging neighborhood. If a house costs $250,000, you’ll be able to get an FHA loan with a 3.5% down payment. That means you’ll need to have $8,750 saved up.
Is this an easy amount to save?
You bet it is… if you have a plan. If you saved $365 a month, you’d have saved up enough for the down payment in 24 months. During this time, you’ll be renting – but after that you’ll have your own home and every mortgage payment you make will go towards owning an asset that appreciates over time.
Unlike rent payments which only gives you shelter for 30 days, house payments are for an asset you own.
This is an intelligent financial decision. So is buying a pre-owned car with lower mileage so that you avoid the deep depreciation that the first owners have to shoulder.
It has been shown that a car loses 20% of its value within the first year of ownership and tapers off to 10% a year after that. By buying pre-owned, you’ll be saving quite a bit of money. This too is an intelligent financial decision.
Your takeaway: Do your research and find ways to reduce your expenses while building your net worth.
Max Out Your Retirement Accounts
There are several options such as 401(k), IRAs, and so on that will allow you to save your money. The 401(k) is an employer-sponsored savings account where your employer will contribute a certain percentage that matches your contribution.
You’ll definitely want to contribute here or else you’ll be missing out on the ‘free money’ your employer would give you. While you can’t withdraw from your 401(k) until you’re 59 and a half years old, you’ll be saving for retirement here.
The contributions will be tax-deferred, So your taxable income will drop too. That’s a win-win. When you’re older, if you’re in a lower tax bracket, you may end up paying lower taxes upon withdrawal.
You’ll only know how to do all of this by studying this topic in greater detail. Alternatively, you could speak to a financial advisor and get them to draw up a plan for you to follow. This one-time investment in their services will reap rewards many times over.
Your takeaway: Save up for retirement.
Invest, Invest, Invest
Investing is not just reserved for big players like Warren Buffet or big-talking Wall Street shysters. Anyone can invest, if they have the funds for it.
What’s important to know here is that you should not go in blindly and invest haphazardly.
Once you’ve eliminated debt and saved up an emergency fund, whatever extra you have can be invested in stocks, funds, bonds, etc.
Do note that you have no business investing until you settle off your credit card debt, personal loans, and so on. The interest rates on these balances will far exceed the gains you make on investing and cancel them out. Better to get rid of debt first.
When investing, you’ll want to assess your risk tolerance. Since you’re young, you can afford to have a high risk tolerance. Any losses can always be recouped over time. That said, it’s best to invest in companies that show promise, and then hold on to the stocks for as long as you can.
Fidelity Investments, Inc. once did a performance review to see who were its best investors. To their surprise, their best investors were either dead or people who had forgotten they had an account. So, they left their money invested in the stocks which appreciated over time. This is undeniable proof that long-term investing will yield the best results.
Your takeaway: Study investing and do your research first – then invest your money and let it grow.
Marry Wisely
The partner you choose will impact your finances in ways you never thought possible. If your future partner is laden with debt, that debt will soon become yours to bear too.
If the person you marry has poor spending habits, the household expenses will be in disarray and you’ll constantly be in debt. Some partners may want a lavish lifestyle with little regard as to whether they can afford it or not.
A marriage that ends in divorce can also have a significant financial impact if alimony, child support payments, etc., become an issue. So choose your partner wisely and make sure they’re level-headed when it comes to money and responsible spending.
Your takeaway: Make sure you marry someone whose financial philosophy is in alignment with yours.
In Conclusion…
These are just 10 tips of many out there, but these are some of the most important ones.
Remember them and apply them.
The best way to manage your money and grow it will be to pay attention to the numbers. Good money management doesn’t happen by accident.
Don’t be obsessed, but be aware of what’s going on in your finances. Then do what you can to improve your financial situation in life.
The good news is that time is on your side. The decisions you make today will decide your financial future tomorrow. Be wise.