Mastering Personal Finance: A Guide for Young Adults

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Lack of financial literacy remains a pertinent issue among young Americans. In 2023, 88 percent of US adults believed high school education did not prepare them for handling finances in the real world.

To help address this problem, we outline simple financial literacy tips for young adults who want to save and earn more. After reading, you will get crucial pointers that can help you determine how to handle and manage your finances better.

Buy What You Need, Not What You Want

You must understand how to differentiate wants from needs. The daily expenses that directly contribute to enhancing your quality of life, such as transportation and housing, are part of your “needs.” Meanwhile, other expenditures not falling in the former category should be classified as “wants.”

This clear distinction facilitates the improvement of your spending habits and helps you create more effective budgeting plans. Adjusting your expenditures can be more manageable by knowing and prioritizing your needs over your wants. 

When it becomes necessary to trim down your expenses, you can cut down on miscellaneous costs without compromising on meeting your fundamental needs. This strategic approach ensures financial prudence while fostering a more sustainable and balanced lifestyle.

Learn Smart Budgeting

In 2019, almost 48 percent of part-time undergraduate university students in the US worked 35 or more hours per week. Students might feel the excitement of earning a real-world paycheck for the first time and be tempted to spend it capriciously.

However, if you are a working student, you should take a step back and consider how to budget your income. Maybe you want to buy a house or a new car. You want to think of a financial goal early on to save more as you work more.

One common and valuable strategy for budgeting is the 50-30-20 rule. This approach divides your income into three main categories:

  • Fifty percent for needs or basic living expenses, such as housing, utilities, food, clothing, insurance, and transportation fees
  • Thirty percent for wants or spending on things and experiences that help make life fun
  • Twenty percent for savings or the money you will set aside to meet both your short-term and long-term goals

The most expert savers know that smart budgeting involves tradeoffs. For example, if you live in a more expensive town or city, you may have to compromise by spending less money on entertainment. While this can be easier said than done, you can look into alternative options for fun. Visit free museums or enjoy a wholesome picnic at your local park. You can also invite your friends over for dinner at your place.

Budgeting early on is crucial as you earn and spend more money. Moreover, it allows you to enjoy guilt-free spending because you are also planning your expenses for the fun stuff.

Manage Debt Wisely

For most American adults, managing debt is an intrinsic aspect of life. In the US, household debt rose to $17.29 trillion during the third quarter of 2023 due to student debt, mortgage debt, and credit card loan balances.

The increase in household debt emphasizes the financial complexities that come with adulthood. However, it is crucial to note that individuals with higher debt loads earn considerably more than young adults who are just beginning their professional journeys.

If you are just starting, you should monitor your debt-to-income ratio. This ratio is derived by dividing all your debt payments by your gross monthly income.

A typical debt obligation for recent graduates is student loans. Young adults interested in buying properties may also have to consider home loans. If you use credit cards to shop, you must manage your credit card debt and credit score.

It is wise to allocate a chunk of your monthly budget for loan payments to instill a habit of debt planning. This approach ensures you remain on track to lower what you owe and eventually eliminate debt. The following practices can help you manage your debt more easily: 

  • Using credit cards responsibly to establish a robust financial foundation
  • Spending only within your means
  • Paying monthly debts in full and on time
  • Aligning your economic values with credit card perks

These practices help build a favorable credit score and pave the way for securing significant loans, such as mortgages.

If you want to own a home, you can look for mortgage loans that are easier to pay. For example, the Department of Housing and Urban Development’s Federal Housing Administration (FHA) offers loans with a lower minimum down payment than traditional lenders. Moreover, applicants for FHA mortgage loans may have lower credit scores than is usually required.

Start Investing Early

The most successful savers treat investing for retirement as a non-negotiable monthly commitment. Like paying a bill, monthly investment can be a practical foundation for gaining long-term financial wisdom. 

However, for young investors, the distant prospect of retirement can pose a significant mental hurdle, especially when you have conflicting financial priorities. Some even ask, “Why should I prioritize investment when I have too many expenses to manage?”

The answer lies in the crucial benefits that early and consistent investing can yield over time, primarily due to the impact of compounding returns. Compounding your assets in a diversified portfolio could generate additional earnings. This advantage allows your funds to work for you and function as a resource of passive income. You have a financial engine that can significantly boost the value of your investments.

Moreover, recent college graduates have a more extensive investment time horizon, spanning approximately 40 to 50 working years if they follow the conventional path to retirement. Because you have more time to save, you will have more money to invest and earn.

Once you start your investment journey, you should seek funds that offer broad market exposure. This diversification strategy helps spread risk and elevates the potential for long-term growth.

You can also consult a financial professional who can provide valuable insights into developing an investment strategy that aligns with your unique economic goals and risk profile.

You can automate your contribution process to ensure consistency in your investment journey. This method allows you to contribute regularly without actively monitoring the money leaving your account. 

While this process might sting a bit at the start, you can make it through by keeping track of your growth. Monitoring your progress can motivate you to work for your financial goal and propel you forward in your wealth-building journey.

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