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Financial Advice For Young Adults

Financial Advice For Young Adults

April 30, 2024

As a financial advisor, I often have folks ask me for casual financial advice. I found I kept bringing up the same topics, such as budgeting, savings, and investing. I decided it would be fun to make a series of blogs that address what financial actions you should address in each decade of your life, from your twenties to your sixties.

 

When you are in your twenties, you are at the beginning of your career and have a lot of things to look forward to in life. You likely have secured your first well-paying job and may be tempted to blow your whole paycheck on designer clothes or a big car payment. However, this is when you must start making important financial decisions that will have a compounding impact on your future. These decisions are listed below:

 

Set Financial Goals

 Setting clear financial goals is the first step towards securing your financial future. These goals can include buying a house, paying off student loans, saving for retirement, or starting a business. Once you have set your goals, you can start working towards achieving them.

 

Get your first Credit Card

 If you don’t have one already, getting your first credit card in your twenties is essential. Look for a card with a strong welcome offer, no annual fee, and cash back. Some folks believe credit cards are dangerous because they allow you to spend money you don’t have. However, if you are responsible, credit cards are integral to building your credit score at a young age. If you follow these three rules, you will use a credit card as an asset rather than a liability:

  • Pay off your credit card in full, at least monthly
  • Only utilize 30% or less of your available credit
  • Only spend money that you have available in your checking account

 

Create an Emergency Fund

 One of the most important financial actions you need to make in your twenties is to start saving. The earlier you start saving, the more time your money can grow and compound. You can start by setting up an emergency fund that can cover at least 3-6 months of your living expenses. Look for a high-interest savings account or a money market fund to build these liquid savings.

 

Manage Your Debt

 You may have accumulated debt from student loans, credit cards, or personal loans in your twenties. Managing your debt and paying it off as soon as possible is important. You can start by making a budget and allocating a portion of your income toward paying off your debt. Avoid taking on more debt than you can handle, and always prioritize paying off high-interest debt first.

 

Start Planning for Retirement

 It may seem too early to start thinking about retirement in your twenties, but it is never too early to start planning. With the effect of compounding, your investment nearly doubles every 10 years (assuming a 7% average annual return). Thus, the longer you wait, the more difficult it becomes to save enough money for retirement. You can start by contributing to your employer's retirement plan, such as a 401(k) or 403(b). You should also consider setting up a Roth IRA to benefit from tax-free growth. It is essential to start your Roth IRA in your early earning years, as you likely will be phased out of being able to contribute as your income (hopefully) increases.

 

Live within Your Means, Track Your Expenses

 Living within your means is essential to achieving your financial goals. It means spending less than you earn and avoiding unnecessary expenses. You can start by creating a budget and tracking your expenses. Look for ways to cut back on expenses, such as cooking cost-effective meals at home, buying a reliable used car in cash, and avoiding the aforementioned designer goods. If you are comfortable managing your expenses on your own, create a detailed expenses sheet to track your income and expenses monthly. If following all this financial advice seems like an overwhelming feat on your own, please reach out regarding our subscription-based financial planning service. We create cash-flow-based financial plans that help you manage your finances with confidence.

 

Treat Savings, Investing, and Debt repayment like a Bill

 Earlier, I mentioned an emergency fund, paying down debt, and a Roth IRA as places to look to put your free cash flow towards. It can seem daunting to put 3-6 months of expenses in a savings account, tens of thousands towards debt repayment, or $7,000 in an investment account (2024 Roth IRA contribution limit for an individual under 50) all at once. Instead, treat these like a bill and pay them monthly. Start with a couple hundred dollars towards each and work your way up. The most important thing is starting young!

In conclusion, your twenties are an important time to make financial decisions that will impact your future. By setting clear financial goals, responsibly managing a credit card, saving up an emergency fund, managing existing debt, planning for retirement, and tracking your expenses, you can secure your financial future and enjoy a financially stress-free life.