Guest blog by Slavik401k
Growing up comes with many perks, like living life by your own rules, buying a car, getting a job, living with friends and so much more. While it’s easy to get carried away by the benefits, there are also some financial realities that young adults are faced with as they transition into adulthood.
Because most primary and secondary schools don’t require students to take a personal finance course in their curriculums, the lack of financial knowledge can make managing money difficult as people grow up and move out on their own.
If you’re a young reader who’s preparing to leave home, make sure you understand these four financial lessons before you take the world by storm. Establishing good financial habits will help you achieve a solid foundation for future success.
1. Manage Your Money so it Doesn’t Manage You
As someone earning, spending, and saving money, it’s important to understand how to manage a proper budget. Elizabeth Warren published a book titled, All Your Worth: The Ultimate Lifetime Money Plan, which describes a budget tool known as the 50/30/20 rule.
The rule is simple. Break down your monthly net income into three categories: 50% for essentials, 30% for wants and desires, and 20% for savings and debt payoff. Using financial apps like Intuit Mint or Spendee can help you better track your income and divide appropriately. You can even schedule monthly bill payments, track retirement account growth, manage loans, and more.
This strategy is essential for young adults as they enter the workforce because it is easy to get swept away in spending once you have a paycheck that beats the part-time job you had in high school or college. Without understanding and using a strategy to manage your money, it can easily start to manage you. Learn more about using the 50/30/20 budget rule on the Slavic401k blog.
For additional tools, check out financial wellness podcasts, such as the Financial Feminist or Fairer Cents to learn about managing your finances successfully. You can also watch YouTube videos from financial experts, like the Financial Diet or His and Her Money.
2. Learn How to Use Credit Responsibly
Credit can be a slippery slope for young adults who don’t understand how to use it effectively, or the ramifications of what happens when it’s not used responsibly.
Essentially, credit cards are a portable, plastic loan. Lenders determine how much a borrower is approved for each month, and the borrower can use it at any merchant that accepts credit. Because so many college graduates have student loan debt, taking on another form of debt, like credit, may not seem like a big deal. But it can be. Credit users may mistakenly think they have more money available than they do. Have you ever heard someone say, “I’ll just put it on my credit card”?
This thought-process can be damaging to young adults who accrue a lot of debt in a short amount of time, and the ramifications of careless spending can last a lifetime. When young adults are unable to pay their credit card bills every month, it can lead to a lower credit score. Many credit cards typically come with high interest rates, which can make getting out of debt difficult as it can be tough to pay down larger balances accruing interest each month. A low credit score is typically anything below 600 and will affect whether you’re approved for a car loan/lease or mortgage loan, as well as negatively affect your interest rate on future loans, and in some cases, employment.
That’s why it’s essential to understand how to use credit responsibly, and the best trick is to treat it like a debit card. Never spend more than you can pay off each month and not carry a credit card balance. If you must take on debt for unforeseen circumstances, make sure your payments are more than the minimum payment each month, so you are paying down the balance as well as the interest.
Credit cards are an essential component for building solid credit so that you can get a car, home, or other loans at low interest rates in the future. Credit cards can be a great resource, but it requires some babysitting. Some cards even have rewards programs so you can earn cash back for purchases such as gas or groceries. Learn more about using a credit card, and the options available to you here.
3. Save for a Rainy Day – It Won’t Always be Sunny
The rule is simple: pay yourself first. As part of your monthly budget, put 20% of your income aside for savings and debt payoff. And while savings can apply to many things, like buying a car or taking your dream vacation, it should also apply to a rainy-day fund, also known as an emergency fund.
Emergency funds are dedicated to unexpected expenses, such as a medical procedure, car or home repair, or sudden job loss. These accounts can be the difference between a financial burden and peace of mind in the event of the unexpected, so it’s important to keep at least three to six months of expenses in an accessible savings account.
If you find yourself in a position where putting that much money aside is unattainable, consider these savings tips:
- Refinance or consolidate existing loans to reduce your rates
- Get a side job, such as an Uber or DoorDash driver
- Cut out unnecessary expenses like magazine subscriptions, streaming services, etc.
- Add bonuses and monetary gifts to the fund instead of spending it
- Reduce how often you go out to restaurants, bars or purchasing non-essential items
You can learn more about establishing and maintaining an emergency fund on the Slavic401k blog.
4. Start Saving for Retirement at an Early Age – Your Future Self Will Thank You
As you enter adulthood, there are multiple ways to save for your future. Accounts like 401(k)s, employer-match 401(k)s, or Traditional and Roth IRAs can help you grow your accounts over time.
- 401(k) : Many employers offer a company-sponsored 401(k) plan as a benefit to employees. The structure is designed so employees can contribute pre-tax funds to an account on an annual basis. The funds are typically invested in mutual funds, stocks, or bonds, and sit in an account until the employee reaches age 59½ and can start withdrawing funds. Young adults should take advantage of these accounts as a tool to help grow retirement savings easily over time.
- Employer-Match Program : If your company offers matching contributions with the 401(k), you should be utilizing it – it’s free money after all! These programs are structured so both the employee and employer are contributing funds into a 401(k) account. For example, if your company offers a 100% match on the first 4% you contribute, and you are contributing 4% of your income to your account each year, then your company will match 4%, meaning your account will have 8% of your annual income deposited into it each year. That means you will have double the amount of money you would have if you do not contribute enough to take advantage of the employer’s match.
- Traditional IRA : These accounts allow individuals to contribute pre-tax dollars up to $6,000 annually for retirement. When a participant retires, funds can be withdrawn at the owner’s current income tax rate and can be withdrawn on a minimum distribution schedule.
- Roth IRA : These accounts allow participants to contribute post-tax funds that are tax-free upon withdrawal. Like a Traditional IRA, individuals under the age of 50 can only contribute up to $6,000 annually, or $7,000 annually if they are over the age of 50.
Remember, financial knowledge doesn’t always come easily, and sometimes it takes some research to understand how to establish your goals and manage your money. As a young adult, the best thing you can do is learn how to utilize tools such as credit, budgets, retirement saving accounts, and more to avoid financial mishaps.
Read books, watch videos, listen to podcasts, and subscribe to blogs – like the Slavic401k blog – to learn everything you need to know about establishing and maintaining a strong financial foundation. Your future self will thank you.