Financial tips for young adults cannot be brought up without speaking of schools…
They never seem to properly prepare students for the financial world ahead.
Although school is arguably the most important phase of our lives according to some, social connections seem to be the only reason why.
Coming as a shocker (but not really…), nostalgic thoughts about school are never tied to math classes or the learning process.
Outdated teaching ways are in need of a facelift, the world’s evolution is rendering education in its current form completely obsolete.
Non-engaging pedagogical methods combined with shorter than ever attention spans can only go so far.
Administering a Personal finance subject under these circumstances seems like an impossible task.
Unfortunately, financial tips for young adults are underlooked and who pays the price for what education lacks are millions of students, financially blind by the time they leave school.
No wonder the majority of people graduate straight into a life of debt and that’s all they’ll ever know.
Schools are factories of hard-working people and there’s nothing wrong with that. The problem starts with the “one size fits all” teaching model, young adults are still taught in a generalized way, too broad to be personalized.
This model discourages thinking outside the box, it promotes instead a “follow the herd” state of mind.
What State of Mind is This?
Working multiple jobs and living paycheck-to-paycheck to support an ever-expanding debt lifestyle. It typically looks more or less like this:
◣ Student loan
◣ Car loan
◣ Credit cards
Speaking of debt, according to CNBC, there are over 17 million Americans under the age of 30 paying student loans.
Americans in their 20s average a balance of $22.135 in debt with an average monthly payment of $351.
These 17 million people account for a total of $376 billion in loans.
Put some thought into it, is it worth working 3 different jobs to pay for a home you never set foot in and end up with a bunch of debt in your lap?
Can You See?
Uncalculated debt is only meant to grow out of control to ruin your life, that’s where possession of financial tips becomes handy, especially for young adults.
The earlier you start accquiring knowledge the sooner you’ll be able to enjoy a shackle-free lifestyle.
Now that we’re past the initial concept… We did some homework for you, let’s dive right in on the 7 Financial Tips For Young Adults you came for:
Tip #1 – Understanding the Difference Between Assets and Liabilities
Your best bet to generate money. These fall under 2 categories.
Tangible assets (physically touchable):
◣ Cash on hand
Intangible assets (not physical):
◣ Royalty agreements
◣ Designs and Drawings
These are sources of debt. Wealth is conquered by keeping your asset-to-liability ratio high.
Collect as many assets as you can while maintaining reduced liabilities.
Having no liabilities is not good, you could be missing out on cheap debt to further grow your net worth. You should definitely have some but remember to be responsible, keeping it under control.
◣ Taxes owed
◣ Mortgage debt
◣ Personal loan
◣ Bank Debt
◣ Any sum of money owed
Liabilities are not to be confused with accumulated depreciation (the decrease in value of an asset over time). They’re nothing more than debt.
Pick Your Assets Wisely
Whenever possible, try to pick assets that appreciate in value over time instead of ones that will depreciate.
Even though this isn’t rule of thumb, appreciating assets will more often than not grow your net worth, even after being used.
Tip #2 – Don’t Park your Money in the Bank
You probably heard it from your parents or any older folk that gave you advice before, “Work to save money and after you’re done… Keep saving more”.
While this is good advice, it’s also incomplete.
You’re never told what to do with your money after saving it. The logical step for blindly following this advice would be to put your money in a bank account and let the funds sit there until you need them.
Well, while your money collects dust in the bank, the prices of goods and services will only keep increasing due to inflation, decreasing its buying power over the years.
In 1950, 10 cups of coffee would cost $1.50. Today, 10 cups of coffee would cost approximately $30.00.
The best workaround is to park your money on investments rather than a bank. This will assure your money grows to beat inflation rates. You can find out more about it in this article.
Tip #3 – Multiply Your Income Streams
School teaches you to work 3 jobs to keep up with debt but this is a different approach. By having multiple income streams you’ll be safe from whatever life throws at you, be able to invest the extra income, and have your retiring plan in action earlier.
According to a global poll created by Gallup, 85% of worldwide workers hate their job.
Multiple streams of income will only facilitate good decisions whenever you search for a new job. The probability of signing for a job you don’t want will be drastically reduced.
Most people trapped in a bad job made the choice to work at such place out of necessity.
Tip #4 – Use Compound Interest to Your Advantage by Investing Early
Time is a powerful tool, even though any investor can benefit from compound interest, those who start early have the advantage.
Compounding is a growth process, investing a given amount will earn you interest.
That same amount + the earned interest will earn more interest. This generates a snowball effect leading to higher accumulative payments each year as your total balance increases.
To understand why a head start is essential, Let’s take a look at JP Morgan’s compound interest comparison.
Consistent Chloe started investing $200 per month from the age of 25 to 65. She invested a total of $96.000 out of pocket earning 5.75% interest over the span of 40 years. Compound interest grew the investment to $368.900.
Late Lyla did the same, the only difference is that she started investing 10 years later. She invested from the age of 35 to 65, $.72.000 out of pocket earning the same 5.75% interest over the span of 30 years. Compound interest grew the investment to $192.000.
Even though Late Lyla also benefited from compound interest, the results were not as good as Consistent Chloe’s because she hopped in 10 years later.
Tip #5 – Prepare an Emergency Fund for Dark Days
When all goes down the drain, an emergency fund will give you mental relief and buy you enough time to re-assemble your financial strategy. One of the most important aspects of having one is the ability to pay for expenses without touching your invested money.
But this is not the only reason why you should have an emergency fund, there’s a world of utilities for it:
◣ Unexpected auto repairs
◣ Medical bills
◣ Death of a family member
◣ Natural disasters
And the list goes on…
Make sure to prepare a fund that goes along your spending habits.
Ideally, it should cover 6 to 12 months of expenses but every scenario is different. You may want to plan for a narrower or a larger period of time, make sure to adjust it to your needs.
Tip #6 – Don’t be Afraid of Calculated Risk
Fear can hold back the best moments of your life but you must make mistakes first in order to learn from them, it’s the process of mastering your craft.
Risks don’t necessarily have to be reckless, avoiding them will help you manage anxiety in the short term, however, in the long run, you’re jumpstarting a pathway to depression.
Learn how to calculate risk, don’t be afraid to take a leap of faith whenever it makes sense, calculate your steps always taking failure into account and the consequences will not be so severe.
I made an article on stock market investing myths, don’t hold back on taking a peek if you’re afraid of investing risks.
Tip #7 – Don’t Take Your Money Out of the Stock Market – Keep Buying in Instead
It doesn’t matter how big of a toll the stock market takes, the bull market that follows is always bigger, it’s important to keep your money invested and hold through declining periods rather than panic sell.
You can potentially lose more money for being uninvested, even during market crashes.
Fidelity found that over the period of 40 years, a $10.000 investment in the S&P 500 Index would’ve grown to $697,421 if the money was kept invested at all times.
Just missing out on the best 5 days would have the returns diminished by $265.010.
The Bottom Line
Financial literacy is an ongoing process, it’s not realistic to expect young adults to dominate the subject or to be even interested in it. It’s important to think about the impact of uncontrolled debt at such young age and push schools to teach personal finance.
One of the best financial tips for young adults is that life is not just about working to pay up debt, financial freedom is achievable through self-discipline and personal balance. This doesn’t mean that one should live a poverty-status lifestyle in order to retire comfortably, plans are usually tailored to suit each individual.