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With record inflation driving up prices and student loan debt reaching crisis levels, it’s no wonder young adults are worried about their financial futures. The fact is, the American Dream achieved by past generations seems to be moving further and further out of reach, resulting in a severe lack of confidence among today’s youth.
More than half (54 percent) of teenagers who responded to the Teens & Personal Finance Survey in February 2022 reported feeling unprepared to finance the life they hope to have in adulthood. And more than two-thirds (69 percent) said the rising costs of higher education have impacted their choice to attend college.
The study also showed more than four in 10 teenagers (41 percent) were not receiving any financial literacy education in school. With that in mind, it’s right to wonder what young adults can learn now that can impact their finances — and their lives — in a significant way.
How to make a budget and stick to it
One of the most important tools young people can use to get ahead is a monthly budget or a basic spending plan that helps track their money. Learning how to make a budget is crucial if you want to make sure you’re living within your means and saving for things you really want or need, like the down payment for a home or a reliable car to get to work.
There are several different budgeting methods that work rather well, including zero-sum budgeting and the 50/30/20 budgeting method. You can try any of them or all of them, but it’s important to find one that works.
According to budgeting expert Dasha Kennedy of The Broke Black Girl, it’s far too easy to believe you don’t need to budget, and that your financial problems can be solved just by earning enough money. However, this often leaves you spending money on “wants” without enough regard for your future goals.
Kennedy lived that way for a while until she finally fell behind on some bills and started to rethink her plan. From there, she began tracking her spending and started to think of her budget as a tool to spend money in financially responsible ways.
“Don’t let the misconceptions about budgeting cause you to make some of the same mistakes as me,” said Kennedy in a YouTube video. “All it takes is a little time and a little math to help you keep track of your expenses and your income.”
Have an emergency fund ready
Young adults should also have an emergency fund, which can kick in to cover bills in the event of a medical emergency, job loss or loss in income. Emergency funds can start out with as little as $1,000, but you should strive to build up three to six months of your expenses in a high-yield savings account.
YouTuber Aja Dang said she learned about emergency funds the hard way when her dog Luke needed emergency surgery after an intestinal blockage. Dang said she almost had to have her beloved pet euthanized due to her lack of extra cash, and that the entire experience caused her to reevaluate her savings plans.
It’s always wise to have extra money for life’s surprises, whether your employer decreases your hours at work or you have a surprise car bill. In Dang’s case, maybe your dog gets sick and you need to pay for the care that will save their life. Whatever life throws your way, having an emergency fund can ease the burden.
How to save effectively
In addition to saving for emergencies, young people should also save for specific goals they want to achieve. For example, it can make sense to save up money for the down payment for a home, or for a bucket list trip around the world.
Not tracking your spending is one of the easiest savings mistakes you can make. Even if you know you don’t make large, irresponsible purchases, there may be a trend that’s costing you more than you think. (We’re looking at you, DoorDash.) It’s always easier to save for the future when you’re using a monthly budget. After all, a budget makes it easier to intentionally allocate funds for the things you really want, including your long-term goals.
Mary Wisniewski, banking editor and fintech features reporter for Bankrate, said it took her years to open a savings account after graduating from college — mostly because she felt like achieving her savings goals would be difficult, if not impossible, anyways.
“Looking back, I’d tell myself to throw a few bucks in a savings account here and there,” she says. “Breaking down big to-dos into smaller ones makes money goals feel much more doable.”
Wisniewski recommends using mobile apps such as Digit, Dobot and Qapital to help you out.
How to navigate and pay off debt and loans
If you have student loan or credit card debt, getting on track with your finances can feel like an impossible mountain to climb. However, there are several steps you can take to pay off debt, from using a balance transfer card to various debt repayment methods.
For example, the popular debt snowball method asks people to pay the minimum payments on their larger debts each month, then throw as much cash as they can toward their smallest debt. As each small debt is paid off, the amount paid gets “snowballed” into the next smallest debt until only larger debts are left.
The debt avalanche method works similarly, except that it targets the highest-interest debts first. Over time, debts with the highest interest rates are eliminated until only a few debts exist, then just one.
Banking reporter Liz Hund said she took out student loans to attend college, but didn’t realize she made some mistakes with her loans until it was too late. She didn’t pay any attention to the interest rates on her loans until after the fact, for example, and made no payments during school, even though she was working.
“All-in-all, I’m thankful to be in a position where I have a much better understanding of my loans, but I wish I would have taken the time to understand them sooner,” Hund says.
How to avoid credit card pitfalls
Young people should also do their best to avoid the pitfalls of using credit, including the consequences of racking up debt. After all, credit cards have higher interest rates than other forms of borrowing, and it’s easy to just make minimum payments as your debt spirals out of control.
If you want to use credit to your advantage, you can absolutely do so. For example, you can use a credit card to build your credit score and earn rewards, but you should put paying your balance in full each month on the top of your list of priorities. In the meantime, only use credit for purchases you know you can afford to pay for, and avoid using plastic for unplanned splurges.
Former star of The Bachelor Matt James recently shared his credit card debt journey with Bankrate. When James first got a credit card in college and started making charges, he didn’t realize he would have to pay the money back. He also had no idea that interest charges would make everything he purchased considerably more expensive.
“I went crazy,” James says. “I was buying shoes. I was buying video games, and I just wasn’t thinking because I was like, hey, this isn’t my money.”
He eventually came to realize the charges did belong to him and that he didn’t want to live his life in debt. The reality star emphasized it’s a lot easier to avoid credit card debt in the first place, vs. dealing with it later.
How to save for retirement
Finally, most young people will eventually wish they had started saving for retirement earlier in life. This is due to the power of compound interest. The reality is that having more time on your side helps your money grow and compound at a significantly faster rate.
There are many ways to save for retirement, but the easiest way is typically any workplace retirement plan you have access to, such as a 401(k). A tax-advantaged workplace retirement plan is often the best place to start since you can set up automatic contributions through payroll deduction, and since contributing to this type of plan can reduce your taxable income.
Bankrate editorial director Lance Davis adds that it’s smart to open a Roth IRA, a type of account you contribute to with after-tax dollars.
“You pay taxes on the money before you put it in the account, but the withdrawals are tax-free in retirement,” says Davis. “This is good. Since you’re just starting out, you’re likely in a lower tax bracket today than you will be decades from now.”
Also don’t be intimidated when it comes to picking investments for your Roth IRA.
“Instead of picking individual stocks, look at low-cost exchange-traded funds that track an entire exchange, such as the S&P 500,” Lance says. “That way, instead of banking on an individual company, you’re spreading your risk across many.”
The bottom line
Financial literacy isn’t always obvious, but with the right education and tools, young adults can set themselves up for success. That said, there’s a lot more to learn about money than what we’ve covered here.
With that in mind, it’s smart to read up on financial literacy and proper money management. If you’re interested in diving deeper, check out Bankrate’s library of financial resources, including investing basics, retirement basics and more. The Consumer Financial Protection Bureau, a government agency that advocates for consumers, is another good place to do research.