Getting your financial footing can be a challenge when you’re young, especially if you have student loan payments or a new mortgage make you feel penniless. Putting aside just a bit of your money in the bank can make a huge difference — but there’s more you can do than that.
In this article, we’ll cover 10 tips for young adults who want to start their financially-independent years on the right foot.
1. Educate Yourself
Take charge of your financial future and read a few basic books on personal finance. Once armed with knowledge, don’t let anyone take you off track, whether a significant other who encourages you to waste money or friends who plan expensive trips and events you can't afford. Research professionals like financial planners, mortgage lenders, or accountants before utilizing their services.
2. Start Saving Early
When you’re not earning much, saving may seem like a big challenge, but setting aside a few bucks a week can still help down the road. You can use your budget to determine how much money you’ll be able to put into savings every month.
If you’re looking to invest, check if your employer offers a 401(k) account. If they do, calculate how much you can afford to contribute from your salary and steadily increase it as you earn more.
3. Learn to Budget
Once you’ve read a few personal finance books, you will understand two rules. Never let your expenses exceed your income, and watch where your money goes. The best way to do this is by budgeting and creating a personal spending plan to track the money coming in and going out.
Tracking expenses, like your expensive morning coffee, can provide a valuable wake-up call. Small changes in your everyday expenses are under your control and can impact your financial situation. Keeping monthly expenses, like rent, as low as possible can save you money over time and put you in a position to invest in your own home sooner than later.
4. Minimize Debt
A budget is one of the most helpful tools to strengthen your finances. Although the word can seem scary, knowing where your money goes throughout the month is one of the most empowering facets of financial literacy. For example, reviewing your expenses can reveal an unused streaming subscription, weekly restaurant trips and an old gym membership. Addressing these expenses can net you a quick $100 a month in your budget, allowing for more saving and investing.
On that note, managing your debt is vital to your finances. For instance, student loans and credit cards can spiral out of control, putting you further behind your financial goals. Instead of letting interest payments eat up more cash, it’s best to create a debt repayment plan. There are two popular approaches to debt repayment: snowball or avalanche.
The snowball strategy means paying off your smallest debts first. Once you repay your smallest debt balance, you can apply this payment to your next smallest debt. This way, you gain momentum with each payment. On the other hand, the avalanche approach means attacking the debt with the highest interest rate, the logic being that interest makes debt more expensive over time. This way, you get rid of the costliest debt first, allowing you to apply an increasing amount of money to your debt’s principal.
Remember, debt is the inverse of an investment. An investment grows based on a rate of return, and debt grows because of interest. Therefore, it’s key to get your debt under control before you start investing significant amounts of money.
5. Keep Track of Your Spending Habits
A budget gives you a foundation for tracking your spending. In addition, a habit of spending less than you make will help unusually high spending become apparent. So, it’s best to give your finances a quick review every two or three months. Specifically, you can review your bank and credit card statements to see if you can reduce any expenditures in the future.
6. Start an Emergency Fund
Once you get into the habit of saving money, you will stop treating savings as optional and start treating it as a required monthly expense. Many accounts offer the power of compound interest, such as a high-yield savings account, short-term certificate of deposit (CD), or money market account.
Surprise expenses can derail the best-laid spending plan. For example, your budget might be chugging along for several months before you need a $700 car repair. Then, suddenly, your investment contributions are out the window, and it can be hard to get back on track once the emergency is over.
To combat this situation, start an emergency fund along with your investment fund. You can build it up over time in your savings account. A good rule of thumb is to have three to six months of expenses in an emergency fund. This way, a broken furnace or surprise medical bill will be a minor bump in the road instead of a crisis.
7. Separate your needs from wants
Many graduates make the mistake of immediately getting a new car and making other big purchases once they land a job. However, making large purchases is about more than being able to make monthly payments; it’s also about being able to pay your debt.
To help you limit accumulating debts, be sure to live within your means and understand how delayed gratification works — it’s a lot cheaper to save up and purchase things in full rather than using credit or loans for each purchase.
8. Monitor Your Taxes
When a company offers you a starting salary, calculate whether that salary after taxes meets your financial needs and savings goals. Many online calculators help you see your after-tax salary, such as PaycheckCity.com, and chart your gross pay (total earnings) and net pay (earnings after taxes and other deductions or take-home pay). In 2022, an annual salary of $35,000 in New York netted $28,270 after federal and state taxes, or about $2,356 per month.3
In the U.S., low-income earners are taxed at a lower rate than higher-income earners—the higher your salary, the higher the tax rate. A salary increase from $35,000 to $41,000 a year looks like an extra $6,000 per year or $500 per month, but the tax rate will be higher, so it will only give you $4,227, or $352 per month.
In addition, your retirement accounts have unique tax implications. For example, a traditional 401(k) uses pre-tax dollars, lowering your tax burden while you work. However, you’ll pay income taxes when you withdraw money from your account during retirement. On the other hand, a Roth IRA uses money the government has already taxed, and you’ll pay zero taxes on income from this account when you’re retired. Therefore, tax planning while you’re young can help you optimize your finances.9. Save for Retirement
You might think it’s too early to think about retirement — after all, you just graduated college, right? But remember that the sooner you start saving, the sooner you’ll be able to stop working and start enjoying your life. No matter how young you are, plan for your retirement now. With the power of compound interest, when you start saving in your 20s, you will earn interest not only on the principal you deposit but also on the interest you earn over time, and you will have what you need to retire someday
Look into company-sponsored retirement plans so you can set aside pre-tax dollars and have the company match your contributions — it’s practically free money
10. Guard Your Health
Healthcare is one of the fastest-growing expenses in the United States. You can lower your chances of spending huge sums of money on hospital bills by making sure that your health stays in tip-top shape.
This means eating well-balanced and nutritious meals, regularly exercising, having regular check-ups, and monitoring any conditions you may already have.
If you’re uninsured, don’t wait to apply for health insurance.
If employed, your employer may offer health insurance, including high-deductible health plans that save on premiums and qualify you for a Health Savings Account (HSA). If you’re under the age of 26, you may be to stay on your parent’s health insurance, an option that has been allowed since the 2010 passage of the Affordable Care Act (ACA).
Many young adults make financial mistakes. Some will encounter bigger problems than others, but that’s okay. It’s important to understand that help is available to get you back on track if needed.
When you’re not earning much, saving may seem like a big challenge, but setting aside a few bucks a week can still help down the road. You can use your budget to determine how much money you’ll be able to put into savings every month.
If you’re looking to invest, check if your employer offers a 401(k) account. If they do, calculate how much you can afford to contribute from your salary and steadily increase it as you earn more.
3. Learn to Budget
Once you’ve read a few personal finance books, you will understand two rules. Never let your expenses exceed your income, and watch where your money goes. The best way to do this is by budgeting and creating a personal spending plan to track the money coming in and going out.
Tracking expenses, like your expensive morning coffee, can provide a valuable wake-up call. Small changes in your everyday expenses are under your control and can impact your financial situation. Keeping monthly expenses, like rent, as low as possible can save you money over time and put you in a position to invest in your own home sooner than later.
4. Minimize Debt
A budget is one of the most helpful tools to strengthen your finances. Although the word can seem scary, knowing where your money goes throughout the month is one of the most empowering facets of financial literacy. For example, reviewing your expenses can reveal an unused streaming subscription, weekly restaurant trips and an old gym membership. Addressing these expenses can net you a quick $100 a month in your budget, allowing for more saving and investing.
On that note, managing your debt is vital to your finances. For instance, student loans and credit cards can spiral out of control, putting you further behind your financial goals. Instead of letting interest payments eat up more cash, it’s best to create a debt repayment plan. There are two popular approaches to debt repayment: snowball or avalanche.
The snowball strategy means paying off your smallest debts first. Once you repay your smallest debt balance, you can apply this payment to your next smallest debt. This way, you gain momentum with each payment. On the other hand, the avalanche approach means attacking the debt with the highest interest rate, the logic being that interest makes debt more expensive over time. This way, you get rid of the costliest debt first, allowing you to apply an increasing amount of money to your debt’s principal.
Remember, debt is the inverse of an investment. An investment grows based on a rate of return, and debt grows because of interest. Therefore, it’s key to get your debt under control before you start investing significant amounts of money.
5. Keep Track of Your Spending Habits
A budget gives you a foundation for tracking your spending. In addition, a habit of spending less than you make will help unusually high spending become apparent. So, it’s best to give your finances a quick review every two or three months. Specifically, you can review your bank and credit card statements to see if you can reduce any expenditures in the future.
6. Start an Emergency Fund
Once you get into the habit of saving money, you will stop treating savings as optional and start treating it as a required monthly expense. Many accounts offer the power of compound interest, such as a high-yield savings account, short-term certificate of deposit (CD), or money market account.
Surprise expenses can derail the best-laid spending plan. For example, your budget might be chugging along for several months before you need a $700 car repair. Then, suddenly, your investment contributions are out the window, and it can be hard to get back on track once the emergency is over.
To combat this situation, start an emergency fund along with your investment fund. You can build it up over time in your savings account. A good rule of thumb is to have three to six months of expenses in an emergency fund. This way, a broken furnace or surprise medical bill will be a minor bump in the road instead of a crisis.
7. Separate your needs from wants
Many graduates make the mistake of immediately getting a new car and making other big purchases once they land a job. However, making large purchases is about more than being able to make monthly payments; it’s also about being able to pay your debt.
To help you limit accumulating debts, be sure to live within your means and understand how delayed gratification works — it’s a lot cheaper to save up and purchase things in full rather than using credit or loans for each purchase.
8. Monitor Your Taxes
When a company offers you a starting salary, calculate whether that salary after taxes meets your financial needs and savings goals. Many online calculators help you see your after-tax salary, such as PaycheckCity.com, and chart your gross pay (total earnings) and net pay (earnings after taxes and other deductions or take-home pay). In 2022, an annual salary of $35,000 in New York netted $28,270 after federal and state taxes, or about $2,356 per month.3
In the U.S., low-income earners are taxed at a lower rate than higher-income earners—the higher your salary, the higher the tax rate. A salary increase from $35,000 to $41,000 a year looks like an extra $6,000 per year or $500 per month, but the tax rate will be higher, so it will only give you $4,227, or $352 per month.
In addition, your retirement accounts have unique tax implications. For example, a traditional 401(k) uses pre-tax dollars, lowering your tax burden while you work. However, you’ll pay income taxes when you withdraw money from your account during retirement. On the other hand, a Roth IRA uses money the government has already taxed, and you’ll pay zero taxes on income from this account when you’re retired. Therefore, tax planning while you’re young can help you optimize your finances.9. Save for Retirement
You might think it’s too early to think about retirement — after all, you just graduated college, right? But remember that the sooner you start saving, the sooner you’ll be able to stop working and start enjoying your life. No matter how young you are, plan for your retirement now. With the power of compound interest, when you start saving in your 20s, you will earn interest not only on the principal you deposit but also on the interest you earn over time, and you will have what you need to retire someday
Look into company-sponsored retirement plans so you can set aside pre-tax dollars and have the company match your contributions — it’s practically free money
10. Guard Your Health
Healthcare is one of the fastest-growing expenses in the United States. You can lower your chances of spending huge sums of money on hospital bills by making sure that your health stays in tip-top shape.
This means eating well-balanced and nutritious meals, regularly exercising, having regular check-ups, and monitoring any conditions you may already have.
If you’re uninsured, don’t wait to apply for health insurance.
If employed, your employer may offer health insurance, including high-deductible health plans that save on premiums and qualify you for a Health Savings Account (HSA). If you’re under the age of 26, you may be to stay on your parent’s health insurance, an option that has been allowed since the 2010 passage of the Affordable Care Act (ACA).
Many young adults make financial mistakes. Some will encounter bigger problems than others, but that’s okay. It’s important to understand that help is available to get you back on track if needed.
You don’t need an MBA in Finance or specialized training to become an expert at managing your finances. By following these ten tips above, you will be on the path to financial security. Start right now. The younger you are, the more your savings can grow.
