Your financial habits and the choices you make as a young adult will shape your finances in the future. Take it seriously and practice good habits.
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Importance of starting early
One of the most important things to do as a young adult is to educate yourself and take control of your money because you have the power of time on your side.
Related: Effortless ways to save money
By starting early, you’ll avoid negative financial situations that can occur if you aren’t educated around the subject of finances. Not only will you avoid these situations, but you’ll also save time, money, and the stress of tough financial situations.
You’ll also experience the power of compound interest, which makes your money grow faster because you earn interest on the total amount of money instead of just the principal amount.
If you ask someone who’s older than you about what they wish they would’ve done to be in a better place financially, they’ll likely say that they wish they started while they were younger.
Get on the path to financial independence now, regardless of how much money you make or have because you have time on your side. Use the following financial tips to get ahead with your finances:
1. Increase your financial literacy
Although financial literacy should be more common, it isn’t. That’s why you need to take the initiative to educate yourself about money. Learn about the value of money, how to save, manage money, develop skills to make more, and make great financial decisions.
The following are examples of ways to increase your financial literacy:
- Read a book about money.
- Ask a financial advisor if they’d be willing to answer questions you have.
- Listen to podcasts.
- Watch videos.
- Take courses from reputable sources.
There are many ways to learn. The key is to take the time to immerse yourself in the world of money and how the economy works. With more knowledge, you can make better decisions and avoid common mistakes that can cause a set-back.
2. Build an emergency fund
An emergency fund is important because it’ll protect you from taking out a loan and going into debt when there are unforeseen expenses.
Life happens and you’ll encounter unexpected events. Emergencies are also the reason people borrow too much money, get into credit card debt, or accept loans with high-interest rates (Source: America Saves). The key to financially navigating those times is to have an emergency fund.
According to Vanguard, the amount you should have saved in your emergency fund is enough to cover 3 to 6 months of living expenses. In general, it’s better to have 6 months of living expenses saved in your emergency fund because you’ll be covered for a longer time if anything happens.
When you’re building your emergency fund, it’s best to keep it in an account that you can access in the event of an emergency. Therefore, keeping it in a savings account or money market account that allows you to use the funds at any time without a penalty is the best choice.
3. Start investing
Once you’ve saved enough for an emergency fund, you can start investing, and experience the power of compound interest. The money you invest can provide financial security and income, especially in the future or during retirement.
It’s important to invest early because you have more time on your side compared to older folks. Your investments have more time to grow, which can lead to a larger increase in value over the years.
When you invest, focus on the long-term. Warren Buffett said, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
According to the U.S. Securities and Exchange Commission (SEC), it’s important that you focus on asset allocation and diversification because you may be able to limit your losses without sacrificing a lot of potential gains.
You should also invest in retirement accounts, such as an Individual Retirement Account (IRA), and if you’re employed, you can also participate in your employer’s 401(k) program.
4. Build your credit
Building your credit score while you’re young will ensure that you’re off on the right foot.
A good credit score will help you save money if you need a loan, qualify for a credit card, get better car insurance rates, and have an easier time getting approved for an apartment or house.
A common misconception about credit is that it costs money to build credit. However, you can get a secured credit card without an annual fee, make your payments on time and in full each billing cycle, and you’ll build credit without paying for anything.
5. Live on less than you make
It sounds like common sense, however, it’s not as common. Living below your means requires discipline and it can be difficult. However, by living on less than you make, you’ll ensure that you don’t go into debt.
To successfully live below your means, sit down and take a look at your financial picture as a whole. This will allow you to understand how much money you’re bringing in, how much is going out, and where it’s going to.
When you live on less than you make, you’ll be able to save, invest, and pursue opportunities without being worried about debt.
6. Take risks to make more money
If you’re a young adult without kids, then you have the opportunity to take risks without worrying about the well-being of your kids. Taking risks and pursuing different opportunities will build confidence in you, and you may have the potential to make more money.
Aside from the potential to earn more income and building confidence, you’ll learn a lot. When you pursue a new opportunity, you don’t know what to expect and are unsure of what will come out of it. One thing is for sure, you’ll go through the learning process and gain knowledge.
Jeff Bezos, the wealthiest person in the world, talks about embracing risk and failure because it’s required to be successful in business.
While you have less responsibilities, take risks for the potential to earn more money.
7. Buy vegetables and eat at home
Let’s face it, eating out costs a lot of money. Cooking from home can help you save money and eat healthier meals. When you’re buying groceries, having a vegetable-rich diet will also save you money because they tend to be cheaper than other foods.
With the money you save, you can continue building your emergency fund, save for a big purchase, or invest. You’ll also be eating healthier, which leads to higher energy levels and feeling more alert.
8. Be careful with debt
If you’re not careful with debt, it may have a snowball effect in a negative way. It’s easy to get over your head in debt if you don’t manage it.
Although it’s a good practice to avoid debt and only buy things you can afford, there are times you might go into debt. For example, if you need a new car and don’t have the money saved up, you’ll get an auto loan. Another example is using a home equity line of credit to renovate a house you bought and sell it for a higher price.
Regardless of the situation, one of the most important financial tips to learn early is to be careful with debt. Make it a goal to pay off your debt, and live a debt-free life.
9. Save for big purchases instead of splurging
Before making a large purchase, take the time to think about whether or not it’ll add value to your life. Value can come in many forms, it could be joy, wealth, quality time with family, or other benefits an item can give you.
If you decide that it’s something you want, and don’t have the money to purchase it, build a savings plan. You can set a weekly or monthly amount that you’ll put into a specific account to purchase the item.
The benefit of saving for a big purchase is that you won’t wipe out a large portion of your bank account or you won’t go into debt by putting it on your credit card.
10. Keep yourself healthy
Living a healthy lifestyle can benefit your financial health because you’ll save money by reducing or avoiding medical costs.
Maintaining healthy body weight is another way to save money because you’ll spend less on clothes. When your weight fluctuates and you no longer fit in the clothes you have, you’ll need to buy new clothes. This can be avoided by maintaining your weight.
Eliminate unhealthy habits, such as smoking or drinking soda filled with sugar. Over time, these things cost a lot of money. By quitting, you can save a good amount and invest it towards your future or use it for enjoyment. According to Smokefree, many former smokers have said that financial rewards helped them stay disciplined.
If you need medication, you can still cut the cost. According to Medline Plus, you can ask to switch to a generic brand, which has the same ingredients and costs less. You can also ask your doctor if there’s a less expensive medicine that treats the condition.
Frequently asked questions
How can you be financially successful at a young age?
To be successful at a young age, you need to educate yourself, get around successful people, take risks, and build multiple streams of income. Find a job that offers a lot of room for growth, invest a portion of your income, start a side business, or learn how to invest in real estate.
How can I be financially stable in my 20s?
To be financially stable, you need to understand your income and expenses, follow a plan to focus on getting out of debt and building wealth.
How often should I invest?
Regularly investing is important for long-term results. Regardless of the amount, investing consistently will add up. If you’re able to, take the thought out of investing by setting up automatic contributions.
How you handle your finances as a young adult will affect your future. By applying the financial tips that we covered, you’ll be able to set yourself up for success and avoid common financial mistakes that lead to stress and difficulties. The most important steps are to save, invest, find ways to increase your net worth, and build multiple streams of income.
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Featured image courtesy of Unsplash.
About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.