HELPING YOUNG ADULTS ACHIEVE FINANCIAL APTITUDE
by: Remie Longbrake | published: June 18, 2023
With the American economy and inflation at levels not seen since in decades, it can feel like financial success is far off. Now add in the timing of those just graduating high school or college and things can seem rather bleak. Things will turn around (in time), so now is the time to be smart and put your money to work in the best way you can. Want to know how? Here’s some tips…
Spend wisely on needs.
Young adults face plenty of firsts: buying their first car. Renting their first place. Buying their first home. One of the best ways to start building financial freedom is to spend the least amount possible on these needs. Not the most you think you can afford, or the most a lender will let you borrow. The goal should be to spend the least amount necessary to fill their need. Sure, everyone wants a new car, but a less-expensive reliable used car is the far smarter move. That will leave you more money for other goals. Same goes with a home. Don’t stretch into the too-expensive home; that often turns into a financial regret. Buy the home you can comfortably afford.
Get on track with student loan payments
The three-year pause on federal student loan repayment has now ended. Beginning in September anyone with a federal student loan will be expected to resume making monthly payments. Loan servicers should be contacting their borrowers to make sure they know when and how much they need to start repaying, but I want every young adult to take the initiative to log in to their account and make sure they understand what’s expected of them. Falling behind on student loan repayments is a very hard hole to climb out of.
Set up automatic savings for an emergency fund
Being ready for one of life’s “what ifs” is how you avoid expensive credit card debt. Getting started with savings is the hardest part when you are young, so save what you can from each paycheck. That might be $100, might be $10, but do something and stay consistent.
Invest in stocks only for long-term goals, not short-term gains
Stocks are for long-term goals, not for savings you might need to cover an emergency bill. My advice for people starting out is to stick to a low-cost index mutual fund or ETF that tracks a broad US benchmark. If they have a workplace retirement plan (see the next tip) tell them to look for an investment option for a “total market” or “S&P 500 index” fund. This is the easiest way to get instant diversification. Investing in individual stocks can come later.
If you don’t have a retirement plan through work, you can set up their own long-term savings account for free at a discount brokerage such as Fidelity, Schwab, TD Ameritrade or Vanguard and others.
Open a Roth account for retirement
Most 401(k) plans now offer a Roth 401(k) option. And at a discount brokerage, you can open a Roth IRA. A Roth account is hands down the best choice for young adults. With a Roth you contribute dollars that have already been taxed, and then in retirement you get to withdraw the money without paying a penny in tax. When you are just starting out and likely in a low-income tax bracket, the Roth is the way to go. (Extra bonus tip to share: If you were auto-enrolled in a workplace retirement plan, it will be a traditional account, not a Roth. It’s easy for them to make the switch by contacting HR.)
There is an income limit on who can save in a Roth IRA, but there is no income limit for a Roth 401(k). In 2023, an individual with a modified gross income below $138,000 and anyone married who filed a joint tax return with income below $213,000 can contribute up to $6,500 in a Roth IRA.
Use these tips to help manage your money wisely. We know it’s not easy, but with the right amount of effort, financial success is possible!
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