Five financial tips for young adults

Many of our clients ask what financial tips they should impart to their children or grandchildren as they become young adults.

Even kids who grew up in the same family don’t always have the same knowledge, interest, readiness, and attitudes about money. So, it’s worth discussing this information with them, even if you feel you’ve been educating them about money as they grew up.

Knowing the basics is important no matter how much money a young person has. In fact, when young people come into an inheritance or other money, it can be harder for them to know what to do with it than if they gained that wealth slowly over time.

So, sharpen those pencils and take note of our top financial tips for young adults:

1. Save for emergencies and large expenses

Set aside — or work toward saving — an emergency fund of three to six months of living expenses. Not sure how much that is? Start with $10,000, or create a monthly budget to figure out your exact expenses.

This money is meant to be used for true emergencies, like a car accident, serious illness, or loss of a job. It is not a backup account to dip into when you get low on spending money or want to take a trip.

Speaking of trips, make a savings plan for large purchases. Set aside the right amount each month to have the total needed at the right time.

Keep your emergency fund separate from your savings for large expenses. You can keep both funds in traditional savings or checking accounts. If you want to earn interest on the funds, there are other options. You could consider a high-yield savings account, money market account, or certificate of deposit. Be sure you know how quickly and how often you can access the money in those accounts. Learn more about these options.

2. Start saving for retirement

It might feel strange to think about the end of your career as it’s just getting started. But, because of compound interest, the sooner you start saving for retirement, the less you will need to invest to retire with the amount you want.

If you have a work 401(k) and your company offers a matching contribution, save enough of your paycheck to receive the full match. Do this before moving on to any of the steps below to make sure you don’t leave any free money on the table.

If you aren’t eligible for a 401(k), consider opening an Individual Retirement Account (IRA) and contributing to it.

When choosing how to invest the money in your retirement account, we recommend a target date fund if that is available to you. When choosing an account, be very careful to look at annual performance, both up and down, over the last 15 years.  It is important to be able to withstand the downdrafts and not sell out.

3. Take advantage of tax-free money

Contribute to a Health Savings Account if you are eligible. Anyone with a qualifying high-deductible health plan can open and contribute to an HSA. Some employers will set the HSA up for you and even contribute to it. There are limits to how much you can contribute each year, so check the current limit. In 2021, it is $3,600 for an individual.

In addition to being able to use pre-tax money for health care expenses, you can also invest your HSA funds. Use a money market or cash account until you have set aside your full health insurance out-of-pocket amount. Then you can start investing it in other funds.

If you are not eligible for an HSA, consider using a Flexible Spending Account. Set aside the amount of medical expenses you expect to have in the current year. Unlike an HSA, this money does not carry over from year to year. You must use it in the year you save it, so only put in what you can reasonably expect to spend on health expenses like health care visits, prescriptions, eyeglasses, and over-the-counter medication.

Once you’ve set aside pre-tax money for immediate health care needs, turn back to your retirement account. If you aren’t contributing the maximum amount allowed per year, increase your contributions. The tax advantages that these retirement accounts offer make them powerful savings methods, so in most cases they should be used fully before you invest elsewhere (for retirement).

4. Build a strong credit history

A good credit score takes time to build because it is based on your personal history. Start building that history early on, so you have a good score when you need it.

One way to start is by applying for, using, and paying off – ON TIME – a couple of credit cards. Credit cards should not be used to outspend your budget. You can avoid this temptation by leaving your credit cards at home, using them only for set expenses like bills set up on autopay.

See more credit-building tips.

5. Start investing

If you have done all the steps above and have extra money each month, you can start thinking about investing in the market. Here are two ways to get started:

• Acorns: For as little as $1 a month, this app makes getting started in investing easy and automated. You can invest as little as $5 here and there or on a recurring basis. The app automatically rebalances your portfolio, so you don’t need to know a lot about choosing stocks and bonds.
• The Intelligent Investor: If you want to get more hands-on and don’t know where to start, read this book. Most recently revised in 2006, it has been the go-to book on investing since it was written in 1949.

No matter how you choose to invest, make sure you understand the taxability of your stock profits. If your Acorns account produces $50 of income in a given tax year, for example, that is taxable and will need to be reported when you file taxes

While there is much more to financial planning and wealth management, these five tips can give young adults a good start on their financial future. It’s never too soon to start using these strategies.