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When you enter the working world and start bringing home an income, your future financial security may be the farthest thing from your mind. But young adulthood is actually a great time to prepare for future goals like homeownership, starting your own business, and retirement.
Even setting aside small amounts can make a powerful difference due to compound interest. For example, setting aside just $25 per month from ages 25 to 65 at a 3% interest rate adds up to more than $20,000.
Here are a few financial planning tips for young adults to ensure financial security in the future.
Key takeaways
- A budget can help you to determine how much you can save each month.
- An emergency fund can help you cope with unexpected expenses. While experts say you need 3 to 6 months of expenses saved, even a small emergency fund can be helpful.
- Automating savings can help keep you on track to reaching your goals.
Create a budget
Once you start earning a paycheck, sit down and work out a budget that outlines where your hard-earned money goes. One popular budgeting model is the 50/30/20 rule. Under this rule, your income is allocated like this.
- 50% goes to your needs like rent or mortgage, utilities, food, and transportation,
- 30% goes to wants like dining out, entertainment, vacations, and other discretionary spending,
- 20% goes to savings or debts.
You can, of course, use variations of this model too. For example, if paying off your debts is more important to you than spending money on non-essentials, you can choose to allocate 30% of your income to paying off debts and 20% to your wants. The key is to get a plan in place so you can control your spending, pay off your debts, and save for your future.
The best budgeting apps could help you develop a budget that works for you.
Build your credit
A good credit score is important to your financial well-being. Even if you earn a decent income, if you have bad credit, you’ll have trouble buying a car or a home, renting an apartment, or sometimes even getting a cell phone plan. And you’ll pay more for a car or home due to paying higher interest rates.
To get your credit in good standing, you need to make sure to pay your bills on time, especially loan and credit card payments. If you don’t have a credit card, you can improve your credit score by having one. However, you need to do your best to pay the card off every month. Otherwise, you could increase your debt and hurt your credit.
Use credit cards wisely
Credit cards can be a challenge to your financial health. You need them to build credit, but they can cause problems for your finances if you aren’t diligent about paying them off regularly. According to the Center for Microeconomic Data, credit card debt reached a whopping $1.13 trillion at the end of 2023.
Credit cards can make it easy to spend more money than you have, so it’s best to only buy what you can afford to pay off. Or consider putting money on a prepaid debit card that you can use for discretionary spending.
Save for retirement
You are never too young to start saving for retirement, and the earlier you get started, the more you’ll have when it comes time for you to leave the working world behind. Even if you have only a small amount to contribute from each paycheck, something is better than nothing.
Many employers offer matching contributions, which is like getting free money. If your employer offers to match your 401(k) contributions, try to contribute as much as you can. For example, if your employer matches contributions up to 6%, try to contribute 6% to your 401(k).
Build an emergency fund
Unfortunately, there are things in life you can’t predict that can put a strain on your finances. Your car may break down and need costly repairs, your dog may get sick and rack up a hefty vet bill, or you may lose your job unexpectedly.
That’s why it’s crucial to have an emergency fund saved up for life’s surprises. Financial experts say you should have at least three to six months of living expenses saved in a rainy day fund to help protect you when the unexpected happens. But even a small emergency fund is better than not having one at all.
Pay down your debts
Debt can take a big chunk out of your income, especially student loan debt. According to the Education Data Initiative, the average federal student loan debt balance is about $37,088, which may be more than what a graduate earns in their first job after college.
If you graduated with a significant amount of student loan debt, focus on paying off that debt first. That might mean putting off buying a home or a new car until you’ve paid off much of your student loan balance.
Set life goals
Where do you want to be financially in five to ten years? Do you plan on buying a home or a car? Are you getting married or starting a family?
The goals you have in life impact how you spend and save your money now. So, when you’re laying out your budget, consider your life goals and cut your spending or increase your savings accordingly.
Automate your savings
Many financial institutions enable you to automate your savings, so a certain percentage of your income automatically goes into a savings account. This can make it easier for you to save money instead of being tempted to spend it.
Recommended financial tools for young adults
If you’re a young adult who wants to get their financial future on track, there are several financial tools available to help. Here are a few of the tools we recommend to help with financial planning for young adults.
- Rocket Money: This budgeting tool can help you lower your bills and save money. It has automatic savings capabilities and can even help you cancel unwanted subscriptions and lower your bills.
Visit Rocket Money | Read our Rocket Money review
- Stash: This robo-advisor investing tool is perfect for beginner investors. Stash builds an investing portfolio for you based on your goals and risk level. Stash also has tools to help you learn how to invest money.
Visit Stash | Read our Stash review
- Simplifi: This is another budgeting tool. It offers easily customizable budget categories, which you can use to follow the 50/30/20 rule of budgeting.
Visit Simplifi | Read our Simplifi review
- YNAB: This budgeting tool uses the zero-based budgeting approach, where every dollar you earn is allocated to savings, expenses, or debts. By the end of the month, your income minus your expenses should zero each other out.
Visit YNAB | Read our YNAB review
FAQ
What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting model first introduced by U.S. Senator Elizabeth Warren. Under the 50/30/20 rule, you allocate your monthly after-tax income so that 50% goes to your needs, 30% goes to your wants, and 20% goes to your savings or debts. Needs are considered your monthly expenses and bills like your rent or mortgage, utilities, groceries, and gas. Wants are things like dining out, travel, clothes, and entertainment.
There are variations of the 50/30/20 rule, such as the 80/20 budget model where 80% of your income goes to your expenses and 20% goes to savings. With the 70/20/10 rule, 70% of your income goes to your needs and wants, 20% goes into savings, and 10% is used to pay your debts.
Where should a 25 year old be financially?
By the time you are 25 years old, you should be starting to build a nest egg that can keep you financially stable in your retirement years. Most experts recommend that you have at least three to six months of living expenses saved by your mid-20s. If your average monthly expenses are about $3,500, you should have between $10,500 and $21,000 in your savings account.
At age 25, you will probably be employed and earning a steady income, so this is also a good time to start contributing to a 401(k) or IRA savings plan. Even if your contributions are small, compound interest on your accounts will help your money grow.
A good goal is to contribute between 5% and 15% of your income to a retirement savings account. If your employer matches your contribution, try to contribute as much as you can. For example, if your employer matches 401(k) contributions up to 6%, you should contribute 6% if possible because that employer match is basically free money.
Should I get a financial advisor in my 20s?
It’s probably unnecessary to get financial planning services when you are in your 20s and don’t have many assets. However, it may be beneficial if you have substantial student debt, have saved a considerable amount of money, or want to purchase a home in the near future. A financial advisor can also help educate you on what you need to do in your 20s to ensure a financially secure future.
Bottom line
Getting a handle on your finances as a young adult can pay off when you reach your golden years. It’s never too early to learn how to manage your money and start budgeting and saving for your future.
While you may not have a lot left over from your paycheck after paying your expenses, even a little saved today can go a long way toward reaching your personal finance goals. If you follow a few simple financial planning tips for young adults when you are in your 20s and early 30s, you can reap the rewards and have financial security when you enter your 60s and 70s.
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