8 Financial Planning Tips for Young Adults

As a young adult, it is important to plan your finances proactively to position yourself well for a strong financial future. While you may be early in a career and not earning as much as your older peers, there are two distinct financial advantages you have: time and compound interest.

Here are 8 financial tips to help young adults manage their finances and get on a solid footing.

1. Start saving early.

This is literally the #1 financial advice I would give a young adult. As a young adult, age is on your side, and so is the power of compounding. The earlier you start, the more savings you will have down the line.

Let us look at 2 examples to make this real:

• A person starts saving $10,000 per year ($833 per month) at age 35. They will have saved $790K at age 65.
• Now imagine that this person starts saving at an earlier age of 25. And since they are earlier in their career, they can only put away $6000 per year ($500 per month). Despite saving a lesser amount monthly, they will actually have a larger nest egg of $930K at age 65. 

(We assume a 6% annual rate of return in both cases)

This is the power of compounding over a larger time period.

You can use our Financial Independence Calculator to calculate how much you need to save to achieve your retirement and financial independence goals.

2. Plan your budget

As a young adult, you probably want to enjoy your social life with friends and spend money on eating out and entertainment. But this is also a good time to start saving for the future. So how do we find that balance between budgeting for the future and enjoying a good social life?

A good rule-of-thumb for budgeting is the 50/30/20 rule.

• 50% of take-home pay goes towards ‘needs’, such as rent, utilities, debt payments and basic groceries.
• 30% towards ‘wants’ including discretionary spending such as eating out, entertainment, travel or other interests.
• 20% towards savings.  

This budgeting method gives young adults a good balance between enjoying life now while also building a strong financial future.

3. Max out retirement tax benefits

401K: You can gain valuable tax advantages by setting aside a portion of your salary in 401Ks. Make sure to at least save enough to gain on employer match, if not more.

Roth IRA: When you are early in your career and your income is lower than in later years, a Roth IRA can be a good savings vehicle. This is because with Roth IRAs, you will invest post-tax dollars, but the growth and withdrawals are tax-free in later years. And since you are early in your career, you may be able to meet the income eligibility criteria for investing in Roth IRAs.

4. Manage debt

As a young adult, you may be carrying multiple loans. Perhaps you already have a student loan. Additionally, you may have bought a car recently and have car loan payments as well. And if you have the habit of making only minimum payments on credit cards, those credit card loans may be piling up.

If this is the case, it is important to make a solid plan to pay off all your debt. You can decide if you want to use the debt avalanche or snowball method to pay off debt.

Avalanche method

In this method, you pay off the highest APR (Annual Percentage Rate) debt first, before tackling the next highest APR debt. You’d be paying the minimum on all other debt accounts and putting all your extra cash towards the highest interest debt. This approach helps save money on interest payments over time, since you will be paying down the highest interest loans first. 

Snowball method

Start with the smallest debt amount, pay it off and move to the next smallest debt. You’d be paying the minimum on all other debt accounts and putting all your extra cash on paying off the smallest loan. This approach is a good motivator and psychological boost, because you will start paying off debts sooner, starting with the smallest.

5. Set aside emergency funds

An emergency fund is a cash reserve that is set aside for emergencies or unplanned expenses. This money can be used for covering expenses in the case of a job loss, or unplanned expenses such as home repairs or medical bills. It is typically recommended to save at least 3 to 6 months’ expenses as an emergency cash reserve.

You can put your emergency funds in a high yield savings account. This ensures that the money is easily accessible when you need it, but you can earn more interest than in a regular checking account.

6. Evaluate health plans

In general, young adults tend to have lower healthcare related expenses than others. So it may be worth considering if high deductible health plans (HDHPs) are right for you. These plans typically have a low premium but high deductibles. This means that you save on premiums, but may have to pay for any healthcare costs out-of-pocket until you hit the deductible.

HDHPs are typically paired with Healthcare Savings Account(HSAs), which enables you to save pre-tax dollars for qualified medical costs. Any unused funds earn tax-free interest.  Moreover, the HSA can roll over from year to year, and you will be able to take the money with you when you change jobs.

Therefore, this option could be beneficial if your healthcare costs tend to be low in the first place. You get to save on premiums, while having protection for any medical emergencies. Moreover, you get to save pre-tax dollars for out-of-pocket medical payments.

7. Maximize employer benefits to grow your career

While it is important to maximize savings from your current salary, it is also important to grow your career so that you can maximize future earnings. Many employers provide benefits that young adults can use to build skills and make career progress. Look into your employer benefits to see what opportunities you can avail to take your career to the next level.

Some examples include:

• Tuition reimbursement or assistance
• Career enrichment or training programs
• Student loan repayment programs
• Certification programs

Also check out our blog post 5 overlooked workplace benefits to save money.

8. Plan for future goals

Think about what goals you want to work towards in the next few years. Maybe you want to buy a condo, or complete grad school or spend some time traveling. This is a good time to figure out how much you will need to save for these goals.

Increasingly, many young adults are thinking about being financially independent in their 40s. If this is something you want to plan for, you can use our FIRE (Financial Independence, Early Retirement) calculator to evaluate how soon you can attain financial independence.

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