When you were tiny, did your parents or other generous adult give you a few coins to spend on sweets? We felt mighty strutting to the register and handing over our cash! Now, with the wisdom of hindsight, we look back on those experiences to see how misguided we were.
We tasted purchasing power at such a young age; that experience conditioned us to see cash solely as a way to get what we wanted. The shopkeeper, playing along with the big spender charade, reinforced the idea that spending is good. And when we emerged from the shop, the adults were all smiles and delighting, driving home the notion that this behaviour is praiseworthy.
For most of us, that's where our financial education ended. You have money; you spend it on something you want. That doesn't mean that caregivers never talked about saving money, not having money, or not being about to afford something. But those lessons were abstract.
Experiencing the power of money during our formative years taught us the gratification of using cash. We've been spending to recapture that feeling ever since, even though we know doing so doesn't serve our financial goals. So we must learn to see money as more than just a means of paying for stuff. We need to:
- become financially literate
- learn how to budget
- establish financial goals
- realise the importance of investing
- plan for our retirement
Following these financial tips will lead to lifelong financial security. But we need to clarify each point so you can know how best to make each one work well for you. We'll start by explaining the most critical issue.
What Is Financial Literacy?
Financial literacy is the foundation of sound financial management. It's a blanket term to describe the ability to understand and use financial skills such as budgeting, saving and investing. Financial literacy informs your relationship with money, and being financially literate protects you from financial fraud and bad debt risks.
Financial literacy means knowledge about every aspect of finance, from budgeting to managing debt. People tend to think of debt as a strike against their economic well-being. But in today's debt-based economy, you must incur debt to earn a credit score, and you cannot buy big-ticket items like a home or car without a decent credit score.
Let's take out a mortgage together. Our credit score isn't perfect; we're young adults, too. We expect a high-interest rate, but the mortgage broker suggests we take a variable-rate mortgage instead. A financially literate buyer would decline that offer because it's impossible to budget around a financial obligation that changes every month.
As a young adult, you will make financial mistakes like taking out floating-rate loans. That's OK; you're young, and the finance learning curve is long. But the sooner you learn financial literacy, the fewer and less damaging your financial missteps will be.
How to Set Up a Budget
Universities worldwide survey their students to discover what pupils like about university life and what they don't. The questions also cover how well their experiences matched expectations and what they wished they knew before starting university. On that last part, students agreed and wished they had learned how to manage their money better.
Budgeting is the first step towards financial management; it's your first lesson in financial literacy. Budgeting is more than tracking your expenses and accounting for every pound, though that's a part of it. More to the point, budgeting is planning your costs, weighing what you have going out versus what you have coming in.
To set up a budget, you need to establish three main categories: what you have coming in, your needs and your wants. As most expenses are monthly, you should set your budget accordingly, even though you might get paid every week. Your budget might look something like this:
Income
- work
- side job
- birthday money
- sell old stuff
Must Pay
- rent
- utilities
- food
- insurance
- myself!
Extras
- clothing
- dining out/entertainment
- hygiene items, cleaning supplies
- haircuts
This is a general breakdown of budget categories and what should fall under each. Unless you're fortunate, your expenses will outnumber your sources of income, so leave yourself plenty of room to list everything. If you prefer a budget-building app, the personal finance gurus at Nerdwallet have outlined the best of them.
Determine Your Financial Goals
Many people take a relatively laissez-faire attitude towards money. They earn it, spend it, and pay their bills. What's the point of financial goals, anyway?
We can think of several. You have the cash you need to cover an emergency, for one. Let's hope it never happens, but what if you're so ill you can't work for a few months? What if something significant happens - you wreck your car or have to move?
After setting up your budget, building an emergency fund should be your second financial goal. You'll note in our sample budget that we listed 'myself!' in the 'must-pay' column. That's the money you'll save to cover six months of living expenses in an emergency.
You might want to start your own business one day; that's another reason to have financial goals. It may be OK to start a business on a budget, depending on the type of business you're going for. But success is more likely if you're financially prepared to meet every funding challenge head-on.
Finally, ditching credit cards is an excellent reason to have financial goals. You may want to go on holiday, but charging your expenses will mean paying more for your fun time. Make not buying on credit your top financial goal to save money in the long run. Glory makes overspending too easy; it's the most common way to ruin your financial plan.
Why Investing is Important
Putting money out of reach is a common blunder many early-life investors make. Tying up your cash in long-term holdings such as 5-year certificates of deposit (CDs) is not advisable because you're locked in at a specific, likely low-interest rate for the duration. You cannot access those funds or move them to take advantage of a better financial opportunity.
Investing gives you more flexibility to put your money to work. As a young, tech-savvy investor, you know where to find the information you need to make sound investment decisions. You can join the global young investors' community and compare notes on investment opportunities. And then, you would position yourself to take maximum advantage of market fluctuations.
As an early-life investor, the benefits are all yours. You can afford to take a risk on a volatile stock to earn greater returns. You have everything you need to get a feel for trading and learn how markets operate. And you have your entire working life ahead of you to absorb any fallout from financial headwinds.
Should You Think About Retirement?
Budgeting, setting up your emergency fund, and investing are the first three steps to financial security. Taking all three makes you far ahead of many other young adults. But is it time to think about retirement already?
A comfortable retirement is your ultimate financial goal. Even as you're planning for everyday life, maybe marrying, raising a family and sending kids to university... All of that's done with retirement in mind. Investing is the only way to meet this financial goal.
These days, we have plenty to worry about when it comes to banking and finance in general. Pensions are fast disappearing, too. So it's up to individuals to ensure their comfort and financial security once they finish working.
How much you should plan to have for retirement depends on your living expenses and desires. You may want to travel or become a collector of rare books. If you plan on downsizing or joining a retirement community, you must prepare for the move. It would be best to consider your health; you may need maintenance medications and regular doctor's care when you're older.
The closer you get to retirement, the more risk-averse your investments should be. You'll no longer be able to take chances; now, you're looking for steady growth. Of course, you'll earn far better yields if you invest early and reinvest your interest earnings.
Compounding - reinvesting earnings is the proven path to growing wealth. The earlier you start investing, the more opportunity you'll have to compound your earnings. But you don't have to reinvest everything all the time, and you can access those funds if needed.
Saving for retirement is another path to financial security, but it shouldn't be your only one. Interest rates on savings are meagre at best, and the financial institution may attach conditions to withdrawing your money. Financially literate people consider all of these points when establishing their financial future.
Financial Advice for Young Adults
1. Start Saving Early
Saving money early on can significantly impact your financial well-being in the long run. Start by setting aside a portion of your income for savings. Even small amounts add up over time and can provide a safety net for unexpected expenses or future goals. Consider opening a dedicated savings account and automating regular deposits to make saving effortless.
2. Track Your Expenses
Keeping track of your expenses is crucial for gaining control over your finances. Use mobile apps or budgeting tools to monitor your spending habits. Categorise your expenses and analyse them regularly to identify areas where you can cut back. You can make informed choices and avoid unnecessary expenditures by understanding where your money goes.
3. Set Financial Goals
Having clear financial goals gives you direction and motivation. Determine what you want to achieve in the short and long term, such as saving for higher education, a down payment on a home, or retirement. Break your goals into actionable steps and track your progress. Regularly reassess and adjust your goals as your circumstances evolve.
4. Build an Emergency Fund
Life is unpredictable, and unexpected expenses can arise at any time. Building an emergency fund provides a safety net during challenging times. Aim to save three to six months' living expenses in an easily accessible account. Having this financial cushion helps you navigate emergencies without resorting to debt.
5. Avoid Debt Trap
Debt can become a burden if not managed wisely. Limit your borrowing and prioritise paying off existing debts. Understand the terms and conditions before taking on any loans or credit cards. Make timely payments to maintain a good credit score and avoid unnecessary interest charges. Being mindful of your debt will prevent it from hindering your financial progress.
How Much Money Should I Have Saved by 21 (UK)?
The amount of money you should have saved by age 21 varies based on individual circumstances. However, it is wise to aim for at least three to six months' worth of living expenses as an emergency fund. Additionally, starting to save for long-term goals like higher education, homeownership, or retirement at a young age provides a head start and allows your money to grow over time.
Best Bank Accounts for 16-18-Year-Olds
Several banks offer specialised bank accounts designed for young adults between the ages of 16 and 18. These accounts often come with features like lower fees, higher interest rates, and educational resources to promote financial literacy. Research different banks and compare the benefits they offer, such as debit cards, mobile banking apps, and savings incentives. Choosing the right bank account sets a strong foundation for managing your finances effectively.
While borrowing should be approached with caution, some young individuals may need financial assistance for various reasons. Explore loan options specifically designed for young adults, such as student loans or personal loans with reasonable interest rates and flexible repayment terms. However, always borrow responsibly and evaluate the impact on your financial future before taking on any debt.
Can You Live by Yourself at 16?
The legal age to live independently varies across different jurisdictions. In the UK, the minimum age to leave home is generally 16, but it's important to consider factors like financial stability, support systems, and legal requirements. It is crucial to assess your readiness for independent living, including budgeting, finding accommodation, and managing day-to-day responsibilities. Seek advice from trusted adults and local authorities to make informed decisions.
Navigating the financial landscape as a young adult can be challenging, but it's also an opportunity for growth and independence. By implementing the financial tips mentioned in this article, such as budgeting, saving, and seeking support, you can establish a strong foundation for a secure financial future. Remember to be proactive, stay informed, and make sound financial decisions that align with your goals.
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