Often unknowingly, one’s financial illiteracy begins early in life and can have costly long-term or even lifetime consequences. Fortunately, educational programs are increasingly available in many communities, along with books and podcasts found through online searches. And as of 2022, nearly half of the United States require completion of a personal finance course to graduate high school. Equipped with a solid financial knowledge base, young adults, especially, can better manage their finances for the long term.
What I wish I’d known then
Financial regrets are common according to author Daniel Pink, with inadequate emergency and retirement savings particularly worrisome. Persistent inflation, rising interest rates and volatile markets have many people asking themselves, “What could I have done earlier, had I only known?’’
Budgeting is a common challenge, but mastering it contributes to financial success. It can be helpful is to think of budgeting as a jigsaw puzzle, where each distinctly sized piece represents a portion of income.
One suggestion is to start with the 50/30/20 rule: 50% of income for needs; 30% for wants; and 20% for savings and debt repayment. To document spending, begin with a savings goal followed by recurring expenditures like housing, auto, food, utilities, clothing, insurance, etc.
Online personal finance programs and debit and credit card-embedded apps can identify historical spending. Outlays can be categorized by type, amount or percentage for any time interval. By tracking spending, inefficiencies are revealed for potential correction or reallocation.
Taxes are impactful at every age, and best acknowledged or accepted as early as possible.
“So, who’s FICA?” is a common reaction by young employees who see their wages reduced by 20%-30% due to employer-required tax withholdings. Self-employed workers, nearly 10 million and rising as of January 2023, must be especially conscious of tax liabilities. In lieu of withholding, taxes must be paid independently by the earner, and a 30% set-aside paid quarterly is often recommended. Late payment and/or non-payment can result in penalties when tax returns are filed.
Credit is easy to abuse with so many daily temptations to buy coming from TV, streaming apps and social media channels. Following basic guidelines can help avoid or mitigate long-lasting credit trouble:
- Knowing the appropriate time or circumstances to use credit—such as for a car repair— and not for a routine meal with friends or an impulse purchase.
- How to read and interpret a monthly credit card statement.
- The importance of making payments—at least the minimum amount—when due.
- The cost of carrying an unpaid balance, especially with average annual credit card interest rates exceeding 20%, and $9,000 as the average American household credit card debt.
- What a credit score is, and the five weighted factors that influence it.
- What a balance charge-off is, and how it can restrict or eliminate future access to credit—especially in an emergency.
Saving is a discipline. Since time cannot be replaced—and is often a saver’s biggest ally—missed savings in the form of a skipped month or an employer’s matching contribution are a lost opportunity.
Goal-oriented savings can take months or years and can be facilitated by online calculators that use contribution amounts and interest rates to target a goal-achievement date.
Savings strategies include keeping discretionary spending money (the 30% noted above for wants) apart from an account that pays monthly bills; having accounts at different banks or financial institutions to “silo” savings for specific purposes; and using automation or payroll withholding to allocate pre-tax income for retirement.
Compounding grows money exponentially over time when interest is repeatedly applied to a principal amount. Through compounding, total value snowballs, with the money working powerfully for the saver, not vice-versa. Compounding over time and at various rates is an essential part of wealth building and can enable “bucket list” accomplishments like retirement, vacation home ownership or significant charitable contributions.
According to polls and surveys, adults often wish they’d been financially literate sooner, and they lament over life’s missed opportunities. Family conversations about money can be particularly helpful, especially while children are still living at home. By learning differently than their predecessors, young adults can see beneficial results sooner, and hopefully experience fewer financial regrets as they age.