Entering the journey of adulthood comes with its fair share of challenges. One of the most jarring of them all is dealing with money problems and their impact on your survival, health, and overall life satisfaction.
Research has shown — and you might even agree yourself — that money is a leading cause of stress among millions (if not billions) of people all over the world.
While many would say money is not as important as intangible things like relationships or friendships, it sure does play a heavy role in our physical or material well-being in this day and age.
People living paycheck to paycheck. Some individuals live way above their means. Worst of all, folks getting trapped into an unending cycle of debt — a burden they could carry for the rest of their lives with seemingly no way out.
With that said, hope is not completely lost. You can do something about it. You’re not too late to prepare for a better life ahead. Keep in mind that you’re still a young adult with a lot of time to test things out and see what works.
Besides, we are here to help you as much as we can.
See, in this article, we will delve into the most important financial life skills that every young adult should master to stack the odds in your favor and be successful in your personal finance endeavors.
But first, let’s address the elephant in the room:
Why Financial Literacy Is Important For Young Adults
You’re not getting any younger.
You may still be a young adult now — but you’re an adult nonetheless.
Now this isn’t meant to scare you but to emphasize that sooner than later, you’ll shoulder responsibilities that can be heavy to handle, especially if it involves money.
Rent. Bills. Family. From this point onward, your world’s only about to get a whole lot bigger. All these aspects of adulthood have the power to spread your resources thin. But that’s only if you don’t know exactly what to do and how to overcome it.
So first of all, you need to arm yourself with the gift of financial literacy as soon as possible. Better knowledge leads to better decisions. And better decisions lead to a better life — a life without stressing that much over money, which allows you to focus on what matters.
Now, as a young adult, you have all the time & energy to master finance on an intricate level. And keep in mind that it doesn’t matter if you have less money to manage right now.
To be honest, when you think about it, having lower funds is a better start. Because if you can’t even handle less money — how could you expect to handle more of it?
See, the important thing is you learn exactly what your financial goals and priorities are (or planning). How to budget and allocate resources effectively. How to be “smart” with debt and credit cards.
Aside from that, you need to know where to invest your time and money right now. And most importantly, how to protect yourself and your loved ones in both the short-term (emergency funds) and the long-term (insurance).
Mastering the ins and outs of these key concepts allows you to make the best out of your financial situation – and be on track to achieving the financial freedom everyone seems to dream about.
The 7 Key Financial Skills You Should Learn
Cash Flow and Budgeting Basics
Mastering cash flow and budgeting forms the bedrock of financial stability for young adults. Cash flow is the movement of money in and out of your wallet or account.
You see, it’s not just about the amount of money you earn but also how effectively you track the movement of your money — at specific periods. For example, you may earn $1,000 in a month, while all your expenses are only $750.
It might seem like you have a positive cash flow and you have a lot of legroom to save money. But what if your salary comes in at the end of the month, and you need to pay your rent and bills on the 15th?
This is exactly why cash flow is so important. It provides a clear picture of where your money is coming from, where it’s going, and more importantly, the exact dates on which money needs to be moved.
On the other hand, budgeting often follows this core principle: You need to allot the majority of it to your needs — or essentials such as rent, bills, food, etc.
Then, a lesser portion goes into your wants — the things you desire that are not necessarily a need. It could be a new PC game you’re into or new clothing. If done right, as in you’re not overspending on your wants, this type of fund could make you happy.
Lastly, a piece of the pie is dedicated towards savings. This is where you put funds for your plans, emergencies, or simply a pool of flexible funds you might need sooner or later.
Now, a good rule of thumb is 50% on needs, 30% on wants, 20% on savings. However, the exact percentages may vary per person. Some may need to allocate more for their needs. Or they just want to spoil themselves with a shopping spree. Others might opt to aggressively save instead.
That’s fine. Just make sure your current needs and long-term goals are covered before you make financial decisions.
If you’re looking to save more, the next section will show you some of the proven tips that have worked for countless adults.
Top Saving Strategies
Saving money is a habit that pays dividends in the long run. Here are some top-notch saving strategies to incorporate into your financial skill set:
Automate savings. Set up automatic transfers to your savings account each month. Treat it like a non-negotiable expense – a need. Out of sight, out of mind.
Cut unnecessary expenses. Using a money management app, you can regularly check your spending habits. Identify areas you can cut back on without sacrificing quality of life. Add that amount to your automated savings.
Explore high-interest savings accounts. With the rise of digital banking, a lot of banks now offer high-interest savings accounts. This allows you to grow your money without any extra effort.
Emergency Funds 101
Emergency funds are exactly that — money you set aside in case of any unfortunate circumstances, like loss of job, hospital bills, or any urgent spending you didn’t see coming.
There’s no limit to the final amount of your emergency fund. However, a good rule of thumb is to save anywhere between 3-12 months of your average monthly expenses.
Credit Cards, Credit Scores, and Debt
Credit cards often have a bed rep. We get it, many people — whether in movies or real life — get into soul-crushing credit card debt.
Note: Mastering this concept is a bit advanced so diving in head first could put you in a lot of trouble. That’s why we highly recommend you learn other financial life skills first, before exposing yourself to this huge responsibility. Credit cards may have a bad rep, but it’s perfectly justified.
But the huge upside is, if you could use it intelligently, as in you don’t bite more than what you can chew and use it to improve your cash flow instead, you can build excellent credit scores.
This will open a lot of flexible payment options for expensive necessities down the line, such as housing and cars. This is because a great credit history makes you trustworthy in the eyes of banks.
Investing for the Future
Investing is key to accelerating your wealth-building and securing your future. It’s not a get-rich-quick kind of scheme, but playing the long game will help you achieve long-term financial success.
Think of it as saving but the money you saved is also working hard to make money on its own, all for you. However, it’s important to note that investing involves risks – whether large or small.
Just keep in mind that the higher the risk, the higher the reward. You could gain as much as you could lose what you’ve invested. The S&P 500 is a relatively lower-risk investment option, as it spreads your money across different top companies in the U.S. (also known as diversification).
There are a lot more choices out there. But note that you need to consider your “risk appetite” before deciding. Again, don’t try to be super aggressive that you’re failing to meet your current needs. Play the long game.
Note: If you want to know what we think is the best option to invest your money, keep on reading as it’ll be revealed in the later sections.
Death and taxes. Two inevitable things in life. You can’t escape it. So you better learn the basics of personal income taxes.
This includes income categories (earned and unearned incomes), taxable and non-taxable income, filing status (single/married/etc.), tax deductions, tax credits (if you have a child or not), tax brackets (socio-economic class), filing process, etc.
Note: Now we won’t go into detail with these topics, as it’s best explained by tax professionals, such as lawyers and accountants. But you can browse such concepts on the Internet if you’re up for it. We just wanted to introduce the basics of tax for your awareness.
As we’ve mentioned above, insurance protects yourself, as well as your loved ones, especially in the case of a critical illness and an untimely passing.
There are a lot of insurance types or deals out there. But life and medical insurance are great places to start exploring. The security they provide is now more important than ever.
It’s best to conduct your own research, preferably with the help of a trusted insurance agent to see what makes the most sense for you and your loved ones.
The Best Financial Advice For Young People
Time is your greatest ally. The best time to start mastering financial life skills is now — while you’re still young. You have all the time to experiment and take risks because you still don’t have many responsibilities just yet. Use this to your advantage.
You can’t improve what you don’t track. Make an effort to monitor your spending habits. Otherwise, you won’t be able to allocate your resources more effectively. Even worse, you might be spending too much on things you could cut back on.
Satisfy your present, and secure your future. Don’t compromise one or the other. And if funds are tight, it’s even a better idea to make sure your present needs are covered first. This is simply because you live in the now, so if you don’t take care of your current self, what good is the future?
Out of sight, out of mind. This is especially true for automating savings. See, if you don’t see a chunk of money lingering in your bank account, there’s a greater chance that you won’t be able to spend it unintentionally. It protects you from temptations as well as helps secure your savings.
Invest in yourself. Many young adults right now value self-improvement and personal development. They invest in learning profitable skills, such as sales and marketing, so they can maximize their earnings, and reap returns far greater than if they first invested in stocks.
Great Financial Goals To Have As A Young Adult
Clear debt. If you have outstanding debt you could pay as soon as possible, make sure you clear it first. Don’t let it sit there and give it the power to stress you out. This is first priority.
Secure your emergency fund. If you don’t have debt, this is the very first thing you should focus on. Again your emergency fund is worth 3-12 months of living expenses – but you could strive for 6-12 months.
When worst comes to worst, this will protect you from getting blindsided by financial problems. But most importantly, it will allow you to take risks that could get you high rewards.
Get an insurance. Once you’ve covered your bases via emergency funds, it’s time to protect yourself and your loved ones.
Go take risks and invest. When you’ve completed all the things above, you can now use the extra money to play higher stakes to open you up for bigger prizes, without compromising your financial security. This would be the best time to start a business or a side hustle.
It is without doubt that mastering financial life skills is very important for young adults like you. Knowing all these things, especially the set of actionable skills and the game plan towards achieving your financial goals, is a great way to kickstart your path towards financial freedom.
Master these concepts. Apply it to your life. Build your future.
We hope you’ve found value in this blog post.