Most high schools don’t offer a course called “Finance for Young Adults,” which is a regrettable error that prevents many young people from knowing how to handle their finances, apply for credit, and avoid debt. Despite some progress—by 2022, graduating from high school will be required in 23 U.S. states to have taken a personal finance course, and in 25, it will also—there are still significant knowledge gaps in this age range.
5 Crucial Money Rules for Young Adults
1. Exercise restraint by paying with cash instead of credit.
If you’re lucky, your parents instilled in you the virtue of restraint when you were little. If not, remember that the sooner you develop the crucial life skill of holding off on satisfying your desires, the sooner you’ll maintain your own finances as a matter of habit. One of the most crucial methods for practicing financial restraint is also one of the easiest. You can use a debit card rather than a credit card for all regular purchases if you postpone making them until you have saved up enough cash.
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2. Avoid unreliable Advice by educating yourself
People will discover ways to mismanage your money for you if you don’t learn how to do it yourself. Some of them, such as dishonest financial planners, might have harmful intentions. Others may have the best of intentions but may not be entirely aware of your situation, such as relatives who offer general advice on the value of owning a home even if the only way you could currently afford to do so would be by taking out a dangerous adjustable-rate mortgage.
3. Establish a Budget and Understand Your Spending
You will comprehend the significance of two guidelines that every personal finance counselor keeps repeating once you have read a few personal finance books. Keep an eye on where your money is going at all times and avoid letting your spending exceed your revenue. Budgeting and making a personal spending plan to keep track of your income and expenses are the best ways to accomplish this.
4. Start an emergency fund and pay yourself first.
Paying yourself first refers to setting up funds for future expenses and unexpected expenses. It is one of the most often used adages in personal finance. This straightforward routine not only keeps you out of debt but also improves your quality of sleep. There are methods to put at least some of your monthly income into an emergency fund, even on the tightest budget—regardless of how much you owe in student loans or credit card debt or how little money you make each month.
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5. Begin Your Retirement Savings Now
You need to start making plans for your retirement right immediately, just as your parents sent you off to kindergarten to get you ready for success in a world that seemed to exist in the distant past.
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Learning about the wonder (some might say power) of compound interest is a great way to start along the correct path. When you do, it will be obvious why you should start saving for retirement as soon as possible. Compound interest can be conceptualized simply as “interest on interest,” which means that in addition to the principal (the money you put in), you will also earn interest on the interest (the money the bank pays you for holding your principal).
Don’t lose hope if you can’t use the company plan. Self-employed people have a variety of possibilities for creating retirement plans. Others can set up their own IRAs, enabling a predetermined monthly withdrawal from their savings account and a direct contribution to their IRA. Even if it’s just a little bit, over time it will add up to something significant.