Many young adults graduate from college and are thrust into the workforce with little or no financial literacy or personal finance skills. Unfortunately, that’s a result of the United States education system not requiring high school financial literacy courses. However, the tide seems to be turning. Twenty-one states now require high school students to take a course in personal finance, according to the 2020 Survey of the States conducted by the Council for Economic Education.
While the curriculum change should help future generations with financial literacy, young adults who recently graduated high school or college still seek personal finance guidance. This article will offer young adults strategies and actionable tips to become financially literate and financially independent.
Establish A Budget That You’ll Stick To Each Month
Creating a monthly budget and continually seeing it through is one of the most important aspects of personal finance. By creating a monthly budget, you’ll be able to track where each dollar you earn and spend will go. Many financial institutions offer financial budgeting tools to help to establish a budget.
There are various types of personal budgeting techniques. Here are a few of the most popular ones you can implement when planning out a budget.
The 50/30/20 Rule
This may be one of the most popular and easy-to-use methods for personal budgeting. The 50/30/20 rule is a plan to allocate your after-tax income into three main categories—needs, wants and savings.
When using this strategy, 50% of your take-home pay will be allocated to necessities. Be cautious that you don’t conflate needs and wants. The needs category should include things necessary for surviving, such as rent or mortgage, utilities and groceries.
The next step when using this strategy is to allocate 30% of your after-tax income to wants. While this category may seem similar to the needs category, it’s fairly different. This group is things you may desire but don’t need to survive. That includes things like vacations, shopping, dining out, music and video streaming services and much more. Remember, it’s okay to spoil yourself. Just make sure you are doing so in a financially responsible way.
Lastly, when using this method, you want to put 20% of your take-home pay into savings accounts. Whether that be your personal savings account, an emergency fund or a 401(k), make sure you put something away for a rainy day.
Traditional Budgeting
When thinking about budgeting, the traditional budgeting method is arguably the first one most people imagine. This technique is simple yet effective. You’ll need to list out your after-tax income and your expenses. You can use the old-fashioned pen and paper or an online budgeting tool.
Unlike the 50/30/20 rule as mentioned above, all your expenses should be listed at once. Once your list is complete, you can figure out the difference. Your income should be larger than your expenses. If it isn’t, you may need to adjust your spending—if possible.
The 80/20 Rule
This budgeting strategy may be more popular and more straightforward than the 50/30/20 rule. Similar to the 50/30/20 rule, 20% of your take-home pay should be allocated to some sort of a savings account. The remaining 80% is for spending. The 80/20 rule may be too much for some people. This strategy demands that you spend your money wisely. If you feel you may not have the self-control to implement this method, simply modifying it can help tremendously. For example, this method can be changed to 70/30 or 60/40. It all would depend on what you believe would be the best fit for your financial situation.
Learn The Importance Of Credit And Credit Scores
Many young adults may have already started building credit without realizing it. Student loans and credit cards are all forms of credit. But, what exactly does credit mean? Credit is the ability to borrow money to access goods or services with the agreement you’ll pay in the future. However, interest is included on top of the money you borrowed.
As credit gets established, you’ll receive a credit score from the three major credit bureaus—Equifax, Experian and TransUnion. Your credit score has an immense impact on the financial decisions you’ll make in the future. If you wish to purchase a car or home, a low credit score can halt the process.
Equifax defines a credit score as a three-digit number designed to represent the likelihood you will pay your bills on time. The general credit score ranges from 300 and 850. The following are credit score ranges and the standings.
| Standing | Range |
|---|---|
| Poor | 300-579 |
| Fair | 580-669 |
| Good | 670-739 |
| Very Good | 740-799 |
| Excellent | 800-850 |
Since credit scores affect certain financial decisions you’ll make in the future; you’ll want to start building credit responsibly as a young adult. Understanding the main factors that go into the credit score calculation will put you in a successful position. It’s always important to remember that you should only take on debt that you can handle.
Review your credit report at least once a year for potential inaccuracies. According to the Federal Trade Commission’s website, you’re entitled to one free copy of your credit report every 12 months.
There are great online tools you can use to check your credit report. For example, AZCCU offers its members a free credit monitoring tool where you can credit score, credit report, personalized money-saving offers, financial education articles and much more.
Understand The Terms Of Your Loans
One of the most critical aspects of financial literacy or personal finance is completely understanding the terms of any loans you wish to pursue.
Aside from the fact that the cost of attending a four-year university is rising, the lack of understanding of loans is a major contributing factor to the student loan debt crisis.
For the young adults who are graduating high school and about to embark on the college journey, please take a moment to comprehend your loans before applying. Some loans like the Parent PLUS loan or private loans come at a higher interest rate when compared to direct subsidized loans and direct unsubsidized loans.
The same sentiment can be echoed for the young adults who recently graduated from college. Do some research to find the best home loan or car loan.
Tackle Debt Early
The average college graduate exits with $28,950 of student loan debt, according to a 2019 study conducted by The Institute for College Access & Success. There is a good chance many young adults will enter the workforce swimming in debt. Don’t put it off. Tackle your debt early. Paying off debt fast can be beneficial to your long-term financial health. There are various debt payoff strategies to help manage debt. Additionally, maintaining a consistent payment history will show up positively in your credit score.
Start Saving For Your Future
While saving money may be easier said than done, it’s essential to jump on it sooner rather than later. There are two main saving types young adults should prioritize over anything else. That’s an emergency fund and retirement.
Create an Emergency Fund
Stowing money away into an emergency fund is imperative because sometimes life may throw you a curveball. Take the COVID-19 pandemic as an example. Millions of Americans lost their jobs instantly and had no idea when they would earn another paycheck. Building an emergency fund allows you to be financially stable in a time of need without having to rely on credit cards or high-interest loans like a payday loan. Emergency funds are meant to help you in a time of need. The only time you should dip into this fund is for unexpected emergencies such as a loss of your job to cover living expenses, medical bills due to a sudden illness and significant home improvement costs.
While everyone’s financial circumstances are different, most financial experts agree that having at least three to six months’ worth of expenses stashed away for emergencies. If it is at all possible, putting in 12 months of living expenses can help you avoid problematic situations down the road.
If you are stuck trying to figure out how much to start saving, use Arizona Central Credit Union’s Save for a Rainy Day calculator as a starting point.
It’s Never Too Early to Start Saving For Retirement
Saving for retirement as a young adult will financially put you in a good position when you are ready to hang up your working shoes. Most millennials understand this because, according to a Chase Bank Generational Money Talks Study, millennials started saving for retirement at the age of 23.
Many companies in the U.S. offer their full-time employees retirement plans like a 401(k) with a matching contribution. Use this benefit to your advantage. However, if your company does not offer retirement benefits, pursue an Individual Retirement Account (IRA).
Seek Financial Advice From The Professional At Arizona Central Credit Union
Managing finances as a young adult may be challenging at times. Continue your financial literacy and personal finance journey by doing research and reading. If any other financial advice is needed, check with the professionals at Arizona Central Credit Union.
We offer a range of financial services. Whether you are in the market for a low-interest rate credit card, mortgage, student loan or have general financial-related inquiries, our financial experts can help. Contact us if you have questions or would like to open a bank account.
