father explains money management for young adults

Financial Literacy Basics: A Guide for Your Young Adult – Part 1

Nurturing Financial Wisdom and Money Management

What Would You Tell Your Younger Self about Money Management?

Whether your children are facing life’s financial journey as recent college graduates, starting their first job, or even in an established career, your experience can be a valuable guide. Give your child the benefit of your knowledge of the crucial financial topics that young adults need to understand.

In Part 1 of our three-part series, Financial Literacy Basics: A Guide for Your Young Adult, we cover some of the topics financial newbies have posed to us, either directly or through their parents.

Financial Factors of a First Job

A steady income brings financial responsibilities and spending priorities to the forefront. As your young adult begins their career, encourage them to contemplate decisions such as moving out, handling student debt, and initiating savings. And cover the importance of allocating funds for discretionary spending such as entertainment, shopping, and travel.

Paycheck Essentials

Completing the W-4 tax form properly ensures correct federal income tax withholding. If an employer offers a retirement savings plan, guide your children in deciding how much of their income is an appropriate contribution.

Explain the benefit of a reduced taxable income in contributing to retirement savings. Have them find out if their employer matches a percentage of the contribution – it’s basically free money!

Budgeting for Financial Discipline
Numbers Matter

Understanding one’s financial landscape is the key to building for the future and staying out of financial trouble. Most people are surprised to find out where their money goes.

New earners benefit from documenting income, tallying expected expenses, understanding tax obligations, and allocating savings. While free tools are becoming scarce, the process of filling out and regularly maintaining a personal spreadsheet can be impactful. Though feedback from a spreadsheet is not in real-time like some apps, this hands-on document will provide a tangible view of spending and encourage positive habits.

Avoiding Overspending

Responsible choices and informed spending trade-offs are essential to living within means. In expensive cities, even high salaries don’t go as far as expected, making it crucial to manage finances wisely.

Help your young adult learn how to create and stick to a budget to prevent excessive credit card use and bank overdrafts.

Circumventing Credit Pitfalls

We have seen many otherwise responsible young people in financial trouble from credit card spending and costly buy-now-pay-later schemes. A few months of overspending and soaring interest rates can quickly snowball into a problem too big to tackle.

Using credit cards responsibly and limiting the number of credit cards will help build credit history and improve credit scores.

Before applying for cards, help your child research credit cards to determine which offers the most valuable perks and rewards. These can range from zero-cost financing for a defined period and low or no annual cost to cashback rewards and airline mileage points, to name a few.

Building Savings

Educate your young adult as to the importance of saving. They should establish an account and save about six months of expenses that can provide a cushion if they lose their job or become unable to work. Consider allocating funds for living expenses to a checking account and funds intended for savings to a high-yield savings account.

Also, educate them about establishing savings goals to build for their future. These could include saving for a car, a house or apartment, further education, wedding expenses, or travel.

Automate Savings Goals

Automation can help your child meet savings goals without much thought. Direct deposit from a paycheck into a savings account or regular automatic transfers from checking to savings can ensure a consistent approach to building an emergency fund, saving for future goals, and planning for retirement.

Smart Savings Strategies

In a period of relatively higher interest rates, strategic choices like high-yield savings accounts can be advantageous. Teach your young adult how to evaluate interest rates, compounding frequency, transfer ease, and financial institution credit quality for informed decision-making.

Wealth Building
Long-Term Investments

Encourage your child to explore the option of locking up funds in CDs or Treasury Bills to take advantage of higher interest rates. As long as the funds won’t be needed prior to the maturity date, this can be a savvy move to secure favorable returns on their savings.

It’s crucial to stay vigilant and actively manage the investments. Caution your young adult about possible automatic investment renewals, which may occur at a lower interest rate. Make sure they carefully evaluate their financial goals and potential needs before committing to locking up their money for extended periods.

Investing in the Stock Market

Once essential savings goals are met, your child could consider venturing into the stock market for long-term wealth-building strategies.

Read the other articles in our Financial Literacy Basics Guide for Young Adults – Part 2: Navigating Major Financial Decisions and Part 3: Employee Benefits and Financial Security. For information on our services in this area, please visit our LifeArc page.

Launching your kids into the world can be daunting. It is even more challenging to help them navigate the complexities of money management to build a secure financial future.

Eddy & Schein Group has expertise and experience in empowering newly independent adults with financial knowledge and insight. If you’d like some assistance, please give us a call. We’re here to help.

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Tell us what you need.
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