8 essential finance advice tips for young adults

Are you ready to take control of your financial future and achieve financial independence? 

In this post, we’ll share 8 essential finance advice tips for young adults, guiding you through various aspects of personal finance, from establishing a financial plan and building credit wisely to understanding insurance needs and maximizing employee benefits.

1. Establish a financial plan

Everyone’s financial journey starts with a well-crafted strategy. Creating a spending plan is the foundation of personal finance, and the 50/30/20 rule is one financial tip that will teach you to allocate 50% of your income to needs, 30% to wants, and 20% to savings to reach your financial goals.

A strategy to consider is setting aside $1 for every $3 income, including income taxes, which aligns with the one-third rule. Prioritizing personal savings, such as automatically deducting a portion of your paycheck, ensures you consistently save money. This approach should also apply to any extra income, like bonuses or gifts.

The importance of financial planning

Financial planning can improve so many areas of your life. Here are just a few of the benefits financial planning can do for you:

• Manage your income, expenses, and investments in a smart and efficient way
• Set achievable goals
• Develop strategies to reach those goals
• Achieve improved financial security
• Develop better spending and saving habits
• Increase wealth
• Gain more control over your financial future

A flat-fee-only financial planner will regularly recalibrate your plan, ensuring you make wise decisions while keeping your financial objectives in sight.

Setting realistic goals

Setting realistic financial objectives helps you establish a clear end game to strive for, giving you motivation and focus to reach your goals. List and prioritize your financial targets, take care of the financial basics, and connect each one to a deeper motivation to stay focused.

Write down your objectives to make them tangible and real, and treat yourself along the way to celebrate your progress. To stay on track, make your financial goals visible or set up reminders to keep you motivated.

Regularly reviewing and adjusting the plan

Periodically reassess and modify your financial plan to keep it current and adaptable to any life changes. You should review your plan every few months to once a year to ensure your goals remain on track.

Regular reassessment of your plan allows for adaptability to changes in your financial circumstances, helping you to make necessary adjustments to remain on the path to financial success.

2. Building credit wisely

Maintaining a good credit score opens up a world of opportunities when making big financial decisions, such as getting a mortgage or an auto loan. You can positively impact your credit score by consistently paying bills on time, not maxing out your credit cards, and only using your credit cards for purchases that you can pay off quickly.

The importance of good credit

A good credit score, typically 720 or higher, demonstrates that you are a reliable borrower with a positive history of paying your bills promptly. A strong credit score can lead to:

• Better interest rates
• More favorable loan terms
• Increased financial flexibility
• More opportunities to achieve your financial goals

Tips for using credit cards responsibly

To use credit cards responsibly, keep your credit utilization rate below 30%, monitor your credit report regularly, and shop around for the best interest rates. This will help you make wise financial decisions and maintain a good credit score.

Additionally, pay your credit card bills on time to avoid credit card debt, practice responsible spending, and stay within your means.

Managing debt effectively

Effectively managing debt is an essential component of successful financial planning. Paying off high-interest debt and avoiding accumulating unnecessary debt can help young adults stay on top of their finances and achieve their goals.

Prioritize the loan with the highest interest rate and utilize credit monitoring services to take charge of your debt and work towards financial stability.

3. Prioritizing savings and investments

Prioritizing savings and investments is key to securing your financial future. Here are some financial tips to consider:

1. Start saving early: Build an emergency fund
2. Invest in retirement accounts
3. Diversify your investments

Starting an emergency fund

An emergency fund is a savings account that you can rely on for any unexpected expenses that come your way. It’s wise to save enough to cover 3 to 6 months’ worth of living expenses in your emergency fund, providing a financial safety net in case of unforeseen costs like:

• medical bills
• job loss
• car repairs
• home repairs
• unexpected travel expenses

Having an emergency fund can help you avoid going into debt or relying on credit cards when unexpected expenses arise, providing a sense of free money during those challenging times.

Having a dedicated account for emergencies protects your long-term savings, giving you the confidence to plan for your future.

Investing in retirement accounts

Company-sponsored retirement plans like 401(k)s and 403(b)s are a great way to set aside pre-tax dollars and take advantage of your company’s matching contributions (if eligible). Contribute to your retirement plan diligently and ensure you contribute the minimum amount to receive the full employer match.

While it’s ideal to contribute between 15% and 20% of your gross income to your retirement account, that’s not an easy task for many. If this is you, it’s best to start at a comfortable level and then increase your contribution rate over time. Even 1% a year can make a huge difference in the end.

Diversifying your investment portfolio

Diversification involves spreading your investments across different assets to lower the chances of major losses. Spreading your investments across various asset classes like stocks, bonds, and cash potentially yields a more balanced risk-return ratio, offering potential growth with the added benefit of compound interest.

Consistently reassess and recalibrate your investment portfolio to maintain diversification and adaptability to market fluctuations.

4. Smart spending habits

Developing smart spending habits is crucial for maintaining financial stability. Distinguish between needs and wants, resist the urge to make impulse purchases, and practice mindful spending to make the most of your hard-earned money.

Differentiating needs and wants

• Needs are the absolute essentials for living a healthy life—food, shelter, clothing, and healthcare. 
• Wants are the extras that make life more enjoyable—entertainment, dining out, and luxury items. 

Prioritizing expenses helps distinguish between needs and wants, promoting wise spending and financial stability.

Avoiding impulse purchases

Creating a shopping list and sticking to it can help you stay focused on what you need and resist the urge to make impulse purchases. Monitoring your expenses annually helps curb unnecessary spending and keeps you aligned with your financial objectives.

Practicing mindful spending

Before making a purchase, take a moment to reflect on its long-term value and the impact it will have on your financial situation. Mindful spending, which involves contemplating the long-term value of purchases, aids in making savvy financial choices, ensuring the effective allocation of your money.

5. Understanding insurance needs

Insurance is essential for protecting yourself against potential financial risks. Evaluate your insurance needs in the following areas to ensure you have the appropriate coverage for your unique situation:

• Health insurance
• Renters or homeowner’s insurance
• Life insurance
• Disability insurance

Health insurance considerations

Opt for a comprehensive healthcare plan that caters to your essential medical needs and is affordable. Consider factors such as:

• Premiums
• Deductibles
• Copay or coinsurance
• Coverage and benefits
• Provider networks
• Out-of-pocket costs

When selecting a health insurance plan, ensure you have the best possible coverage for your needs.

Renters or homeowner’s insurance

Protect your personal property and liability with appropriate insurance coverage. Renters insurance typically covers personal property, liability insurance, guest medical expenses, and additional living expenses, while homeowner’s insurance covers the physical structure of the home and personal belongings inside.

Make sure your home and personal belongings have adequate coverage to safeguard against possible financial risks.

Life and disability insurance

Life and disability income insurance are vital for ensuring financial security for your loved ones in case of unexpected events. Life insurance provides a financial payout to your beneficiaries after your passing. In contrast, disability income insurance replaces a portion of your income if you become disabled and cannot work.

Assess your requirements and select the suitable coverage to safeguard yourself and your family.

6. Maximizing employee benefits

Make the most of the benefits offered by your employer, such as retirement plan contributions, health and wellness benefits, and additional perks and incentives. These benefits can help you reach your financial goals and improve your overall well-being.

Retirement plan contributions

Optimize employer-matching contributions to retirement accounts by establishing payroll withholding and augmenting your contribution percentage to secure the maximum match. This can help you make the most of your retirement plan and ensure you’re on track to achieve your retirement goals.

Health and wellness benefits

Utilize your employer’s health-related benefits, such as gym memberships or wellness programs. These benefits can improve your physical and mental well-being, increase productivity, and enhance company culture.

Additional perks and incentives

Investigate other benefits your employer provides, like tuition reimbursement or flexible work arrangements to boost your financial and personal well-being. These benefits can help you reach your financial goals and improve your overall quality of life.

7. Developing multiple income streams

Diversify your income sources through side hustles and passive income opportunities to achieve greater financial stability and flexibility. Supplement your full-time job by monetizing your skills, hobbies, and interests.

Benefits of multiple income streams

Extra income sources foster financial stability and flexibility, facilitating better management of your finances and attainment of your financial objectives. Multiple income streams can help you achieve the following:

• Financial independence
• Greater stability and safety
• Increased cash flow
• Alleviation of money stress in case of job loss

Side hustle ideas

Explore freelance work, part-time jobs, or monetizing hobbies to supplement income. Some part-time jobs that can help you increase your income include transcriptionist, blogger, web design services, ride-share/delivery driver, household helper/personal assistant, caregiver, pet sitter/dog walker, bookkeeper, or career coach.

Related: 10 ideas to create passive income streams

Passive income opportunities

Invest in income-generating assets to generate passive income. This can provide strong returns, low market correlation, and tax advantages, ensuring a steady income stream and financial security.

8. Navigating tax responsibilities

Grasping the concept of income tax brackets and optimizing deductions and credits aids in minimizing tax liability and saving money. Familiarize yourself with tax brackets to estimate tax liability and plan accordingly.

Understanding income tax brackets

Income tax brackets range from 10% to 37%, with each tax rate applying to the income within that range. Having a thorough understanding of the current income tax brackets enables you to optimize your financial capacity and strategically plan for future tax obligations.

Maximizing deductions and credits

Leverage tax deductions and credits to lower your taxable income and save money. Keep track of your expenses throughout the year, as some deductions and credits require you to have receipts or other documentation, and consult a tax professional if needed to ensure you’re maximizing your deductions and credits.

Final word

Financial independence and success start with a solid foundation of financial planning, responsible credit usage, wise spending habits, and maximizing available benefits. By following these 8 essential finance advice tips for young adults, you’ll be well on your way to taking control of your financial future and living the life you’ve always dreamed of.

Frequently Asked Questions

What is good financial advice?

Start small (early) and prioritize saving, not spending. Look at saving as investing in your future and build a nest egg or rainy day fund to rely on.

What is the 50/30/20 rule?

The 50/30/20 rule recommends devoting 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debt payments. This method allows you to allocate funds for both current consumption and future goals.

What is the #1 rule of personal finance?

The number one rule of personal finance is never to spend more than you make. By being disciplined with your spending, you can avoid getting into debt and living beyond your means.

Is it worth getting a financial advisor?

Having a financial advisor can be beneficial if you lack the time or knowledge to manage your finances or need help staying on track. However, whether or not an advisor is worth the money depends on your needs and the quality of service they provide. It’s important to do your research to determine if hiring an advisor is right for you.

How can I improve my credit score?

Pay bills on time, don’t max out credit cards, and use credit cards responsibly to improve your credit score. Be sure to pay off credit card purchases quickly for the best results.