4 financial tips for young adults

Allworth Co-CEO Scott Hanson shares four foundational pieces of financial advice for young adults.

A study of 30,000 recent college graduates showed that almost 70% had never taken a course in either high school or college that taught personal finance. ¹

As a parent, relative, educator, mentor, or guardian, helping the next generation prepare to manage money falls to us.

When you are in your 20s and just starting out, the last thing most of us want to think about is saving for the future. While you probably know exceptions, I remember the attitudes of the people in my college social circle and I’m pretty sure it has always been this way.

And therein lies the conundrum, because not only are the 20s an ideal time to begin saving, if a few good money practices become habits early on, including consistently setting aside even small amounts of savings, a person can accumulate an impressive portfolio in just a few decades.   

So, let’s say you have (or you know of) a person who is chronologically an adult, they’re trying to launch, and yet you know they have no real sense about finance, saving, or taxes. Beginning with the most basic of basics, here are four things I would introduce to them to try and help that young person get a better grasp of money.

1. Budgeting is fundamental

Noun? Verb? Adjective? While the word “budget” may have several different uses, it’s an ideal place to begin and help your young person understand how to live within their means.

Start by talking about monthly expenses. Work with them to list everything they spend in a month and then separate them into two categories: essential (rent and gas) and non-essential (evenings out and travel).

When you’re all done, you’ll have three totals: essential expenses, non-essential expenses, and total expenses.

Now, how much, if any (allowances count), money do they earn or receive each month?

If by chance they earn roughly what they spend, it’s time for the next phase: cut some expenses and introduce to them the importance of creating an emergency fund.

2. They need money in reserve

Tech. Influencer stardom. Crypto. Spend five minutes on social media and you can plainly see that “virtually” everyone is getting filthy rich fast.

Uh … no.

But the fact is that never has getting rich quick and easy been a bigger part of our collective consciousness. And when behavioral finance and the fear of missing out grabs a young person by the throat? It is difficult to break free.

So, why expect them to save when that money could be invested in a fad?

Starting an emergency fund doubles as both an integral part of establishing lifelong, responsible financial habits (i.e., “boring”) but just as importantly, it also can enable your young person to be able to walk away from a dangerous or unhealthy personal living situation or even a toxic work culture.

And interest rates on CDs and savings accounts have finally risen so it is not as though cash is losing quite as much ground to inflation. There are actually a few FDIC-insured online savings banks paying almost 5% interest that do not charge a fee and have no account minimums. While as of the release of this article, 5% is right around the current level of inflation, it beats all of 2022, and to save a little accessible cash for an emergency while keeping pace with inflation is not bad if it gives your young person some security.

Lastly, I can’t explain it, but saving is addictive. And once your young adult receives a few monthly statements with an accrual of interest income, it will absolutely have an impact on the way they view how money can work for them.

3. Taxes feel … bad. But understanding taxes? That feels good.

I recently met a young woman who did not realize that she was self-employed because for the previous six months she had been receiving a check from a well-known company.

The odds are high that you know someone (or even you) who has worked as an independent contractor or freelancer; maybe as a driver or delivery person for say, Uber, Lyft, or Uber Eats.

Not comprehending the basics of taxation places a person at risk of big headaches down the line. Conversely, understanding our tax system can save you money today and in the future.

So, if your child or young adult mentee is an employee, and his or her employer takes out federal, and likely state taxes, and pays half of their Social Security (currently 6.2%) and Medicare (currently 1.45%), help them make certain that they have filled out their W-4 correctly and that the proper amount of taxes are being withheld.

Nobody wants an unexpected bill next April.

On the other side of the equation, if they are self-employed, you want to make sure they understand that they are responsible for paying not only their income taxes, but also the full amount of the equivalency of the FICA bundle.

But the importance of tax awareness certainly doesn’t begin and end every April 15. Later, having a solid grasp of how taxes work, and, even more importantly, how different investments get taxed, could allow them to save tens of thousands over the course of their lives.

4. Employee benefits are financially meaningful

If or when your young person gets an offer to work for a company in the field of their dreams, the excitement of the moment may prompt them to impatiently sign anything that is put in front of them. Most firms have legally accountable human resource departments whose job is to explain the contracts you are being asked to sign, and the ramifications for any intentional or accidental breach.

Then there’s healthcare and everything the comes with it. Is there insurance in case your young person must undergo a long-term absence? What about vacation and family leave?

Last, but certainly not least, does the company offer a defined contribution plan such as a 401(k)? No matter how young your charge is, it is always time to save for the future. And there is no two ways about it, a 401(k) with employer matching dollars is flat-out free money (with huge long-term interest upside).

As an investment fiduciary, we select our advisors as team members because we believe that with proper planning and guidance, everyone benefits. The fact is that we were founded on the fiduciary concept that 100% of our advice would be in the best interests of the people we serve.

With that in mind, if your adult child would be interested in speaking with your advisor, just ask. We are always here to help and there is nothing better than helping a young person start on a path toward a great financial future.

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