It’s not easy being a young adult in this economy. As much as people like to bemoan the financial challenges of today, young adults have one advantage. The advantage of time.
Focusing on financial management now can enable you to become a millionaire later in life with very little effort.
Here’s what you need to know about managing your money and growing your net worth as a young adult.
Take Advantage of the Power of Compounding
Compounding is the primary tool you have to grow your net worth. The stock market has a historical annual growth rate of 7%.
With this in mind, let’s examine the power of compounding. If you invest $1,000 a month from the age of 25 until you reach the age of 35, your money will grow to a total net worth of $1,444,969 by age 65, using that 7% growth rate.
In total, you would have invested a total of $120,000. That’s more than a 10x return for a low-risk investment.
Compounding is the number one reason why you should start investing for the future right now. For more information on low-cost, low-risk investing, read this Firstrade review.
The number one mistake young adults make is not controlling their spending. Whether it’s not being aware of what you’re spending or failing to make a budget, mistakes in your youth can linger long into adulthood.
Get hold of your finances right now and live within your means. There are plenty of budgeting apps to help you manage your finances. For a way to create a budget and plan your financial future, check out this Tiller Money review.
Build an Emergency Savings Fund
Did you know that 28% of U.S. adults have no emergency savings?
That means if the washing machine breaks, they lose their jobs, or if they need emergency medical attention then they’re in trouble. This can lead to unsustainable lending practices and total financial ruin.
Young adults are the most likely group to not have any emergency savings. Life happens and if you’re not prepared for it then it could turn your world upside down.
Traditionally, financial advisors have suggested holding at least six months’ worth of income. However, modern financial experts recommend maintaining a minimum of twelve months’ worth of income in your emergency fund.
Create a Passive Income
The main difference between the rich and the poor is the former invests in passive income streams. Whether it’s creating a business that runs itself or investing in high dividend stocks, passive income could enable you to take early retirement or to supercharge your investment portfolio.
Stop living paycheck to paycheck and begin investing in your future. There are plenty of investment tools and resources available to learn how to build up a passive income.
Learn How Taxes Work
There’s no getting around taxes. Federal and state taxes are a fact of life and a lack of knowledge means Americans are paying thousands of dollars more each year than necessary.
Understanding taxes now can help you to meet your financial obligations, while minimizing how much leaves your bank account every spring.
This is vital for planning your finances for the year. For example, if you earn $35,000 annually in New York City, you will have $2,291 per month to live on after Federal taxes in 2020-21. However, this doesn’t take into account state or local taxes. If you don’t know how much you have after taxes, it could get you into financial trouble.
Start Investing Now
Investing has long been considered something that people begin thinking about when they start a family. Smart young people need to think about investing now.
Due to the aforementioned power of compounding, the earlier you start the better. Creating an automated investing process will build your financial future and ensure you can enjoy a comfortable retirement.
But how should you invest?
Avoid being swayed by the prospect of huge returns from risky assets, such as penny stocks and cryptocurrency. Focus on traditional, conservative investments, such as bonds, stocks, and ETFs.
The idea behind investing as a young person is the money you put away won’t be touched until you retire.
To get an idea of the power of investing, project your future finances by reading this review on PocketSmith.
Understand Debt Management
Certain types of debt are expected and unavoidable. For example, mortgages and student loans are perfectly acceptable types of debt.
Certain types of debt are useful for building your credit rating. Spending on your credit card is recommended, but only if you know that you can pay that debt off at the end of every month.
Young people often don’t learn about debt, and so they make mistakes when they reach adulthood. Learning about good debt, bad debt, and how to manage debt is a vital skill if you’re going to keep control of your finances.
Investing, debt, and financial management are intimidating concepts. The lack of any preparation via the public education system represents a serious problem in this country.
Educating yourself now can put you far ahead of your peers and increase the likelihood that you’ll retire wealthy, healthy, and happy.