Money Management for Young Adults: Understanding Basic Financial Terms and Concepts
The transition from childhood to adulthood can be a strange, confusing, and stressful period in life. Both minors and young adults are likely to face many of their firsts: first job, first car, first home purchase, marriage, and much more. With the introduction of newfound experiences comes the need for increased financial literacy, one of the most important coming-of-age skills for young adults. Financial literacy gives an individual the ability to make informed decisions when it comes to money management, budgeting, and investing.
The concept of money management can be intimidating, especially for someone new to it who hasn’t had formal financial training. As a result, young adults may find themselves overwhelmed and confused, unsure of where to begin. Financial literacy encompasses a wide range of topics and concepts. It is essential that young adults become acquainted with some of the most common terms, so they can be prepared to handle their finances responsibly and have a solid foundation to build upon.
Financial Goals
The first step of money management is to determine your financial goals. Knowing what your personal financial objectives are will help guide you to make the right decisions. Prioritizing your needs and wants is a crucial part of financial planning and sets the stage for your long-term financial success. Some common financial goals a young adult may have are saving for retirement, building an emergency fund, increasing net worth, setting up a budget, and paying off debt.
Budgeting
Once your goals are established, you can create a budget that works for your individual lifestyle. A budget is a tool that allows you to track and monitor your spending and income. It is important to keep in mind that every budget is unique to one’s individual financial situation. The goal of a budget is to help you plan where your money is going and to make sure that your income covers all of your expenses.
Budgets should be realistic and based on your future needs. It is a good idea to re-evaluate your budget at least once a year to account for changes in your financial outlook. Budgeting can help you achieve financial stability and success by giving you a clear picture of where your money is going and whether or not you are staying within or dipping into your limits.
Savings and Investing
Once your budget is set, you can start to save for your future. Savings are funds that are set aside for specific expenses, such as retirement or other investments. Savings should be part of your budget and ideally should be put into place at the beginning of each month. It is also a good idea to have a set amount of time you will have the money saved for (i.e. three, six, or twelve months).
Investing is a unique way to save money and build wealth. Investing includes stocks, bonds, mutual funds, or other options. For young adults, generally the best way to invest is through a 401 (k) or IRA retirement account. These accounts allow you to invest funds on a tax-deferred or tax-free basis, allowing the funds to grow without the impact of taxes until retirement. It is important to do research on the different types of investments before investing any of your money.
Debt Management
Debt is an inevitable part of adult life, but it doesn’t have to be a burden. It is important to try to be aware and responsible with debt, and to use it strategically when it is needed. As a young adult, it is important to understand the different types of debt that may be necessary.
The most common types of debt for young adults are student loans, credit cards, and auto loans. Being familiar with these types of debts can help you manage them more effectively. It is especially important to understand the differences between good and bad debt, as well as the repercussions of mismanaging debt. Additionally, it is important to remember that bankruptcy is always a last resort, should all other attempts fail.
Insurance
Insurance is an important part of money management and a necessary risk management tool. Young adults should have certain types of insurance, such as health, auto, home, and life insurance. Insurance policies can protect a person in case of an unexpected event and come in handy when making large purchases, such as buying a car or a house.
It is important to remember that insurance policies vary and should be tailored to the individual’s needs. Knowing the different types of insurance can help a young adult make an informed decision when choosing a policy. Additionally, it is important to understand the various terms associated with insurance, such as deductibles and premiums.
Credit
Credit is an important and often confusing factor in finances. Credit, good or bad, has a significant impact on an individual’s financial health. Poor credit can impact one’s ability to gain access to credit cards, loans, and mortgages, so it is important to make sure credit is in good standing.
Credit is gained by the successful repayment of borrowed funds and other financial obligations, like paying bills on time or taking out a loan. Credit is based on a few different factors, such as payment history, amount owed, length of time accounts have been open, and types of credit used. Managing credit responsibly and having a good credit score are important components of financial literacy.
Conclusion
The financial world can be overwhelming and intimidating, especially for young adults who are just starting to learn about money management. Young adults have a lifetime ahead of them to develop the knowledge and skills needed to be financially successful. It is important to take the time to understand basic financial terms and concepts early, so that money management is easier to approach as an adult. The more knowledgeable a young adult is about finance, the greater their ability to make smart decisions about their money in the future.