Top financial tips for young adults

As a young adult, you spend a lot of time managing new responsibilities. One of the most essential is your finances — how much you earn, save, spend, and invest. You know you need to prepare for the future, but it’s not always clear how to do that.

These three tips will help you get started. We’ll start with Finance 101 — what you need to know to apply each tip — and then move on to money management steps you can take today.

First up: Understanding the basics of personal finance

Before discussing personal finance tips for young adults, let's define it and explain why it's so important. Once you understand the "why," the what-to-do is much more motivating.

What is personal finance?

Personal finance is the process of managing your money and planning for the future. Learning personal finance requires you to develop essential skills, including:

• Managing your earnings

• Understanding your spending

• Repaying your debts

• Saving and investing

• Planning big purchases, like a car or home

When you build these skills, you become what money experts call "financially literate" — able to understand what your money can do and capable of using tools like savings accounts, investments, and budgets to make your money work harder.

The importance of financial literacy

Make family finances fun!

Make family finances fun!

With Greenlight’s award-winning debit card and app for kids and teens, financial literacy is one step away.

Try Greenlight today

Financial literacy helps you develop responsible money habits and reach your financial goals. It’s an essential skill set because it opens up the world of money, just like literacy opens up the world of words. You learn to “read” money options and make smart choices — like strategic budgeting to free up more of your money for saving. 

Consider these money-managing tips for young adults as the phonics of financial literacy: the building blocks you can create a strategy around.

1. Set financial goals

Smart financial planning is one of the most important life skills to develop – and the younger the better. The key is to plan for each stage of your life, but don’t get too committed to the individual action steps. Know your big-picture goals, like where you want to be money-wise when you retire, and shift things around as your needs change.

Here’s how that might look:

Short-term goals

These are goals you hope to achieve within the next year. For example:

• Building an emergency fund: Aim to set aside three months’ worth of living expenses to cover you in case of job loss or unexpected large expenses.

• Living within your means: Avoid spending more than you earn, even if you have to cut back or take on a side hustle.

• Starting micro-investing: Funnel a little bit every month into a brokerage account and build your market knowledge. 

Medium-term goals

These are goals for the next five years or so, depending on the goal and your circumstances. They’re all about laying a solid financial foundation for the years ahead. Options to consider include:

• Improving your credit: Pay your bills on time and keep your borrowing at an affordable level. Responsible borrowing habits boost your credit score, making it easier to get affordable loans and insurance later.

• Paying off debt: Eliminate credit card balances if you can, or reduce them if that’s all you can manage. Any debt you get rid of means less interest building up.

• Hiring a financial planner: A professional can help you develop a money strategy to guide your longer-term planning.

Long-term goals

Long-term goals keep young adults like you focused on your financial future. When spending is tempting, goals keep your eyes on the prize so Future You stays happy. The most important goals to consider include:

• Building an investment portfolio: Investing always involves risk, but even beginner investments have the potential to grow significantly over time. Start a portfolio now and set a goal for 10, 20, or even 30 years down the line.

• Preparing for retirement: This is one of the best financial tips for young adults. The sooner you start saving, the longer your money can grow.

Retirement funds benefit from compound interest. Your initial deposit earns money, which becomes part of your balance and generates even more. Many experts suggest putting 15% of your income into retirement savings starting at age 25.

2. Create a budget

Once you’ve outlined your goals, you need to work them into your budget — a plan for managing your money day-to-day. Your budget will list your income streams and expenses so you can plan where your money goes.

The first step is to choose the budget type that works for you. Here are three popular options to get you started.

The 50/30/20 budget and alternatives

This budgeting system has three destinations for your income:

• 50% toward needs: Essentials like rent, groceries, utilities, and clothing basics.

• 30% toward wants: Extras like streaming services, weekend trips, and dinners out.

• 20% toward savings and debts: Saving for the future and paying back money you owe.

Another option is the 70/20/10 rule, which can work well if you have large student loan payments or other significant debt. It puts 70% of your income toward needs and wants, but you decide what that division looks like. Another 20% goes toward savings, and 10% goes toward debt. 

The zero-based budget

Some people need a more flexible budget than percentage-based budgeting allows. Enter zero-based budgeting, which lets you start fresh every month. You look at how much you have available and allocate accordingly, using the previous month's budget as a guide. 

For example, imagine you’re a freelance journalist who brings in $5,000 in February. You sit down and allocate $1,500 for rent, $75 for your phone bill, $100 for gas, and so on. You give every dollar a job until nothing’s left. 

If you tend to overspend or prefer to work with cash, consider the cash stuffing or "envelope system." You take actual cash and put it into envelopes or folders for each category. Take the cash out to pay each bill. Any leftover cash is what’s available for other necessities that month.

The pay-yourself-first method

This method works with any budgeting system. Start your budget by setting aside money for saving and investing, then crunch the numbers and ensure what’s left will cover your necessities. If not, try adjusting your regular expenses. For example, can you get a cheaper cell phone plan or change your car insurance?

If you’re still coming up short, reduce the amount you budgeted for saving and investing, but keep your goal in mind. Aim to pay yourself more next month.

Track your monthly income and expenses

Good financial habits start with consistent record-keeping. Challenge yourself to record everything you earn and spend, then look for ways to have more left after expenses.   

3. Understand how credit scores work

A good credit score sets you up for better financial opportunities, from better interest rates to easier apartment hunting. You build a good score through responsible borrowing, and your credit cards are a great place to start.

Credit card best practices

Using credit cards responsibly is the best way to build credit as a young adult. Follow these three tips to get a good start:

• Only use credit if you can afford to pay cash: Balances accrue interest that can quickly add up. It's better to pay off your card every month.

• Pay on time every month: On-time payments count for 35% of your credit score. Set up auto-pay whenever possible and schedule it to pay the entire balance. This is how you keep yourself on the "don't buy it if you can't afford it" track.

• Keep your balances low: Credit bureaus prefer when your total balances are 30% or less of your credit limit, and leaving room for emergencies is essential.

How to continue learning and improving finances

As a young adult, you know building good financial habits is crucial. The Greenlight teen banking app teaches you to manage your own money, including investing, growing your savings, and setting up direct deposit for paychecks. You can even request transfers from your parents and get paid by friends and family. Try the Greenlight debit card and money app to build healthy money habits that last a lifetime.

Disclaimer: Greenlight is a financial technology company, not a bank. The Greenlight app facilitates banking services through Community Federal Savings Bank (CFSB), Member FDIC.