You've probably relied on your parents to manage your financial matters for years, and you may not know more than a few basic things about personal finance. Then you graduate from college, and suddenly you're responsible for all kinds of important financial decisions. Learning to manage your money is about overcoming four big hurdles. But just because these tasks may be challenging doesn’t mean you can’t take them on.
- Understanding personal finance before you start in the workforce can help you get a handle on your finances early.
- Financial literacy will allow you to create proper budgets, save and invest smartly, and even start retirement planning.
- Tackling student debt is one of the biggest hurdles young people face. Creating a plan to pay down your loans consistently over a given period of time will greatly improve your financial situation.
- Investing early benefits young people because they have a longer time frame to take advantage of compounding growth.
- What may have worked for previous generations in regard to financial hurdles may not apply to the current generation, as times, laws, and the economic environment have shifted.
"The crying need for more financial literacy in Gen Yers cannot be overstated,"
says consumer finance expert Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. "The good news is that managing finances is not an innate skill, but something that is learned like math, reading, and writing."
Unfortunately, financial literacy is rarely taught in schools. Gallegos says that Gen Yers must take the initiative to educate themselves about topics such as budgeting and living within one's means, paying bills on time, managing credit and debt, making regular contributions to savings, tackling student loans, and planning for retirement. Following just one good online or print resource can provide the foundation to learn these basics, he says.
His advice also applies to younger generations, of course.
Repaying Student Loans
In an age where an undergraduate degree no longer seems to be good enough in many fields, student loans have become the biggest challenge many young people face.
"There's so much pressure to go to a good school and compete for limited jobs that a lot of students are taking out expensive loans to finance an education that won't pay for itself no matter how good a job they land after graduation," says attorney Shane Fischer of Winter Park, Fla. "If I knew then what I know now, I wouldn't have gone to an expensive private school and would have opted for the less prestigious public school."
Current graduation school debt is estimated at $31,100 per individual. For a new graduate, the average student loan debt-to-income ratio is 54.6%. The national student loan debt has outgrown the value of the U.S. dollar by 543.9% and analysts believe it may fuel the cycle of poverty.
Learning to Invest and Take Risks
The economy's performance during the Great Recession had a major impact on many Gen Yers who could not find jobs or who watched their parents' investment returns disappear. "Unfortunately, the economic downturn has caused many young adults to fear investing in the stock market," says Rachel Cruze, a professional personal finance speaker and daughter of financial expert Dave Ramsey.
"But you have to think long-term when investing in the stock market. The past few years have been rough, but over time the stock market has made money. If you begin investing early and often, you'll be able to build wealth through your investments," she says.
Buying books on investing or taking courses can help you start investing early.
Brian Ullmann, CFP and wealth manager at Ford Financial Group, an independent advisory firm in Fresno, Calif., also says that market turmoil has impacted the younger generation’s investment strategies.
"Our younger clients now have a much lower tolerance for risk and have more conservative portfolios. In fact, we have clients in their 20s who wish to have their portfolio positioned for someone twice their age," he says. "One of our concerns is that this new, more conservative positioning for Gen Y clients is a permanent change and one that could lead them to miss out on opportunities in the future."
Overcoming Pressure to Follow a Worn-Out Path
"One of the biggest hurdles is overcoming societal pressures," says Matthew B. Brock, CFP, senior partner and owner of Divergent Planning in Bethesda, Md. Brock says Generation Y is constantly being told that there is a right way to plan financially. This advice often comes from an older generation whose financial status doesn't show that their way is the right way.
"Young adults no longer want to keep up with the Joneses, because the Joneses lost their jobs, lost their house, and may never retire," Brock says, adding that Gen Yers' choices reflect their preference for freedom and experience over property ownership. "Most young adults are waiting longer to get married, waiting longer to move to the suburbs, and waiting longer to have kids," says Brock.
Renting means they can leave a job and move to another city on a whim, save up, and then take a few months off to travel, or quit a job to start a company. The American Dream does not always include buying a house, a nice car, and earning a high salary. It means being free to do what makes you happy.
"Older generations need to recognize younger people may have a better idea of what happiness means than they ever did," Brock says.
What Are Common Financial Mistakes Young Adults Make?
Some common financial mistakes that young adults make include high credit card debt, a lack of financial literacy that leads to poor budget choices and a lack of savings, not having an emergency fund, not addressing student loans, and not planning for the future.
What Age Is Financially Peak?
The age that is an individual's financial peak will vary based on a variety of circumstances; however, generally, your 40s and 50s are considered to be your financial peak. This is when you are expected to be earning the most. The effort you put in your work and the knowledge you gained in your 20s and 30s would see you move up to higher-paying positions and have a better grasp of your finances.
Why Do Most People Struggle Financially?
The reasons that most people struggle financially will vary on the individual case but can include a lack of financial literacy, a scarcity mindset, self-esteem issues leading to overspending, and unavoidable high costs of living.
The Bottom Line
To overcome the challenges they face, today's young adults need to educate themselves about personal finance, manage the student loan debt they've already incurred, avoid or minimize additional debt, learn basic investment skills, and not be afraid to choose their own paths. Also, as youth are so often advised, they need to practice patience.
"Remember that you're still young, and be content with what you have," says Cruze. "Work hard so that you're able to save up to make large purchases that you can afford without having to pay interest."