July 27, 2023
It was so great to see that “financial freedom” was the top long-term goal in a survey of young adults between the ages of 24 and 32. Many of you know this is the centerpiece of everything I do; it’s hard to believe my bestseller The 9 Steps to Financial Freedom was published before some of Gen Z was born.
If you have a young adult in your life—child, relative, friend, colleague—I want you to also know that they may be looking to you for financial advice. In the same survey “friends and family” was the most popular source young adults say they rely on for financial advice.
Here is my short list of tips you can share with young adults that will put them on the road to financial freedom.
Stay/get on track with student loan repayment.
As I shared with you in a previous newsletter, the three-year pause on federal student loan repayment has ended. Beginning in September anyone with a federal student loan will be expected to resume making monthly payments. Loan servicers should be contacting their borrowers to make sure they know when and how much they need to start repaying, but I want every young adult to take the initiative to log in to their account and make sure they understand what’s expected of them. Falling behind on student loan repayments is a very hard hole to climb out of.
Spend wisely on needs.
Young adults face plenty of firsts: buying their first car. Renting their first place. Buying their first home. One of the best ways to start building financial freedom is to spend the least amount possible on these needs. Not the most you think you can afford, or the most a lender will let you borrow. The goal should be to spend the least amount necessary to fill their need. Sure, everyone wants a new car, but a less-expensive reliable used car is the far smarter move. That will leave you more money for other goals. Same goes with a home. Don’t stretch into the too-expensive home; that often turns into a financial regret. Buy the home you can comfortably afford.
Set up automatic savings for an emergency fund.
Being ready for one of life’s “what ifs” is how you avoid expensive credit card debt. Getting started with savings is the hardest part when you are young.
Suggest they set up an automatic system where they have money automatically transferred from their checking account into a separate savings account. That savings account can be wherever they do their checking, or an online bank that offers a higher yield on savings accounts. (Just have them do a quick search for “best online savings rates.”) And of course, I think one of the best deals for them is my Ultimate Opportunity Savings Account offered by Alliant Credit Union. Once you save at least $100 a month for 12 consecutive months, Alliant will deposit a $100 bonus into the account. That’s a great deal!
Bonus tip: When you’re just starting out, it can be helpful to break down savings goals into small chunks. If you get pushback from your Gen Z that they can’t possibly see how they could save $100 a month (or more), suggest they reframe it as a weekly goal. Aiming to save $25 a week (that’s less than $4 a day) can be an easier goal to set and keep.
Invest in stocks only for goals that are at least 10 years away.
Stocks are for long-term goals, not for savings you might need to cover an emergency bill. My advice for people starting out is to stick to a low-cost index mutual fund or ETF that tracks a broad US benchmark. If they have a workplace retirement plan (see the next tip) tell them to look for an investment option for a “total market” or “S&P 500 index” fund. This is the easiest way to get instant diversification. Investing in individual stocks can come later.
If they don’t have a retirement plan through work, they can set up their own long-term savings account for free at a discount brokerage such as Fidelity, Schwab, TD Ameritrade or Vanguard. I hope they are smart and choose to open a Roth IRA. Keep reading for why.
Open a Roth account for retirement.
Most 401(k) plans now offer a Roth 401(k) option. And at a discount brokerage, you can open a Roth IRA. A Roth account is hands down the best choice for young adults. With a Roth you contribute dollars that have already been taxed, and then in retirement you get to withdraw the money without paying a penny in tax. When you are just starting out and likely in a low-income tax bracket, the Roth is the way to go. (Extra bonus tip to share: If they were auto-enrolled in a workplace retirement plan, it will be a traditional account, not a Roth. It’s easy for them to make the switch by contacting HR.)
There is an income limit on who can save in a Roth IRA, but there is no income limit for a Roth 401(k). In 2023, an individual with a modified gross income below $138,000 and anyone married who filed a joint tax return with income below $213,000 can contribute up to $6,500 in a Roth IRA.