Teaching financial literacy to young adults provides them with a stable and secure future as they navigate life’s financial challenges. Helping a young adult develop these skills at an early age sets them up to excel in life. Financial literacy is the ability to understand and apply various financial concepts, including basic banking, building credit, budgeting, and setting financial goals.
Banking can be a foreign subject for many young adults, but educating them on the basics will help boost their confidence when they begin managing their finances independently.
Important topics to discuss include:
- The difference between savings and checking accounts
- How credit cards work
- The difference between earned interest and paid interest
- How to avoid high-interest products
- How to spot scams or identity theft
Building Credit
Helping a young adult build credit early is highly beneficial, as establishing a longer credit history contributes to a stronger credit score over time. A high credit score makes it easier to get approved for life’s first major purchases and saves money through lower interest rates. Young adults can begin developing credit by opening a low-limit credit card or, when appropriate, having a responsible adult co-sign a loan. It is crucial they understand that on-time payments build their score, while missed payments and excessive debt damage it.
Managing Debt
They should also learn strategies for managing debt if it begins to accumulate, such as:
- The avalanche method: paying off the account with the highest annual percentage rate first.
- The snowball method: paying off the smallest balance first, then rolling that payment into the next debt.
Ultimately, maintaining a strong credit history prepares them for the future financial obligations they will take on independently.
Budgeting
Furthermore, teaching young adults about budgeting helps alleviate the stress of managing expenses and paying off debt. Budgeting involves tracking income and expenses to distinguish true needs from wants.
A common guideline is the 50/30/20 rule:
- 50% of income is allocated to needs
- 30% to wants
- 20% to savings
While this rule may not perfectly fit everyone’s situation, following it closely helps young adults categorize expenses and track spending. Saving 20% of one’s income opens the door to investment opportunities and funds an emergency savings account. An emergency fund is essential, as it prevents minor financial setbacks from spiraling into financial distress.
Setting Financial Goals
Finally, setting financial goals, whether short-term or long-term, helps young adults give their money a purpose, avoid unnecessary expenses, and experience satisfaction when milestones are reached.
Examples of financial goals include:
- Creating an emergency fund
- Paying off debt
- Saving for a down payment
- Tackling student loans
- Contributing to a retirement account
While financial literacy encompasses much more than these few topics, mastering these basics is a great start to ensuring a young adult is prepared for a strong financial future.
Ready to help a young adult in your life build a strong financial foundation? Visit Germantown Trust & Savings Bank at one of its four Clinton County locations in Germantown, Breese, Bartelso, or Beckemeyer. You can also call 618-526-4202 or learn more at www.gtsb.com.
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