Young adults in particular are usually only slightly or not at all prepared for building up their own financial independence. Therefore, they should avoid some common mistakes in this area of life and follow five helpful tips.
Young Adults: Poor financial literacy
In the Financial Education Study 2021 commissioned by Union-Investment, more than 2,000 young adults aged 18 to 29 were asked about their financial education. It turned out that – although the topic of money and finances plays a central role in young people’s lives – most of them rate their financial knowledge as insufficient with grades between three and four. Only 19 percent of the adults surveyed indicated that they would rate their financial knowledge as “good” or “very good”. Around two-thirds of those surveyed (61 percent) rated their own knowledge as “satisfactory” to “sufficient”. It was also shown that those who still attend school in particular rate their knowledge as “poor” to “insufficient” (32 percent).
Nevertheless, 90 percent of those surveyed consider finance to be important or very important in order to be well prepared for life. Therefore, it can be helpful for many young adults to consider financial independence tips and avoid the five most common mistakes in this matter.
Five tips for financial independence
First of all, young adults should invest in stocks. Because in the long term, forms of investment such as shares and bonds have beaten the classic savings book by a long way. However, in order to reduce the risk of loss, one should not only invest in shares, but diversify one’s assets across different forms of investment.
Many make the mistake of buying insurance that they don’t need, but forgetting to take out insurance that is important. Therefore, you should make sure that you take out the right and most important insurance policies. Some insurance companies play a major role in protecting you from major financial losses. Private liability insurance, for example, protects against the risk of lifelong payments. Household contents and disability insurance can also be considered important.
In addition, young adults should invest in their own financial education. As the Financial Education Study 2021 shows, most see the responsibility for financial education at school. However, the assessment of the performance of the schools is disappointing among those surveyed (school mark 4.8 on average). This is precisely why you should start learning about finance yourself as early as possible, for example by reading financial books or corresponding blogs on the Internet.
According to the advice of many experts, you should also save at least ten percent of your monthly income. Financial goals should be written down and a savings plan drawn up in order to be prepared for major purchases such as cars or a home.
Finally, you should also deal with passive income. Passive income is cash income resulting from past performance. For example, if you write a book over a period of years, this can ensure a regular income in the future through the sale of the book over several years.
These four mistakes should be avoided
CNN Business also tracks the most common mistakes young adults make on their journey to financial independence that should be avoided whenever possible.
The first mistake is that many start saving for retirement too late. It’s all about finding the right balance between what you put aside for later and what you need for things now. Delaying this, however, can mean a high price. For example, if you start saving $100 a month at age 25, that money can grow to around $150,000 by age 65 with a 5% return. But if you start saving $100 at age 35, you’ll have just over half that amount by retirement age.
Another mistake is to indulge in “lifestyle inflation”. This occurs when people begin to view supposed luxuries as necessities. “Social media is fueling a desire to keep up. Fear of missing out combined with an ‘I deserve it’ mentality has led more and more millennials to spend the majority of their income on things that provide short-term fulfillment and status,” Nick Reilly, a Seattle-based chartered financial planner, told CNN. Young adults underestimate the extent to which excessive spending can ruin other financial plans.
In addition, many young people have no reserves for emergencies. Emergency funds can come to the rescue when you lose your job, become too ill to work, or face other unexpected bills. Jay Lee, a certified financial planner at Ballaster Financial, tells CNN that any amount is a good place to start, but in general, single people should have six months’ worth of expenses set aside for emergencies. For couples with two incomes, the amount should be at least three months.
Finally, volatile investments such as cryptocurrencies endanger financial security if you do not take their price fluctuations into account. The new investment opportunities such as NFTs, meme shares, SPACs and cryptocurrencies have attractive growth potential, but are associated with high risks, especially for young investors. “Financial planning is about preparing for the worst rather than chasing the best returns,” said Lamar Watson, a board-certified financial planner based in Reston, Virginia.
E. Schmal/Redaktion finanzen.net