Essential savings tips for young adults

Budgeting is the cornerstone of financial health, providing a clear road map for managing your money and achieving your goals. To get started, it's important to choose a budgeting method that fits your lifestyle and preferences. Whether you prefer a detailed zero-based budget, the simpler 50/30/20 rule, or a digital tool like a budgeting app, the key is to find a method that you can stick to consistently. Experiment with different approaches until you find one that works for you, and remember that the best budget is the one you can maintain over the long term.

If you’re not sure where to start, the 50/30/20 rule is a popular budgeting method that helps you manage your income in a balanced way. According to this rule, you allocate 50% of your after-tax income to essential expenses like rent, utilities, and groceries, as well as making the minimum payments on your debt. The next 30% goes toward discretionary spending, such as dining out, entertainment, and hobbies. The remaining 20% is dedicated to savings and additional debt repayment, helping you build a financial cushion and pay off any outstanding debts. This simple and flexible approach can be a guidepost for how to think about savings early on, and you can tailor it to your needs as they change over time.

An emergency fund is a financial safety net that can provide peace of mind and protect you from unexpected expenses. Having this fund in place is crucial because it allows you to handle unforeseen situations without derailing your financial plans or taking on unnecessary debt. To start, have at least $2,000 saved for spending shocks, such as car repairs or health care costs. In the case of an income shock, such as job loss, aim to save at least 3 to 6 months' worth of living expenses in your emergency fund to ensure you're well prepared to navigate these challenges.

Saving in a cash management account can help you maximize financial growth while ensuring safety, security, and accessibility. High-yielding accounts offer a competitive APY (annual percentage yield), allowing your savings to grow faster. This is particularly beneficial for reaching financial goals faster. Moreover, the safety of your investment is paramount. Cash held in a cash management account may be eligible for FDIC or SIPC insurance, which protects your deposits up to certain limits, ensuring your money is safe. You're taking on the same amount of risk as you would saving in a bank account, so why not choose an option that may offer a higher APY?

To avoid additional debt and reduce existing debt, it's important to create a budget and stick to it, prioritizing saving, paying down any debt you already have, and cutting back on nonessential spending. Additionally, paying more than the minimum payment on debts, consolidating high-interest debt, and avoiding new debt can significantly help in getting back on track financially.

Debt can be beneficial—if used wisely. When you buy a house, you’ll usually take out a mortgage. If you take on debt, it should be as an investment in your future. For example, a house is an asset that can grow in value over time and allow you to build equity. But overspending and accumulating credit card debt usually means you’re not living within your means and can make it much harder to save for the future. If you must take on credit card debt, try to use a card that starts with 0% APR (annual percentage rate)—and make sure you have a plan to pay it off before the standard, higher rate takes effect.

When it comes to student loans, making the minimum payment is essential. While it's important to pay down your high-interest debt first, some people may prefer the snow ball method, or focusing on smaller balances to build momentum. Whichever approach you choose, they key is to stay consistent. Pay the minimum and see if you can pay a little more after that. Get a bonus at work? Put it toward your student loans or other debts you’re actively working to pay down.

Maintaining a healthy credit score is another key component of managing debt. Start building a credit history early and look for credit cards with strong benefits. You can use credit card points to pay off your card balance, and toward vacations, airfare, etc. The biggest mistake you can make is not paying the minimum payment on your loans. Not paying the minimum can destroy your credit score and lead to additional debt and fees.

Managing your finances will always be part of your life. Why not get good at it? Understanding how to budget, save, and invest can help you avoid debt, prepare for unexpected expenses, and achieve your long-term financial goals. We have tools and resources to help you navigate all of these, and in turn, move through life more easily.