Every now and then I hear from my cousin and we talk personal finances. He’s in his second year of college, but he still doesn’t know what he wants to do with his life. He works a little, but only part time for an hourly wage. Ultimately, he’s adrift and has no clue that some of the most important financial decisions of his life have already passed him by and he’s only a few years away from many more.
Young adults have it tough. There are a number of important financial decisions to make between the ages of 18 to 25. The worst part is that most young adults aren’t equipped to make those decisions. If I could go back in time with my cousin, I’d give him advice on three key financial decisions that young adults need to make.
The first (and perhaps most critical) decision any young adult will make is whether they should go to college and if they go, what degree should they get.
Research has shown that the high cost of tuition is impeding college graduates’ ability to out-earn high school graduates. Additionally, those who do not obtain a degree have less earning potential than if they had never started a college program in the first place.
Successfully navigating college will mostly be about lowering the costs by taking advantage of financial aid, grants, scholarships and low-cost tuition from community college or state schools. If you can minimize your tuition costs, then you won’t have to worry about earning a large starting salary.
Unfortunately, there is no “one-size-fits-all” answer to whether you should buy or rent a home. Most young adults should probably buy a home so long as mortgages remain the same or lower than rents.
Owning a house allows you to fix a large portion of your housing costs. You also get to avoid rent inflation while making money off of real estate appreciation. For these reasons, it’s important to consider housing situation early in life. If you are going to buy a home, you’ll get the most value the longer you own a home.
However, you need to be careful about the market you are buying in. Many young adults were hit hard during the recent housing bust. There are some markets where home prices are so much greater that local rents, that buying isn’t practical.
I know that retirement is decades away for young adults. However, it’s important that young adults start saving as young as possible.
There are only two ingredients to building up a retirement nest egg: time and money. The good news is that you can substitute one for the other. If you don’t want to have to put a lot of money into a retirement account every paycheck, you can opt to save longer.
The temptation is to start saving for retirement when you feel like you have extra money. Instead, it’s best to begin as young as possible. You don’t have to put a lot of money into an account to grow a large sum 40 years down the road. Delaying will only mean putting in a larger share of your paycheck later.
There are no easy answers to the questions above, but avoiding them altogether will hurt your finances for years. If I could give you one more piece of advice, it would be to start a strategy for each of the three. The sooner you tackle these issues, the better off you’ll be financially.
JP is an MBA and works in finance. He is the author of the blog My Family Finances where he writes about how families can better manage their money and budgets.