tudent loans, credit cards, Roth IRAs, and 401K we’ve all heard these terms before but what are they and how do they help or harm us? You may be sitting back thinking I’m too young to be thinking about my credit score and future investments. The truth is that you probably should have been thinking about it sooner. In our youth, we lack access to a lot of things. One of those things is a means to establish a credit history early. 

When we don’t have a credit history it makes it harder to qualify for an apartment on your own or a car loan. A lot of young people open credit cards to start building credit without fully understanding the risk or responsibility. 

According to research the prime years for making smart financial decisions is around 53- 54. Despite that being the prime years to make financially informed decisions I don’t believe you should wait that long. Instead, You should become educated on what financial decisions to make and how to avoid making mistakes. 

In this article we’ll discuss:

  • The current economy and how it affects financial decisions 
  • The difference between making financial decisions in different stages of life 
  • Financial tips and tricks 

The current financial market 

As of June 2023, there has been a 4% increase in credit debit which equates to around 45 billion dollars. The average cost of a studio apartment is $1,600 a month. Most average students have a student loan payment of about $400 dollars. The cost of essentials is rising, which puts financial strain on the average person. 

More and more young people are graduating college and living at home because they can’t afford to move out. You may be thinking, “Well that's depressing, what do I do?” The first thing is we need to acknowledge that going to college, taking out student loans, and opening a credit card isn’t the best option with the current state of the economy.

 A graph that shows the decrease in disposable income and the flattening out of consumer spending.
Disposable income is on the decline, meanwhile spending is remaining constant. Image courtesy of Forbes. 

Instead, ask your parents if they can add you as a joint owner on one of their credit cards. It will still build your credit and establish a credit history without putting the financial responsibility on you. Our parents and grandparents are already established and most likely have more disposable income than we do. 

Obviously, not everyone can ask their parents to be a joint owner on a credit card but there are other decisions you can make. 

A new age of financial decisions

We need to be selective with how we spend our money and where we invest it. If you’re in your twenties, take time to research financial markets early. The reason we make poor decisions is because we aren’t informed. Another component of making poor financial decisions is not being honest with ourselves. If you know you're overspending then don’t open up a credit card until you’ve figured out a way to prevent overspending. 

Individuals who are 53-54 have had years to learn and understand financial markets. They have experienced debt and figured out how to get out of it. It’s important to note that older people grew up in a different generation. It was easier to save and establish yourself when you could rent an apartment for $500 a month. People who are now 53-54 have some of the highest salaries compared to other age groups. 

Take some time to research the financial decisions of the past to understand how to tailor those decisions to the current economy. Some advice isn’t acceptable anymore. For example, if someone tells you to buy a house instead of rent. The housing market is a seller's market right now. Interest rates are high and the selling price is almost double what it was prior to Covid. Depending on where you live it will be cheaper to rent for now. 

Make decisions that fit your circumstances. 

Graph of Average ad Median Savings by Age
Striving to save as much as you can is great but don’t feel behind if others have saved more.

Smart financial decisions you should be making 

Credit Cards 

If opening a credit card is unavoidable then utilize these tips:

  • Keep your credit utilization amount between 3-5 percent of the total balance (this is ideal and would categorized as excellent)
  • If you can’t keep it between 3-5 percent try not to exceed 10 percent (if you stay around 10 percent you’d have good standing
  • Try to have the lowest utilization amount on your statement date (the statement date is when your balance is reported to your credit card company)
  • Pay off your card every month 

High Yield Savings Account 

If you have short-term saving goals you should open a high-yield savings account. Most high-yield saving accounts have an interest rate of 4.35 percent compounded daily. As previously mentioned the housing market is expensive, so is renting. Having a high-yield savings account can help reach saving goals faster. Companies like Ally still allow you to withdraw money from your account if you need to. There are a lot of different types of high-yield savings accounts out there. Some have monthly fees if your balance is under a certain amount. Be careful and choose wisely. Some accounts to look into are:

  • Ally
  • Sofi
  • Bask Interest Savings Account

Roth IRA

Roth IRAs are great because you can deposit up to $6,000 a year and invest that money into low-risk or high-risk investments. The money is non-taxable and interest occurs. The earlier you start investing in a Roth IRA the better because your investment will have longer to gain interest. Despite 53-54 being the prime time to make smart financial decisions if you wait till then you won’t have any money for retirement. A Roth IRA is meant to be a long-term saving strategy. Once your money is put in ideally you don’t want to take it out. It is possible, but there is a fee associated with doing so. 

If you’re young and want to invest in a Roth IRA I recommend having an investment banker walk you through your first couple of investments until you get the hang of it. Also, don’t feel pressured to max out your Roth IRA every year. Invest what you can so that down the line you have less of a financial burden. 

Living below your means

We all dream about some financial goal we want to reach. Some may want to travel the world, others want to own a home or a fancy car. It doesn’t matter the financial goal you're trying to reach, the quickest way to reach it is by living below your means. Often in our twenties, we get our first high-paying job and we scale our life up to meet our salary. Instead of increasing your lifestyle, continue to live below your means to better set yourself up for financial freedom later on. 

I want to make it clear I’m not saying never eat out or don’t grab Starbucks when you want. I wouldn’t give up Starbucks to save money. I’m saying live at home or get roommates to cut down on rent costs. Instead of buying a new car off the lot, look into used cars. Try to thrift shop to save money. Get groceries from farmers' markets. There are small adjustments that can be made to cut your cost of living down by slighting. 

Image of renters versus owner by age demographic. 
The younger you are the more likely you are to rent and as you get older you lean toward owning. Image courtesy of RubyHome.

That's all the tips and tricks we have for making smart financial decisions!

Remember that it's never too early to start making the right financial decision. The reason older people make smarter financial decisions is because they learned from the mistakes of their youth. Instead of waiting until that happens, try to become educated now to minimize financial mistakes. 

The key to making any informed decision is evaluating your current situation and proceeding from there. Learn what your spending habits are and then plan accordingly. 

I believe you’ll make the right decision. I wish you luck on your saving journey!

Sep 29, 2023