Financial Literacy for Young Adults

You’re fresh out of college and ready to begin the next chapter of your life. There’s a lot of exciting moments ahead of you as a young adult—but there’s also plenty of hurdles that will come your way.

Whether you’re starting a new job, paying off student loans, or moving out of your parents’ house, your early 20’s can be full of financial instability and stress. But by familiarizing yourself with financial literacy, you can be better prepared for success as a young adult.

Here is a guide to beginning this journey:

What is financial literacy?

Financial literacy is the idea of being competent and knowledgeable in different money management skills, which allows you to take personal financial matters into your own hands. Obviously there are some situations where you may need the advice of a professional, but for the most part, you should be capable of managing your accounts and making sound decisions.

This means being able to successfully take care of the basic necessities like moving money around from your paycheck, making loan payments, and maintaining a healthy budget. It also means being able to make tough, but important financial decisions for some of the large milestones of your life, like purchasing your first home or setting up a retirement plan.

Financial literacy is all about self-improvement and gaining knowledge, so it’s never too late to start, and there is always room for improvement.

Important milestones for young adults

Once you begin your adult life and find your first full-time job, there’s bound to be many other “firsts” for you along the way. While all of these milestones are specific to the individual, and some of them may not apply to you, others will and you need to be prepared for everything that gets thrown your way.

Here is a list of some important milestones for young adults, with a financial literacy tip or trick for each:

First car:

Once you start earning a steady paycheck, you may think it’s time to purchase your first car all on your own. So the question becomes, how much should you spend? The general rule of thumb is that you shouldn’t spend more than 15% of your monthly take-home pay. For this reason, you may strongly consider leasing your first car rather than buying. Not only is a monthly lease payment cheaper than if you were to buy the car, but you’ll be able to get a newer model and are only tied to a three-year contract in most cases. Even with a lease, you can still negotiate the price, and if you want to keep the car at the end of your contract, you can usually purchase it for the remaining balance.

Starting a retirement plan:

Although your retirement may seem like it’s decades away, you really need to start planning as soon as possible. If you plan ahead correctly, the money in your retirement plan should grow over time. This means that the earlier that you begin financing your retirement, the better off you’ll be in the long-run. The first step is to take full advantage of the 401(k) program that your employer offers. Ideally, you should be contributing between 10 to 15 percent of your paycheck, but if you can afford more it’s even better. At the very least, you need to be matching your employer’s contribution, which is usually between 3 to 6 percent. This benefit is like free money, so taking full advantage of this will help you out in the long-term.

Paying off debts:

Time is of the essence when it comes to paying off debts. The longer it takes you to make payments, the more the interest will compound—this means it will take you, even more, time and money to pay off your debts. The key to paying off debts is to create a realistic plan and timetable by evaluating your overall budget. It certainly can be hard enough to keep up with the minimum payments, but you really should try to pay off even more if you’re able to. Unfortunately, this means that you may need to place a firm grip on your spending habits. To make things a bit easier, you can follow different debt management plans like the debt snowball or avalanche methods.

Becoming financially independent:

There’s not a more freeing feeling than becoming financially independent from your parents. Many young people receive financial assistance from their parents throughout college, and even into young adulthood—that’s nothing to be ashamed of. But being able to go out and do things on your own dime is a source of pride and accomplishment for young adults. One of the most important steps you can take to become financially independent is to set goals.

What expenses are your parents covering? How will your budget and save to start covering those expenses?

Having honest and open conversations with your parents can help you create a plan and learn along the way.

Financial skills that young adults should know

In order to guide yourself through early adulthood and all of the milestones that come with it, you need to be well-versed in various financial skills. Being able to save, budget, and invest are all important facets of financial literacy.

Here is a list of some skills that should be the foundation of your financial decision-making as a young adult:


You’ve likely already learned how to budget from the time you had your first part-time job. However, as a young adult with more responsibilities, and more money, it’s time to establish a more in-depth budget. If you haven’t created a spreadsheet that breaks down your monthly income and various expenses by category, that’s step one. But you really should try to budget for several years into the future. This is the only way to prepare for larger expenses in your late 20’s, such as buying your first house. If you want to have enough money for a down payment, the time to start saving is now.


Once you’ve covered your monthly expenses and set aside part of your paycheck for a 401(k), you can start exploring other investments. It may be tempting to spend any additional income on your “wants,” but making the right investments is one of the best ways to grow your income and earn more over time. If you want to make more long-term investments in a retirement plan, you can invest in a traditional or Roth IRA.

The main difference between the two accounts is when you pay taxes on the money—a Roth IRA is for after-tax contributions and a traditional IRA is for pre-tax contributions. A Roth IRA is better for individuals who expect to earn a higher income later in life, making it the preferential choice for young adults. If you’re looking for more short-term investments, popular options include money market funds and short-term CDs.

Building credit:

Many young adulthood milestones are much more financially feasible if you have good credit. Having a poor credit score will lead to higher interest rates on loans, which could cause even more issues with debt. Sometimes, you could even be denied access to a credit card if you have a bad score. According to a poll on credit card usage, this is one of the main reasons why more than 1 in 4 young adults (age 22 to 30) doesn’t even have a credit card.

Luckily, it is possible to still access a financial account without a credit check. These types of accounts offer the perfect stop-gap to access banking features until you are able to build credit. As you start off young adulthood, two things are critical to building and improving your credit score: making your bill payments on time and paying off debt. If you can do these things routinely, you’ll be on the right path.

How to practice financial literacy

Now that you’ve learned a fair bit about financial literacy, and how to apply these skills to your personal finances throughout young adulthood, it’s important to remember that you should always be practicing. Financial literacy is a mindset.

It’s all about gaining knowledge.

Take what you learn and apply it, but also never stop learning. Expand your knowledge and skillset by staying up to date with industry trends. Read books and listen to podcasts from thought leaders in the finance industry. Take your experiences as a young adult and carry them with you into your 30’s and beyond.

Never settle for your current financial wellbeing; there’s always room for improvement.