Financial planning for young adults to consider

As young adults begin their journey to personal and financial independence, there are several strategies that families can use to help them develop strong financial habits. Thoughtful financial planning for young adults starts with building financial literacy and creating successful saving, budgeting and investing behaviors.

While financial literacy can take time to develop, key concepts such as savings vehicles and planning documents can open the door to long-term benefits. Following are several time-tested strategies to help establish a strong financial foundation.

Compound interest builds wealth for young adults

One of the most important principles in investing is compound interest, the ability for earnings to generate additional earnings over time. Starting early and saving consistently can significantly increase results over time. For example, a $10,000 investment at age 25 could grow to more than $70,000 over 40 years at a 5% annual return.

Because growth builds on itself over time, even small contributions made early can have a meaningful impact. This makes compounding a powerful and often underappreciated driver of long-term financial success.

Manage debt

The reverse of compound interest is the financial impact of debt, an important consideration in financial planning for young adults, which can slow financial growth just as compounding can accelerate it. The average American holds roughly $104,755 in debt¹. While some types of debt may be necessary or even beneficial, such as student loans or a mortgage, high levels of consumer debt can limit the ability to save and invest.

Reducing debt can free up cash flow and create more opportunities to build long-term financial stability. The less income committed to loan payments, the more can be directed toward saving and investing. Many younger adults are beginning to take steps in that direction. Millennials, born between 1981 and 1996, saved an average of $12,004.87, while Gen Z, born between 1997 and 2012, saved an average of just over $6,160².

Retirement funds for young adults to consider

Roth IRAs

When a teenager or young adult lands their first summer job or paid internship, parents might consider funding a Roth IRA in their name to match the child’s earnings. Contributions can help establish long-term investing habits while allowing earnings to grow tax-free over time.

Contribution limits allow individuals with earned income to save several thousand dollars annually in a Roth IRA³. For example, if a young adult earns $3,500 over the summer, they can contribute up to that amount. Regardless of the contribution level, a Roth IRA offers the potential for decades of tax-free growth and provides an opportunity to build sound money management habits.

Employee benefits

Many companies offer favorable benefits to employees, like an employer match in a 401(k) plan or Health Savings Account (HSA). Young adults should understand the advantages of participating in a 401(k) program, especially if a Roth option is available. Another option may be a Health Savings Account, which allows for pre-tax contributions and may include employer contributions. While typically paired with high-deductible health plans, unused funds roll over from year to year and can accumulate and grow tax-free when used for qualified medical expenses.

Estate and incapacity planning

It may seem unnecessary to discuss the idea of estate planning with a young, healthy adult. However, without some essential documents, family members may not be able to help in an emergency. This could be an unfortunate issue when your child is legally an adult and attending college.

An estate plan outlines how your assets are distributed and who can make decisions on your behalf in periods of incapacity. Failing to write a will or power of attorney means the default laws of your state of residence will determine those outcomes.

A basic estate plan includes several key documents:

Financial power of attorney

This document allows a young adult to appoint a parent or other trusted adult as agent to access financial information and manage financial matters if needed due to illness, incapacity or extended absence.

Healthcare power of attorney

Similarly, this document allows a young adult to designate someone to make important healthcare decisions and access healthcare information if they’re unable to do so.

Last will and testament

A will allows a young adult to appoint an executor and choose beneficiaries instead of relying on state intestacy laws.

Beneficiary designations

A simple strategy is to ensure beneficiary designations are in place for accounts where that option is available, including retirement accounts, life insurance policies and most bank and brokerage accounts. These should be coordinated with the overall estate plan to ensure alignment.

Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts

Many parents use Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts to hold assets for their minor children. These accounts have rules that vary by state, but generally allow a parent to act as a custodian until the child reaches their state’s legal age of majority.

Once the child reaches the legal age of majority, the assets become their sole property. It is important to ensure they are prepared to receive the funds and to consider appropriate beneficiary designations where applicable.

Getting the advice you may need

Teaching young adults the fundamentals of saving and investing for their future can help them on a path to financial security.