5 Money Lessons Young Adults Need To Know

Money lessons for young adults are far too often learned after we are no longer young – when poor decisions have us digging out of a financial hole later in life.

While it does seem like younger generations are more interested in financial intelligence than previous ones, there is still a lack of financial education in our schools and homes.

Parents are turning to the internet for help, which is great because there are more and more resources online to help teach kids about money than ever before.

Let’s go over some of the most important money lessons for young adults. This is stuff your kids should know before moving out on their own or if you are a young adult, this is for you!

To make it fun and more engaging (and because I’m in the military), I created a 5-letter acronym, COSTS, to show you these money lessons for young adults:

C – Compound Interest

O – Opportunity Costs

S – Salary Understanding and Negotiation

T – Think Reality vs. Perception

S – Set Your Own Dream

Let’s break these down…

C- Compound Interest

A recent financial literacy survey found, 40% of US adults don’t understand compound interest.

Compound interest is a powerful force when it’s working for you. Investing a small amount monthly, from a young age, can turn into thousands, if not millions, by the time you reach retirement.

It’s also important to understand how compound interest can work against you…

Student Loan Debt

Student loan debt hit $1.6 trillion in 2020.

While that number is mind blowing, you don’t have to be part of it.

There are several ways to get a degree without going into debt. These are only a few:

1. Invest for college – Whether you use a 529 plan, ESA, custodial account, Roth IRA, or municipal bonds, there are plenty of ways to get a good return on your money so that it can grow by the time the tuition payment is due.
2. Use scholarships – There are plenty of resources to find scholarships. When you’re in high school, you can think of applying for scholarships like a full-time job. Submit at least one application a week and this could be enough to cover the cost on its own.
3. Stay in your state – Fewer and fewer companies care about your degree and even less care where it comes from. You don’t need to pay twice the price to go to your dream college, unless you can afford it without the debt.
4. Work through school – According to studies, your grades will be higher if you work part-time while in school. You’ll also get a better sense of work ethic and best of all, you won’t have the debt.
5. Go into the military – While plenty of people join purely to pay for college, I don’t recommend that if it’s the only reason. The military isn’t an easy path, but if you’re also interested in serving your country, it’s a way to pay for college that often goes unmentioned.

Student loan debt is one of the main forms of debt crippling Americans all over the country. Once you understand compound interest, you can let your money work for you and stop spending on things like… degrees.

Credit Cards

This is the ultimate killer. Credit cards carry double-digit APRs. That means if you rack up a lot of debt and pay minimum payments, you may still be paying off those cards from your younger years when you hit retirement age.

Credit card debt compounds. You end up paying many times the price of whatever you bought if you’re not paying off your card, in full, every month.

Again, let your money work for you. Don’t let credit cards work against you.

Car Loans

What’s another one of the main things keeping millions of Americans poor? Car loans.

The average car payment is over $500/month. If you simply invested that same amount for a lifetime instead of having car payments for a lifetime, you could retire a millionaire.

I’m not exaggerating. I’ll show you the power of compound interest.

How Compound Interest Works for You

Now that the doom and gloom is out of the way, it’s time for some good news.

Compound interest is your best friend when it’s working for you.

When you’re young, it doesn’t take much. In fact, just investing $160/month when you’re working your first job at 16 would be more effective than investing $500/month if you started when you were 30.

Let’s compare two people who start investing different amounts at different ages to see just how powerful compound interest can be.

We’ll use a base 8% return and a 60-year-old retirement age. If you wait until your 30 and started investing $500/month, by the time you’re 60, you’d have $679,699.27. However, just investing $160/month, starting from the average working age of 16 would surpass that number: $685,343.32.

While the specific numbers don’t really matter, the underlying point of understanding compound interest does, because with compound interest, you’re relying so much more on the interest than on your own money.

O – Opportunity Costs

There are opportunity costs in every area of life. Any time you do something, buy something, or spend your time on something, you’re sacrificing your ability to use it in another way.

Opportunity cost is the cost of what you can’t do, because of what you do, or what you did.

We all see this in daily life. It applies to the little things, such as not being able to buy a new TV because you went out to dinner a few extra times last month, but it also applies to the bigger picture…

For example, if you decide to take out a loan for higher education, you may be sacrificing tens of thousands of dollars that could’ve been used to build a business. That doesn’t mean college is a bad thing, but it’s good to put it into perspective when you’re deciding what you want to do with your life.

You can use opportunity cost in your favor to grow your wealth. It takes discipline, but it’s worth it.

S – Salary Understanding and Negotiation

When people think about negotiation skills, they often instantly go to things like buying a car or shopping in a flea market, but negotiation skills are important in general living and career progression too. 

First off, when negotiating your initial salary, or negotiating for a better one, there is a lot more to consider than money.

You have to ask yourself and your employer several questions to get an overall understanding of what your salary entails. Here are a few questions you need the answer to:

• What is the base salary?
• What are the bonuses on top of that?
• What kind of health insurance do they offer?
• What kind of life insurance do they offer?
• What are your vacation entitlements?
• What are the other perks or benefits?

After all of that, the most important question is: Do you really want to do this job?

It’s not all about the money and I mean that from the perspective of finding a job you love and from the perspective of considering all of the benefits. It’s not worth your mental health to get a job you hate just because it pays more.

And the benefits are a huge component. Good health insurance and high bonuses could be the decision maker. You don’t always have to settle for the initial offer you get. If you’re truly an asset to the company, you can sell yourself, which is exactly what salary negotiation is: selling yourself!

Don’t be afraid of not getting the job. Negotiate back and forth until you find the job that’s willing to pay you what you’re worth.

T – Think Reality vs. Perception

If there’s one thing I’ve seen in the military with young adults, it’s a false perception of reality. I’ve heard countless young servicemembers say they plan to get out of the military because they could “make way more on the outside.” Besides the fact that they make the military sound like prison (“the outside”), they can’t always “make more” in the civilian sector.

This takes us back to salary understanding, when these servicemembers fail to understand their total salary. With health insurance, life insurance, and job security, these young adults have a salary equal to almost double their actual pay.

This often comes down to who you take advice from. Why do all of these young servicemembers think they can make so much more outside of the military? Because they’ve heard that from their peers and their peers are usually the ones they end up taking advice from, whether they realize it or not.

Are you taking advice from whoever happens to be around you or from people who actually have what you want?

Perception comes from what you perceive in your general vicinity (usually without having to try). Reality has to be sought out.

Make sure you’re actively seeking out realistic outcomes when making important life decisions like career choices, retirement planning, budget planning, and investing.

S – Set Your Own Dream

Live your own dream, not the American Dream. The American Dream has caused millions of people to put themselves in a tough financial situation. It’s now common knowledge that the Joneses are broke, so stop trying to keep up with them.

The American Dream of having a nice house, 2 cars, and 2.5 kids by a certain age is leading to high mortgages, those crazy car payments we talked about earlier, and just general debt-ridden lifestyles.

Live your own dream. Set your own path.

I don’t recommend being normal, because being normal means being in debt, living paycheck to paycheck, and not having enough money to retire.

You are the only one who can create your path in life. You’re in charge of your own career, your own future, your own life.

Having a plan is key, but again, be careful who you’re listening to when you’re making this plan. Everyone’s an “expert” and willing to give advice, but you don’t want to live like everyone. You want a more abundant life. You wouldn’t be reading this if you weren’t looking to better yourself.

So be better.

By Kalen Bruce of Freedom Sprout

Kalen is a financial coach, author, and the founder of Freedom Sprout. His new book, Intentional Children, helps parents raise money-smart kids. As a father of five, he believes children need financial literacy now to avoid financial struggles later. He’s written over 1500 articles, which have been featured all over the web, on outlets such as: Yahoo Finance, CNN Money, and The Penny Hoarder.