As young adults begin their journey to personal independence, there are several strategies that families can use to help them develop a firm financial foundation. Developing financial literacy is crucial to creating successful saving and investment habits.
While financial literacy can take time to grasp and develop, key concepts such as savings vehicles and planning documents that are readily available to young adults can open the door to long-term benefits. The Huntington team can help you determine which of these options are right for your situation. Following are some of the time-tested strategies to consider to help establish a firm financial foundation.
The magic of compound interest
Albert Einstein is often quoted as having said that "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it."
To be sure, rule one is to start saving early and regularly. An investment by a 25-year-old of $10,000 will grow to $70,400 in 40 years at just a 5% return. Compound interest is perhaps the foundational role of investing, and one that is often overlooked and certainly under-appreciated.
Manage debt
The reverse of compound interest is the financial drain of debt, which drags financial growth as much as compound interest enhances it. The average American carries more than $90,000 in debt‡. To be sure, certain types of that debt are either unavoidable or even beneficial, such as college tuition and loans for homes. But most consumer debt is worthless. While we recognize the need for some debt, saving for the future remains crucial. And the basic truth is that the less cashflow committed to making loan payments, the more can be invested.
The good news is many members of younger generations are doing just that, with Millennials (born between 1981 and 1996) having saved $9,299 in 2023, followed by Gen Z (born between 1997 and 2012) who on average saved more than $6,400 last year†.
Retirement funds
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. Most individuals including young adults are permitted to contribute up to $7,000 per year into a Roth in 2024§.
However, it’s essential to remember that in most cases, they’re not permitted to contribute more than their earned income. That means, as an example, that if your child made $3,500 over the summer as a lifeguard, they would not be able to contribute more than that amount into a Roth IRA. Regardless of the amount contributed, a Roth IRA will allow for decades of potential retirement growth, and provides a platform to help educate the next generation on prudent money management.
Employee benefits
Many companies offer favorable benefits to employees. Every young adult should learn the advantages of participating in a 401(k) program–especially if a Roth option is available. Another option may be funding a Health Savings Account, which is an investment account for pre-tax dollars sometimes matched to certain amounts by employers. Though integrated with high-deductible health plans, unused funds roll over from year to year and accumulate earnings on a tax-free basis 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.
An estate plan outlines how and to whom your assets are distributed when you die and who you want to have as a substitute decision-maker in periods of incapacity. Failing to write a Will or Power of Attorney means the default laws of your state of residence will decide those points for you.
A basic estate plan will include a few key documents to outline your wishes:
Financial power of attorney
This document allows a young adult to empower a parent or other trusted adult as agent to access financial information and to manage financial matters if needed due to illness or even extended absences, like trips overseas.
Healthcare power of attorney
Similarly, this document allows a young adult to designate someone to make important healthcare decisions if they’re unable to do so. This also includes granting access to healthcare information.
Last will and testament
A Will allows a young adult to appoint their desired executor and to choose beneficiaries instead of relying on the state’s default provisions.
Beneficiary designations
A simple strategy for any young adult is to make sure beneficiary designations are added to accounts where that option is available, which typically includes most retirement, bank, and brokerage accounts. It is important to ensure these designations are coordinated with the overall estate plan so the parts all work together, and not against each other.
UTMA accounts
Many parents use Uniform Transfer to Minor Accounts (UTMA) to establish initial accounts for their minor children. These accounts have rules that vary state to state, but many jurisdictions allow a parent to hold funds in an account as a custodian until the child reaches the age designated by statute. These UTMA designations can be added to traditional bank accounts as well as many investment accounts. Be aware that UTMA accounts always terminate once the child reaches the stated age (usually 25 or earlier), and the funds then automatically become the sole property of the child. Be sure that they’re ready to receive the funds and consider adding beneficiary designations where appropriate.
Getting the advice you may need
Teaching young adults the fundamentals of saving and investing for their future may help set them on a path to financial security. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.
