As a young adult, you were probably told by parents, teachers, and well-meaning relatives to “save early”. The idea is that if you start young, even small amounts will grow into big wealth over time. It sounds smart, and in theory, it is. But in reality, focusing on saving alone can be shortsighted and even detrimental to your financial health. It overlooks the financial struggles young people face today, like sky-high living costs, student debt, and stagnant wages. Saving is important, but it’s not a solution for everyone. Here we’ll discuss why the classic “save early” advice might actually be setting young adults back and what smarter steps to take instead.
Ignores The Struggle of Young Adults
Often, young adults in entry-level jobs barely make enough to cover rent and other expenses. In many cities, there is a rent crisis, where demand is high and supply is low. This drives up the price of renting to the point that many young adults can’t afford the cost. In many cases, young adults are paying more than 30% of their income on rent, making them rent-burdened.
Additionally, many young adults are carrying debt, especially if they are still paying student loans. Approximately 42.7 million Americans have outstanding federal student loan debt, which amounts to over $1.6 trillion. Student loan payments can be crippling, and eat up a large portion of a young adult’s salary. There may not be even $50 a month left over to put toward savings.
Ignoring these essential financial obligations and just focusing on savings could be detrimental to a young adult’s financial health. You never want to ignore things like utilities, rent, loan payments, etc.
Relying on Credit Instead
If a young adult focuses on building up savings, they may then rely on credit cards to cover expenses. In reality, the interest accrued on high-interest credit cards will be more detrimental than the low interest that is earned on a savings account. It’s much better to pay down a credit card that has a 25% interest rate than make 2%-3% on the money you put into savings.
A Culture of Guilt and Shame
Many young adults feel that they aren’t good with money because they are living paycheck to paycheck and not saving money. PYMNTS reports that 63% of zillennials and millennials and 59% of Gen Z consumers live paycheck to paycheck. Because young adults feel that they are behind financially, they may give up more easily on setting financial goals.
Better Advice
Instead of telling young adults to save early, we should focus on more realistic advice for their current financial situation. It may be better to encourage paying off debt to avoid costly interest payments. Young adults should also grow multiple income streams to get ahead financially if their first job isn’t paying enough. Focusing on building up financial literacy will also be helpful in the long run so that young adults have the tools needed to manage their money. For example, learning how to budget, without guilt or shame, is an important skill to learn. Then, young adults will be able to see if there is room in their budgets to save and invest. They will also understand when cash flow is just too tight to save.
Did you save early as a young adult? Let us know your experience with this advice in the comments.
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