The old sayings about young adults relying on ramen noodles, roommates, and sometimes relatives to make ends meet are clichés for a reason. It’s always been tough to stretch an entry-level salary to cover rent, utilities, groceries, and other essentials. However, as the oldest Gen Z members reach their mid-20s, economists note that today’s young adults face higher expenses and fewer resources compared to previous generations.
High rents and student loan debts particularly hinder new college graduates before they even start their careers. “Obviously, both of those eat up a huge chunk of anyone’s budget,” says Ross Mayfield, an investment strategy analyst at Baird. “Every generation has its own challenges, but those are two massive hurdles for younger investors.”
Getting out of debt, saving money, and even building wealth is possible for Gen Z, but financial experts say it requires a strategic approach. “The biggest thing here is thinking about your strategy comprehensively, rather than in silos,” says Anthony H. Williams, founder of Vivid Advisory.
Here are the top five pieces of advice from experts for young adults:
Save a Few Bucks
Building an emergency fund should be every young adult’s first financial goal. With the average credit card interest rate above 21%, even a small setback like an unexpected car repair can quickly become a major budget issue.
“The first thing to focus on is a small emergency fund,” says Steve Matejka, chief operating officer of Valley Strong Credit Union. For those just starting out, a $1,000 target is enough to cover most common financial emergencies and is a realistic goal for young adults on tight budgets. Longer-term, aim for an emergency fund that can cover two to three months’ worth of living expenses in case of job loss.
Use Buy-Now-Pay-Later Sparingly
Despite their popularity, financial experts urge caution with buy-now-pay-later (BNPL) services like Affirm and Afterpay. If you use BNPL for everyday purchases, those small amounts can quickly add up and drain your budget.
“BNPL tends to lead to more BNPL,” says credit expert John Ulzheimer. Using installment payments for everyday expenses can become a hard habit to break, and keeping up with multiple payments can be a hassle.
Another reason experts are wary of BNPL services is that, even if you use them responsibly and pay them off diligently, they don’t help build your credit. While timely credit card payments are reported to credit bureaus and help establish your creditworthiness, most BNPL companies don’t report your activity.
Build Credit Responsibly
Ulzheimer notes that many Gen Z members, possibly due to watching their parents struggle with credit card debt, avoid credit cards entirely.
“Credit avoidance is a problem,” he says. While well-meaning, this approach prevents you from building a positive credit history. Lenders need to see a good track record of on-time bill payments before offering you the lowest rates on credit cards, car loans, and mortgages.
“It’s good to avoid problematic debt, but not having any credit cards out of fear is an overreaction,” Ulzheimer says.
Take the Match
If your employer offers matching 401(k) contributions and you don’t take advantage of it, you’re missing out on free money. “At the bare minimum, take advantage of the match,” Williams advises.
At this age, you benefit from decades of compounding growth over your career. “Investing is a long-term game. Missing out on compound interest while you’re younger can be detrimental,” Williams says.
If you’re not familiar with investing, keep it simple with index funds, which are foundational portfolio building blocks. “Index funds generally outperform other investment strategies over time,” Matejka says.
Consider a Roth
Early-career retirement savers benefit most from Roth IRAs and 401(k)s, which are funded with after-tax contributions. If your job offers a Roth 401(k) or if your income makes you eligible for a Roth IRA (less than $161,000 for tax year 2024 if you’re a single filer), contributing to one offers two advantages.
While you pay income tax on money going into a Roth now, you’re likely paying a lower marginal tax rate than you will in a decade or two when your earnings are higher. Plus, your money grows tax-free. Qualified withdrawals in retirement aren’t taxed either.
“The power of compounding returns growing tax-free is a true benefit,” Matejka says.