Young adults are in a crucial transitional phase, moving from relying on their parents for financial support to achieving financial independence. During this period, they encounter financial decisions that can profoundly shape their future economic well-being. To empower young adults during this transition, it is vital to underscore the importance of financial literacy. By offering structured lesson plans for financial literacy, young adults should gain financial know-how, make smart decisions, and become more self-reliant in handling their finances.

As young adults dive into the whole money game, having their parents as their financial guides is super helpful. This article will explore the crucial aspects of parental guidance in young adults’ financial habits. It will emphasize the importance of instilling smart financial practices from a young age and providing guidance and resources for young adults to achieve financial independence.

The significance of parental mentorship

Financial independence marks the point at which a person attains financial stability. While adolescents tend to rely on parental support and late adulthood focuses on retirement planning, financial independence typically starts during young adulthood. As they move out of their parents’ homes and must manage their accommodation costs independently, attaining financial independence becomes a critical milestone for them.

A survey by the Pew Research Center reveals an interesting pattern concerning the financial independence of young adults in the United States. In the last 40 years, there has been a slight decrease in the proportion of young adults aged 18-29 who are “financially independent.” 

Most young adults in this age group receive financial assistance from their parents across various aspects of their lives. This assistance includes help with household expenses (e.g., groceries and bills), funding for education, support with rent or mortgage payments, and assistance with medical expenses.

The data highlight young adults’ dependence on financial support from their parents. It emphasizes parents’ vital role in preparing young adults for upcoming financial challenges. 

Parents serve as mentors, imparting financial skills and values like responsibility, budgeting, and a strong work ethic to nurture financially independent young adults. They also equip their young adults with essential tools for managing finances effectively in today’s complex world.

Financial challenge for young adults

As globalization expands and the financial services sector continues to grow, young adults face increasing pressure to make complex financial decisions. This highlights the critical need for financial literacy, as it equips them with the skills and knowledge necessary to handle financial decisions independently.

Drawing insights from the Pew Research Center survey mentioned earlier, it’s clear that there are various aspects of the financial challenges that young adults face. It’s important for parents to help young adults grasp and understand these facets.

Student loans

Due to the rising expenses of college or university studies, many young adults turn to student loans to fund their higher education. While these loans can provide access to education and valuable career prospects, they also come with financial responsibilities that can shape a young adult’s financial journey over an extended period.

A 2018 study revealed that approximately two out of every ten young adults opted for both federal and private student loans, while the remainder chose one of the two options. Among these borrowers, young adults who took both types of loans were more prone to experiencing delays in loan repayments, underscoring the challenges associated with student loan repayment. Furthermore, servicing these loans often requires a significant amount of income, affecting young adults’ ability to save and invest.

Employment and income

Young adults often find themselves in a situation where they possess limited work experience. It leads to them securing lower-paying entry-level positions. The initial low income earned from these jobs can pose difficulties in covering basic living expenses, let alone saving for the future.

In unexpected situations like the recent pandemic, young adults ages 18-30  face challenges in securing full-time employment or even lose their part-time jobs due to the lockdown restrictions. As a result, they experience income and job loss. Both of these losses affected their financial well-being, making it even more challenging for them to meet their financial needs and save for their future.

High cost of housing

Rent or mortgage payments can consume a significant portion of a young adult’s income. The quest for reasonably priced housing is frequently challenging, hampering their ability to save or invest. This situation often forces young adults to make tough decisions about their housing arrangements, such as sharing living spaces or delaying homeownership. 

According to the OECD report, young adults ages 20-29 are more inclined to reside in rented houses. It can’t be denied because of the escalating rent that increases in the open market. Meanwhile, the stagnation in investments in social and affordable housing is decreasing. Therefore, it is harder for young adults to access good-quality houses at reasonable prices.

Healthcare costs

The increasing expenses of medical treatment, health insurance premiums, and personal out-of-pocket payments can accumulate rapidly, especially when young adults do not have employer-sponsored health coverage. When unexpected medical emergencies or health issues arise, these costs can become a financial challenge, accumulating substantial medical debts.

According to a report by the Kaiser Family Foundation (KFF) regarding healthcare debts, it was found that around four out of ten adults in the US have medical bills. This data highlights the financial difficulties that can arise from healthcare costs, emphasizing the importance of financial preparedness and understanding in dealing with healthcare expenses.

Parents as financial role models

Parents play an important role in financial socialization, which is the process of transferring financial knowledge, skills, and attitudes to their young adults. Financial socialization is potentially influencing young adults’ financial behaviors and results. Parents’ role as mentors goes beyond mere instruction; it includes modeling financial prudence through their actions and decisions. Here is the role of parents in guiding financial independence effectively.

Setting a financial example

Parents serve as powerful role models regarding financial behavior. Those who modeled good financial habits and taught young adults about money were viewed as financial role models. How young adults perceived their parents’ values and attitudes also played a role in their learning experiences. These factors, along with parents’ financial behavior, influenced young adults’ satisfaction with money management and overall good financial practices. 

Open communication

Engaging in open communication and discussion about jobs and work during childhood can help young adults feel more sure about handling their finances. A study in India shows that adults who chatted about financial matters with their parents during childhood tend to be more financially stable. Therefore, it is recommended for parents to initiate a discussion about the value of money and financial behaviors in childhood.

Setting financial goals

Goal setting is like the ABCs of money matters. It’s a basic skill that helps young adults to plan and prioritize financial objectives. Parents can start this early by showing the importance of establishing clear goals. These goals may range from saving for college, buying a first car, or having some cash set aside for unexpected things. This early exposure to goal setting can provide young adults with a roadmap for their money journey and build a sense of financial independence.

Read more: Family Finance Planning at Different Stages of Life 

Money management education

Money management education can begin during the early school years by introducing the concept of allowance. An allowance can be viewed as an exchange relationship, typically commencing during adolescence. Youngsters are often required to fulfill their routine chores, excel in their studies, or exhibit other favorable behaviors to earn their weekly or monthly allowance.

However, it’s crucial to note that if an allowance is perceived as something a child is entitled to without any effort or responsibility, it could establish a pattern of financial dependence that is unlikely to encourage financial independence.

Moreover, by utilizing allowance, parents can encourage their young adults to engage in the practice of saving and investing. By giving lesson plans for financial literacy, parents can impart essential financial skills that can set the stage for responsible financial habits in adulthood

Read more: Savings: A Key to Unlock Financial Freedom 

In conclusion

In the role of “money mentors” for young adults, parents play a vital role in teaching financial literacy. This educational journey equips young adults with essential knowledge and skills for navigating the complex financial world they’ll encounter in adulthood.

Beyond practical skills, parents also share valuable life lessons on fiscal responsibility and the art of setting meaningful financial goals. This comprehensive approach lays the foundation for financial independence and resilience, enabling young adults to confidently face financial challenges and seize opportunities for growth.

If you would like to see more resources on early adulthood development, check out the Parenting Science Labs. The lab uses the research of the Institute for Life Management Science to produce courses, certifications, podcasts, videos, and other tools. Visit the Parenting Science Labs today.

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