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5 Smart Money Moves for Young Adults

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Financial advice is only useful if it's relevant to your own particular situation. The right move for someone twice your age may be totally wrong for you, while your best financial move may be completely inappropriate for someone else.

To reach as wide an audience as possible, we've spent the week looking at people in different age groups and coming up with tips for them to follow to improve their financial situation. After having given tips for retirees, near-retirees, and middle-aged investors earlier in the week, today's focus moves to young adults and their particular financial needs and challenges.

Just starting out
In stark contrast to those who are close to retirement, young adults have a huge number of short-term and long-term financial needs with minimal resources to put toward them. The biggest challenge that most people face as they start out in their careers is finding the best uses for your money. Especially if you've lived a frugal lifestyle throughout your college years, the temptation to splurge with your newfound paycheck can be almost irresistible. But with time on your side, anything you manage to save can have a much bigger impact on your future lifestyle than if you wait until later to address your long-term goals.

Finding the right balance is tough, but following these five ideas is a good place to start.

Idea 1: Get familiar with finances.
Millions of young adults come out of school with no knowledge of personal finance at all. If you're one of them, don't be embarrassed -- but don't accept your ignorance. Take steps to find out everything you need to know about money.

The Motley Fool's 13 Steps to Investing Foolishly are a good place to find out how to get started with the ins and outs of investing. For more basic advice on debt, savings, real estate, and taxes, the Fool has free resources to help you learn what you need to know. Either way, getting familiar with all the money issues that you'll face throughout your life will pay huge dividends for decades to come.

Idea 2: Address bad debt first.
It's an unfortunate fact of life that most young people now start adulthood with debt. For certain types of student loans, home mortgages, and other low-interest debt, paying down balances over time is both practical and prudent.

But credit card debt is another matter. Even after taking substantial losses during the financial crisis, big card-issuing banks JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Bank of America (NYSE: BAC  ) have all rebounded sharply due largely to falling credit card delinquency rates and high interest rates. There's no investment you can make that will dependably produce returns of 15% to 20% -- even shares of those banks' stock! -- but paying down high-rate credit cards gives you exactly that payoff. Take advantage of it.

Idea 3: Start small and build on saving.
When you're young, building a habit of saving is more important than the amount that you save. A good way to start is to save a tiny amount of your paycheck -- as little as 1% -- and put it into a 401(k) account at work or an IRA. Then, when you're fortunate enough to get a raise, boost your savings by half your extra pay. That way, you'll enjoy the fruits of your career success but also ramp up your long-term saving. It may seem insignificant, but later in life, you'll be amazed how much those little savings add up to.

Idea 4: Focus on your credit score.
It's hard to underestimate the impact that a good credit score has. Nowadays, credit scores aren't just about credit; insurance companies look at your credit report to determine the rates they charge you, and bad credit can even deter prospective employers from hiring you.

The easiest way to establish a solid credit history is to use credit responsibly. Whether it's paying off your student loans on time or getting a credit card and paying off the balance every month, things you do now to build your credit can save you thousands of dollars in the future.

Idea 5: Recognize your most valuable asset.
When you're young, the present value of your future earning power is the most valuable asset you own. Take advantage of training and development opportunities to increase your value both to your current employer as well as in potential future jobs down the road. The effort may not always pay off immediately, but you'll be surprised how often it comes in helpful down the road.

What's next
Tomorrow, we'll look at how you're never too young to learn about money. We'll close our series with money advice for kids and teens.

Once you get your credit card debt paid down, looking to invest in the banks that collected so much interest from you has a certain appeal. But banks have done quite well lately, with Bank of America's stock having doubled in 2012. Find out whether B of A is still worth buying by reading The Motley Fool's premium research report on B of A, in which top banking analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials Bureau Chief, give you the inside scoop on the bank's operations. Click here now to claim your copy, and as a bonus you'll receive a full year of FREE updates and expert guidance as key news breaks.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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