Pick This, Not That: Best Financial Products for Young Adults
The financial services industry offers a dizzying array of products claiming to help them reach their goal of a prosperous adulthood, but which products will really do that and which ones will just enrich the company selling it? WalletPop talked to experts to find out what young adults really need when it comes to financial products and what they should leave behind.Pick This: A Bank or Credit Union Checking Account
Not That: A Prepaid Debit Card
You might have started a savings account as a kid, but if you don't have one, now's the time to get friendly with a bank or credit union and get a checking account so you can write checks for rent and other bills. If you don't already have a relationship with a bank, or if your parents don't recommend theirs, shop around. Ask for information about minimum-balance fees, out-of-network ATM fees and monthly maintenance fees. Ideally, you want to find a financial institution where the fees for all of these are zero. Our experts recommend checking out local credit unions, since these often have lower fees than banks.
If you're worried that you won't be able to control or keep track of your spending, turn down the institution's offer of overdraft "protection," which could cost you close to $30 every time you spend more than the amount in your account when making a debit purchase. (Keep in mind, though, this doesn't protect you from bounced checks or automatic withdrawal overdrafts.)
Prepaid debit cards, although they promise to function just like a bank or credit union deposit account, have some drawbacks in terms of consumer protections. They also tend to be much more expensive than checking accounts, with monthly fees and charges for activities like checking your balance or speaking to a customer service rep that are usually free at banks and credit unions.
Pick This: A Low-Limit Credit Card With a Low APR
Not That: A High-Limit Card With All the Reward Bells and Whistles
"I think the challenge for these folks is entering the world of unsecured credit without choosing the wrong product," John Ulzheimer, president of consumer education at SmartCredit.com, says of young adults entering the credit card market. While some young people may have had student credit cards or been added as an authorized user to their parents' cards, new regulations restricting credit card offerings to youth mean that today's high school and college students will most likely be starting off with a smaller credit footprint than their predecessors.
Ulzheimer says that at least initially, you should ask for a card with a modest credit limit and resist the urge to take all the credit a company is willing to offer unless you're certain you can use that card without abusing the limit. "It's not the credit card company's job to take care of your debt. That's all on your shoulders," Ulzheimer points out.
In addition to a modest limit, young people should search for cards with low fees and interest rates rather than gravitating toward the flashier reward cards. "Rewards programs are heavily subsidized by the interest rates and fees," Ulzheimer points out. While the idea of earning travel points might be nice, stick with a low-APR card in case you have an emergency and need to revolve a balance while in your lower-earning years.
Pick This: A 401(k) or Roth IRA Containing No-Load Mutual Funds, Index and/or Structured Funds
Not That: A Retirement Account Containing Actively Managed Funds
All of our experts agreed that your 20s are the best time to start investing. While you don't have a lot of extra cash to throw around at this point, investing even a small amount has two big benefits: First, you'll get into the habit of putting away money toward your retirement, despite how far-off that may seem in the present day. Second, even a small amount will grow over time, and the longer it's in an investment account, the more it will grow.
Experts say if your employer offers a 401(k) with matching funds, that's your best bet. It's essentially free money, so it's worth skimping a little on your day-to-day expenses to get that. If you don't have the option of a 401(k) plan at your job, or if you've done your research and don't like the financial offerings you can get through it, then it's time to consider a Roth IRA. Unlike a 401(k), the money you put into a Roth IRA goes in after taxes, so you don't get the tax break you'd get with a 401(k), but on the plus side, you won't have to pay taxes when you withdraw the money decades in the future.
"I'm a firm believer in index and structured funds vs. a more actively-managed fund," says Don Chambers, author of Money Basics for Young Adults. Actively-managed funds can command higher fees, and they don't always yield better returns than their cheaper counterparts. Plus, if you're not an investment expert, learning the ins and outs of the investment marketplace can be practically a second job, which probably isn't a burden you want to take on during a time in your life when you might already have a second job. That said, it's safer for you than for someone a generation older to invest in riskier asset classes like small-cap funds, emerging markets and value stocks, since you have plenty of time for any loss to reverse itself before you need to access your money.
At the very least, if you don't think you can lock up your money for an extended period in a 401(k) or other retirement account, open a money market account. This lets you earn a better rate of interest than an ordinary checking account but doesn't penalize you for withdrawing it or closing the account if you're saving for something like emergency medical expenses or a down payment for a house.
Pick This: High-deductible Health Insurance
Not That: A Pricier Plan, or Insurance to Cover the Deductible Gap
Sure you might be healthy now, but something as mundane as a broken arm could derail your financial stability for years. Health care bills are a major cause of bankruptcy, and our experts say it's just not worth the risk.
Since you are young and most likely healthy, though, you might be a good candidate for a higher-deductible plan. The important thing to remember here is to sock away enough money to cover that deductible if you need it. Steve Vernon, a retirement educator and president of Rest-of-Life Communications, discourages young adults from purchasing supplementary insurance that purports to cover the amount of the deductible, though.
"There's a secondary market selling insurance to cover the deductible, but these usually aren't worth it," Vernon says. "Just save up toward that deductible. Usually what happens with these fill-in policies is the premiums would equal your deductible, and if you don't get sick, you have the money."
Pick This: Renter's Insurance
Not That: Going Without
You might not think your stuff is worth all that much, but if you're in an apartment building and another tenant starts a fire or floods the bathroom, you'll have a much more difficult time replacing everything if you don't have insurance. Before shopping around, check with your car insurer first: Some insurers will give you a discount if your car is insured with them, too.