So, you are going off to college or starting your career. Up until now you have relied on your parents to make most of your financial decisions. Now it’s time for you to work on becoming financially independent. Sure, Mom and Dad will still be there for advice (and maybe a few bucks if you are short!) but, you really need to stand on your own.
Navigating the world of finance can be daunting but I’d like to break it down into 3 categories: Saving, Spending and Debt.
You will notice that I put SAVING first. Sixty-seven years ago, when my parents married, they put money in envelopes and the first one was savings. No matter how much, you should try to save. First you want to save for an emergency fund. This is the money you may need for unforeseen events. You should also try to put away some money each week towards something you want - for example, concert tickets or some sporting event. This will help you not be tempted to use a credit card(debt) to finance something you want to do!
For those working, save in a retirement plan at your work for the long run. Many companies match some percentage of the contribution you make, so that’s a great return on investment! Through the power of compounding, you will see that if you put away $100 per month at the age of 18 until the age of 65, at a 7% rate of growth, you will have close to $400,000! And, if your employer matches your contribution, you will double it! These retirement plans allow you to be invested in different equity and bond funds. Looking at the investment choices and doing a little research on the funds will introduce you to the world of investing.
On the SPENDING side, create an annual budget. If you categorize your spending, you will start to see trends that may change your behavior! For example, if you spend $6 on a coffee drink three times a week, over the year you will have spent $936 on coffee! Maybe get your coffee at your local convenience store and only go once a week? Watching the trends will help you feel more confident when you decide to make bigger purchases!
The one area that comes as a shock are the deductions on your paycheck for taxes! This is a necessary spend item! You can calculate whether your salary after taxes meets your financial needs and savings goals. There are good calculators online that may help you with this. Once you know your net income, separate your spending into “needs and wants”. Only consider ‘needs’ as your day-to-day essentials that directly impact your quality of life, such as transportation and housing. All other expenses should be considered as ‘wants.’ Separating these two categories can allow you to adjust your spending and create more effective budgeting plans. You can cut back on your wants anytime to reduce your expenses without sacrificing your basic needs.
Finally, DEBT. Debt is not necessarily a bad word, but it can be a dangerous thing if not handled properly. For most of you a credit card will be the first type of debt you acquire. It’s often difficult to get a credit card until you have some steady income. The five components to a credit score are what you should know1:
- Payment History (35%)
- Ratio of Debt to Available Credit (30%)
- Length of Credit History (15%)
- Types of Credit Used (10%)
- Recent Searches for Credit (10%)
For young people working to get a credit card, some of these are hard to impact – like length of credit. So, my advice to you is to go to your local bank and get a “secured credit card” which is a credit card issued with a credit limit with the same amount of money you deposit in the bank to “secure” the credit. Once you obtain the card, make your first purchase! Then you should pay attention to the due date on the bill. Paying your credit bills on time is something you can control and will greatly impact your credit score as well as the interest you pay!
Check your credit score monthly. As your credit history evolves, you will be able to apply for a store credit card, which is generally easier to obtain. Use it and pay the bill on time. Before you know it, you will have enough credit to get a car loan or qualify to rent an apartment!
Most of all, educate yourself on financial matters. Managing your money isn’t always easy and there will be times when the budget gets away from you. The trick is to know what is happening and to adjust your behavior so you can get back on track. Every time you think about your financial future you build good financial habits that will help you avoid debt and to focus on the big things in life!
1. https://www.experian.com/blogs/ask-experian/how-to-establish-credit-as-a-young-person/
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