What You Need to Know About Money Under 20
Most young people do not learn about personal finance in school, but developing strong habits during your teens and early twenties can help you set yourself up for a truly prosperous life.
This is the first article in the latest TwoCents series, What You Need to Know About Money at Any Age . For those of you who have graduated from college, stay tuned this week for more tips on what you need to know about money in your 20s, 30s, 40s, 50s and older.
Joleen Workman, Principal ‘s vice president of retirement and revenue solutions, says the most common reasons why people say they should postpone a financial decision is because it’s not “the right time” or they’re too busy. “Our research has shown that the real root of this decision dilemma is self-doubt,” says Workman. “Those who spend even a small amount of time studying personal finance issues are 75 percent less likely to delay making a decision.”
We can help with this. Everyone approaches money differently (and our situations, of course, are very different), but there are some general principles of personal finance that you should study before you leave home:
Learn how credit and credit cards work
Although people often think of a loan over credit cards, good credit can help you get higher rates on various types of loans and credit cards in the future, which can be a boon when you are looking to buy a house or car. …
Credit cards are just one of the tools to achieve great results . While it makes sense that young people might be wary of them – the US credit system is meaningless and very punitive , and the average American has an average balance of $ 6,375 on Experian , bringing in even more interest – but if you use the card correctly. you will see how useful it is (and no, a debit card is not the same thing and will not help you increase your credit). Plus, the increasingly generous rewards make some cards insanely beneficial for money backs or travelers.
First, of course, you never want to spend more than your limit (more on that in a second), and definitely not more than you can afford. You should aim to fully redeem your card by each due date. Making small payments over the course of a month can make this easier, and sending the balance by text or email can help you speed up your spending. First of all, if you think of your card as a tool for your financial future, and not as a crutch when you cannot afford something, you should be fine.
Your FICO rating, the most widely used credit rating, will be a number between 300 and 850 (in most cases), the higher the better. It is structured like this:
- Payment history – 35 percent . The most important factor affecting your score is the timely payment of your bills. That means your credit card is yes, but student loans, utilities, housing payments, and even newspaper subscriptions can all hurt your score if you are late. If there is anything that you take away from this article, then it should be this: always pay your bills on time, even if it’s just the minimum payment . “You don’t want your credit reports to be late,” says John Ganotis, founder of CreditCardInsider.com . “He can stay there for up to seven years and it will be much more difficult to get approval for loans and credit cards.”
- Credit Use – 30 Percent : This is how much of your available credit you are using at any given time. For example, if you have a $ 1,000 limit and you billed $ 300, the utilization rate would be 30 percent. By the way, most experts advise against spending more than 30 percent of your limit in one go to get the maximum points. That and payment history are the most important factors by a wide margin, so pay attention to them.
- Credit history – 15 percent: How long you had open accounts and when was the last time you used them.
- Mixed loan – 10 percent: Different types of credit accounts that you have opened.
- New loan – 10 percent : or how often you apply for new cards / loans and when your last accounts were opened.
You are eligible to receive one free credit report per year from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can get them from Annualcreditreport.com or from one of the many financial apps that now offer credit monitoring services (your bank may also offer you free score updates).
If you have zero credit, some banks offer student credit cards to help you score points. You can also apply for a secured card that is backed by money that you have already deposited with the bank. In other words, there is no way to exceed your limit.
Alternatively, if you have the option, consider asking your parents if you can be added as an authorized user to their credit card. “As long as you trust your parents and your parents trust you, this can be a great way to start building your credit history without scrutinizing your credit reports,” says Ganotis. “It takes time to build up a good credit history and credit rating, so starting early can go a long way down the road.”
Track your expenses
Okay, I’m not going to tell you to grab a pen and paper and mark how much you can afford to spend on certain categories each month (although that’s not a bad idea). But you should at least keep track of your expenses so you know where they are going and how much you have left.
There are several ways to do this. Marketers want me to believe that all of you youngsters love to use apps , and there are a few good ones I can recommend: Mint , Clarity Money , Digit, and You Need a Budget are all solid options. You can also use Google Sheets or Excel, or just a notepad and pen.
As I mentioned above, send you text messages or emails every day with your bills so you know how you are doing. Once you get into the habit of knowing where your money is going, you can easily choose spending patterns that you can improve, or completely cut some costs.
Be careful with student loans
For many students, taking out college loans is just inertia. There are no other options, and college is always a smart investment, right?
Well, it’s not like that. There are other options. Tons of scholarships are available, as well as cheaper two-year schools and tech schools. Depending on what kind of career you want, you don’t have to go to an expensive four-year college.
Think: The median balance of 2017 graduates at the time of graduation was $ 39,400, and the monthly payments averaged $ 351. You will most likely be paying back your loans within 20+ years. Do you know how long 20 years lasts? If you’re the target age for this article, that’s longer than you’ve been alive. Really think about this commitment to pay out over $ 350 a month for more years than you were alive. This is a lot of money, and for many it is a struggle. The rates of default and deferral are high and can harm your financial health in general for decades.
Okay, back to reality. If you are going to take out loans, understand what you are actually signing up for. Complete the FAFSA and learn how to decipher financial aid options . First of all, exhaust the possibilities of your federal loan . These are loans funded by the federal government and have more protection than private loans (offered by banks and companies like SoFi ). They can also apply for forgiveness , whereas private loans cannot. Take out private loans only as a last resort.
You will also want to know whether your loans are subsidized or unsubsidized: interest is charged on unsubsidized loans while you’re in school, and on subsidized loans – not, while you are still a student. And it can save you tons of money in the long run.
There are a few other important things to be aware of: you don’t want to borrow more than you need each year (no matter how tempting it may be to invest that loan in a nicer apartment during the school year); try to work while you study so that you can make payments immediately after graduation ; understand all of your repayment options because your school may not offer the one that works best for you .
When you graduate, do not hire third parties to pay for you – this is most likely a scam. As the Department of Education becomes more friendly to predatory commercial education companies and simplifies supervision of credit institutions , you will need to be careful about your payments (and make sure they are accurately recorded).
Finally, beware of impeccable sales practice.
“When I looked for colleges to go to, the admissions staff who attended our school seemed like really good people. They joked about the latest movies and told us how fun college would be, but none of them mentioned the cost of school, ”says Travis Hornsby, founder of Student Loan Planner . “Ten years later, I realized that a university admissions office is exactly like a used car park. The cost is negotiable, you can and should count on scholarships, especially if you have an above average GPA and distortions are likely to be made. If you don’t have a clear idea of what you want to do in your life, go to a cheaper public university. “
Create a High Yield Savings Account
You undoubtedly have a checking and savings account by the time you graduate from high school, but you should take the time to reflect on your goals and open a high-yield savings account to help you achieve them.
As the person who mostly spent my teenage paychecks as soon as the money arrived in my bank account, I speak from my own experience when I say that I would like to save at least $ 20 for the payout period. It probably wouldn’t make a significant difference in terms of capital accumulation, but it would help me develop the saving habit, which I still struggle with many years later. Many people cannot save money naturally, but the sooner you start doing it, the easier it will be.
Consider opening a high-yield online bank account like Ally or Bank of the Internet and set up a direct deposit or transfer from your check every month or week. In some cases, you can name your account, which can help you save money for your purpose .
That said, interest rates are still pretty low, even for high-yield accounts. So don’t count on interest – much more important is how much you save.
Beware of fees
Chances are, you don’t make a ton of money in high school and college, and if you’re not careful, ATM and bank fees can eat up most of what you make. When you open your high-yielding savings and checking accounts, look for a bank with a wide ATM network (especially near places you frequent and on your campus) that reimburses external fees if you need to use the 2 am shady wine cellar machine for energy drinks and snacks while studying.
Your bank probably offers a student checking account that will have lower monthly minimums than standard accounts. If you are comfortable doing all of your online banking, then there probably won’t be any minimum monthly requirements (and small percentage) for an online account either.
Finally, disable overdraft protection. From experience, no matter how carefully and scrupulously you track your spending, you miss a time or two and exceed your target balance. Overdraft protection will allow you to complete this transaction, but you will have to pay up to $ 40 .
Find out what to do first
One of the hardest things about being young is that most of us don’t yet understand who we are and what we really like. We just want to fit in. And the device is very expensive. For example, in high school, I wanted my best friend’s T-Mobile Sidekick (laughs) more than anything, but the Sidekicks were expensive. I was stuck with a dark blue Verizon flip phone that could barely send and receive text messages. She could go to Facebook and download music anywhere and anytime, and I could, well, okay, send emoticons. : /
I never got this Sidekick, but it worked out for me (for the most part). This is one of many silly examples, but the early realization that you can’t always get what you want (in fact, you rarely get) has served me well throughout my life.
In fact, learn to say “no” to things that really do not matter, will be one of the most important lessons that you can extract.
“It’s easy to get carried away with spending money when you’re just starting to enjoy your own income and independence, but learning to say no to yourself is important,” says Tina Hay, CEO and founder of Napkin. Finance, personal finance site. “Use your spending choices as a chance to express your values. If you are a serious foodie, then you may have a higher budget at the restaurant, but you will spend less on clothes than your friends. If you want to travel the world while you are young, you may have to learn to live frugally. By saying no to one experience, you can say yes to others. “
But that goes far beyond cell phones, clothing, and restaurants. Yes, you are young, but it’s never too early to think about what you really want out of life. Is a four-year college right for you, or will you be just as happy starting at a less expensive two-year college and transferring later? Do you want to stay in your hometown after graduation or move to a new place? What is the cost of living there? How can you invest in yourself now ?
Thinking about all of these things ahead of time can help you figure out what your priorities are and how much money you will need to achieve them.
And that will lead us to the next installation of the book What You Need to Know About Money at Any Age .