Strength in Numbers: Financial Tips for Young Adults
Finances often do not top the list of pressing interests but being financially strong lets us focus on the things we are interested in, like taking classes or attending college, starting a hobby or just going out with friends.
For good or for bad, money matters and it is often needed to maintain many aspects of our lives. Not having enough or getting into serious financial trouble can cause a significant amount of stress and prevent you from accomplishing all that we want in our lives.
It is important to know the numbers—how much we spend, how much to save, our credit scores and how to get from “in the red” to debt free. Here are a few simple tips to help ensure we get the most “bang for our buck” and have the financial freedom to really pursue our interests, dreams and goals:
- Save money to make your future dreams a reality. When you get cash or checks for holidays, a birthday or from a job, if possible, automatically put a portion of it—at least 10 percent, but possibly more—into a savings or investment account. This strategy is what financial advisors call “paying yourself first.” Making this a habit can gradually turn small sums of money into big amounts that can help you pay for really important expenses in the future like a car or house, start a business or cover unexpected, emergency expenses. Even at this stage in life, it’s smart to save for retirement (even though it may be 40 or 50 years away). To make saving easy and painless, consider arranging with your bank or employer to automatically transfer a certain amount each month to a savings or investment account. Also consider putting your spare change to good use. Every day, put some loose change into a jar and then about once a month put that money into your savings account.
- Keep track of your spending. Sticking to the old adage, “spend less than you earn” is easier said than done but if you can master this, it will make a difference for your financial future. A good way to take control of your money is to decide on maximum amounts you aim to spend each week or each month for certain expenses, such as entertainment, food and bills. Start with essential expenses first like housing, food and medical expenses. Then add in non-essential expenses. This task is commonly known as “budgeting” or developing a “spending plan.” A budget doesn't have to be complicated, intimidating or painful. To help manage your money, it’s worth keeping a list of your expenses for about a month, so you have a better idea of where your dollars and cents are going and to help create an accurate budget. Often making small, manageable changes in your everyday spending can have just as big of an impact on your financial situation as getting a raise. In addition, keeping your recurring monthly expenses as low as possible will also save you big bucks over time—try coupon-cutting and bargain shopping to help you save more. If you need help creating a budget, download the Sample Budget Excel Spreadsheet available on the On Our Own resource group. There is also a helpful financial Web site that offers free downloadable tools to help you manage and budget your money. It can be accessed at www.mint.com.
- Think before you buy. It is easy to make quick and costly decisions to buy the latest clothes or electronics without considering the financial implications. Ask yourself if you really need the item before buying it. Even better, wait a day or two, or just a few hours, to think things over rather than make a quick and costly decision you may come to regret. To control costly spending habits or impulse buys, take out a set amount of cash, or “fun money,” every month that you have budgeted for splurging. Once all the allotted cash is spent, then you are forced to stop spending for the month. If you want to use your credit card for such shopping, consider the following:
- If you use your credit card for every time you have an urge to do a little “impulse buying” and you
don’t pay the credit card bill in full by the due date, you could be paying interest on that purchase
for months or years to come, which can add up significantly. For example, If you pay only the
minimum payment due on a $1,000 computer, let's say it's about $20 a month, your total cost at
an Annual Percentage Rate of more than 18 percent can be close to $3,000, and it will take you
nearly 19 years to pay it off.
- Take advantage of offers of "zero-percent interest" on credit card purchases for a certain number
of months (but understand when and how interest charges could begin). Also, it is best to limit the
number of credit cards you have.
- Build a good credit record. As you become responsible for paying your own debts—credit card purchases, rent or mortgage, car loans or student loans and other obligations—you are building a credit history. Credit bureaus are authorized by law to collect information on each person’s debt history, which is then used to prepare “credit reports” and summary “credit scores.” In general, the better your credit history and credit score, the better your chances of getting a loan, including a credit card, with an attractive interest rate. Credit reports and scores can also be considered when you apply for a job, an insurance policy, a car or an apartment or house. One of the best ways to build and maintain a good credit history is to pay your credit card bill and other bills and debts on time. This shows you are a reliable money manager. Making a habit of paying bills late can count against you. Periodically review your credit reports from the nation's three major credit bureaus—Equifax, Experian and TransUnion—to make sure their information accurately reflects the accounts you have and your payment history.
- Be careful with cards. Under most state laws, you must be at least 18 years old to obtain your own credit card and to be held responsible for repaying the debt. An alternative to a credit card is a debit card, which automatically deducts purchases from your savings or checking account. Credit cards and debit cards offer convenience, but they also come with costs and risks that must be taken seriously, including getting into unmanageable debt, overdrawing your bank account and harming your credit record. Consider taking the following precautions to avoid these risks:
- Limit the number of credit cards you have, including any from department stores and other
- Avoid choosing a credit card just to get freebies like T-shirts or sports items. Look for a card that's
best for you based on your borrowing habits.
- Try not to use a credit card unless you can pay off the balance each month to avoid or minimize
- If you don't expect to pay your credit card bill in full most months, consider using a card with a low
interest rate and a generous "grace period" (the number of days before the card company starts
charging you interest on new purchases).
- If you have multiple credit cards with various debts, try to pay off the highest interest-rate credit
cards first and as soon as possible.
- Protect yourself from those unlawfully targeting young adults. A person with criminal intent who learns your name, address and Social Security number may obtain a new credit card using your name to make purchases. Be suspicious of any requests for your name, Social Security number, passwords or bank or credit card information. You should avoid sharing this information in emails or in response to Internet advertisements, no matter how legitimate they may seem. These types of fraudulent requests can also come by phone, text message or in the mail. Always err on the side of caution.
- Be smart about college. If you’re planning to go to college, learn about your options for saving or borrowing money for what could be a major expense—from tuition to books, fees and housing. Also consider the costs when you search for a school. It is best to avoid high college debt because it may limit your options when it comes to a career path or where you can afford to live. For more information on saving and borrowing for college, visit www.studentloans.gov, a Web site with information from the U.S. government and other sources.
- If you need to get a car, consider the best way to pay for it. For many young adults, their first big purchase and ongoing expense is their vehicle. Often, the first question is whether to buy (which may involve taking out a loan) or lease (which is similar to renting a car but for a few years). Be sure you understand the difference before signing on the dotted line.
- If you’re renting a house or apartment, consider if it’s time to buy. Once you start earning a good, steady income, you’ll most likely face the decision about when is the right time to own your first home. Real estate can be an excellent investment. But home ownership is a big financial commitment, and home values sometimes go down. Other factors to consider include how long you plan to stay in the house, how much money you have for the down payment and how good your credit record is.
- Review your finances regularly. Check your bank account balances regularly to avoid withdrawing or writing a check for more money than you have in your account. This can trigger fees from your financial institution (about $15 to $30 for each time you overdraw or bounce a check) and from merchants. The best precaution you can take is to closely monitor your account balance, which is easier than ever to do now with the availability of online banking. Be sure to review your bills and bank statements as soon as possible after they arrive or monitor your accounts periodically online or by telephone to also make sure there are no errors, unauthorized charges or indications that a thief is using your identity to commit fraud. Keep copies of any contracts or other documents that describe your bank accounts, so you can refer to them in a dispute. If you spot a problem, contact your bank immediately or visit a local branch to get it fixed.
- Invest in Insurance. Although insurance sometimes seems like a waste of money, you only need one accident or catastrophe to wipe you out financially. Think about disability insurance (to replace lost income if you become seriously ill) and health insurance (to cover big medical bills). Check into low-cost or free insurance options offered through your employer or college.
- Avoid getting deeply in debt. The warning signs of a serious debt problem include borrowing money to make payments on loans you already have, deliberately paying bills late and putting off important activities because you think you don’t have enough money. If you ever find yourself in serious debt and unable to pay off your loans, credit cards or bills on time, visit the Federal Trade Commission (FTC) Web site to learn about how to get out of debt safely or to find a reputable credit counselor who can help you.
For more information on saving, investing and managing your money, visit www.mymoney.gov, the U.S. government's Web site that provides free financial resources and tools to people of all ages.
Adapted from the Federal Deposit Insurance Corporation (FDIC) Consumer News, Spring 2008 Issue. Available at http://www.fdic.gov/consumers/consumer/news/index.html.