Most young people don’t learn the tenets of personal finance in school, but building solid habits throughout your teens and early twenties can help set you up for a truly prosperous life.
This is the first article in TwoCents’s latests series, What to Know About Money at Every Age. For those of you past college, stay tuned for more tips this week about what to know about money in your 20s, 30s, 40s, 50s, and beyond.
Joleen Workman, Principal’s Vice President of Retirement and Income Solutions, says the most common reason people say they need to put off a financial decision is because it isn’t the “right time” or they’re too busy. “Our research showed that what’s really causing this decision dilemma is a lack of confidence,” says Workman. “Those who spend even a small amount of time learning about personal finance topics are 75 percent less likely to put off making a decision.”
We can help with that. Everyone approaches money differently (and our situations, of course, vary greatly), but there are some general principles of personal finance it will pay off for you to learn before you leave home:
Learn How Credit and Credit Cards Works
Though people often think of credit in relation to credit cards, good credit can help you get better rates on various types loans and, incidentally, credit cards in the future, which can be a boon when you’re looking to buy a house or car.
Credit cards are just one tool for building a good score. While it makes sense that younger people might be wary of them—the U.S.’s credit system makes little sense and is highly punitive, and the average American has an average balance of $6,375, per Experian, accruing ever more interest—but if you use a card correctly, you’ll see how useful it is (and no, a debit card is not the same thing and will not help you build your credit). Plus, increasingly generous rewards make some cards insanely good deals for cash back or travelers.
Pay off your card in full each month.
First, of course, you never want to spend more than your limit (more on that in a sec), and definitely not more than you can afford. You should aim to pay your card off in full by each due date. Making smaller payments throughout the month can make this easier, and having your balance texted or emailed to you can help you pace your spending. Above all, if you think of your card as a tool for your financial future and not a crutch when you can’t afford something, you should be ok.
Your FICO score, the most widely used credit score, will be a number between 300 and 850 (in most cases), the higher the “better.” It’s composed like so:
Payment History—35 percent: The most important factor of your score is paying bills on time. That means your credit card, yes, but student loans, utilities, house payments, even newspaper subscriptions—all of them can hurt your score if you make late payments. If there’s one thing you take away from this article it should be this: Always pay your bills on time, even if it’s just the minimum payment. “You don’t want a late payment on your credit reports,” says John Ganotis, founder of CreditCardInsider.com. “It can stay there for up to seven years and make it much harder to get approved for loans and credit cards.”
Credit Utilization—30 percent: This is how much of your available credit you use at any given time. For example, if you have a $1,000 limit and you’ve charged $300, your utilization rate is 30 percent. Incidentally, most experts advise not spending over 30 percent of your limit at any one time to max your score. This and payment history are the most important factors by a wide margin—so pay attention to them.
Credit History—15 percent: How long you’ve had accounts open, and when you last used them.
Mix of Credit—10 percent: The different types of credit accounts you have opened.
New Credit—10 percent: Or how frequently you apply for new cards/loans, and when your most recent accounts were opened.
You’re entitled to one free credit report a year from each of the three major credit bureaus: Equifax, Experian and TransUnion. You can get them at annualcreditreport.com, or on 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 history, some banks offer student credit cards, which can help you build your score. You can also apply for a secured card, which is backed by money you’ve already deposited in the bank. In other words, there’s no possibility of going over 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 parent and your parent trusts you, this can be a great way to start building some credit history without a hard inquiry on your credit reports,” says Ganotis. “It takes time to build good credit history and credit scores, so starting early can make a big difference down road.”
Track Your Spending
Okay, I’m not going to tell you to take out a pen and paper and mark how much you can afford to spend in certain categories each month (although it’s not a bad idea). But you should, at the very least, track your spending so you know where it’s going and how much you have left.
There are a number of ways you can do this. Marketers would have me believe that all you youths like to use apps, and there are some 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 notebook and pen.
As I mentioned above, have your balances texted or emailed to you each day so you know how you’re doing. Once you get in the habit of knowing where your money is going, it’s easy to pick out spending patterns that can be improved or to cut out some spending completely.
Be Smart About Student Loans
For many students, taking on loans to pay for college is simply inertia. There are no other options, and college is always a smart investment, right?
Well, wrong. There are other options. There are tons of scholarships available, as well as cheaper two-year and technical schools. Depending on what career you want, you don’t need to go to a pricey four-year institution.
Consider: The average 2017 graduate’s balance was $39,400 when they left school, with monthly payments averaging $351. You’ll likely be repaying your loans for 20-plus years. Do you know how long 20 years is? If you’re the target age for this article, it’s longer than you’ve been alive. Really think about that commitment to repaying over $350 per month for more years than you’ve been alive. It’s a lot of money, and it’s a struggle for many people. Default and deferment rates are high, and can harm your overall financial health for decades.
Okay, back to reality. If you’re going to take on loans, understand what you’re actually signing up for. Fill out FAFSA, and learn how to decode your financial aid options. Exhaust your federal loan options first. These are loans funded by the federal government, and they have more protections than private loans (offered by banks and companies like SoFi). They can also possibly qualify for forgiveness, whereas private loans cannot. Only take on private loans as a last resort.
You’ll also want to know whether your loans are subsidized or unsubsidized: Unsubsidized loans accrue interest while you’re in school, whereas subsidized loans do not, as long as you’re still a student. And that could save you a ton of money in the long run.
Only take on private loans as a last resort.
There are a some other crucial things to know—you don’t want to borrow more than you need each year (no matter how tempting it might be to put that loan toward a nicer apartment during the school year); try to work during school so you can make payments promptly after graduation; understand all of your repayment options, because your school may not suggest the one that’s best for you.
When you graduate, don’t hire a third party to make your payments for you—it’s likely a scam. As the Department of Education becomes more friendly with predatory for-profit educational companies and eases oversight on loan servicers, you’re going to have to be vigilant about your payments (and making sure that they’re accurately recorded).
Finally, be wary of polished sales practices.
“When I was looking for colleges to go to, admissions officers that visited our school seemed like really nice people. They’d joke about the latest movies and tell us how fun college was going to be, but not one mentioned the cost of the school,” says Travis Hornsby, founder of Student Loan Planner. “What I’ve realized ten years later is that the admissions office of a university is exactly like a used car lot. The cost is negotiable, you can and should expect scholarships especially if you have above median scores, and misrepresentations will probably be made. If you don’t have a clear idea of what you want to do with your life, go to a lower cost public university.”
Set Up a High Yield Savings Account
You no doubt have a checking and savings account by the time you’re leaving high school, but you should take the time to think about what your goals are and open a high-yield savings account to help you get there.
As someone who basically spent my teenaged paychecks as soon as the money hit my bank account, I speak from experience when I say I wish I had set aside even $20 per pay period. It likely wouldn’t have made a significant difference in terms of building capital, sure, but it would have helped me build a savings habit, something I still struggle with many years later. Saving money just doesn’t come naturally to a lot of people, but the sooner you start doing it, the easier it will be.
Look into opening a high-yield account at an online bank like Ally or Bank of the Internet, and set up a direct deposit or transfer from your checking every month or week
Look into opening a high-yield account at an online bank like Ally or Bank of the Internet, and set up a direct deposit or transfer from your checking every month or week. You can name your account in some cases, which could help you save for your goal.
All of this said, interest rates are still pretty low, even in high-yield accounts. So don’t bank on interest—how much you save matters much more.
Watch Out for Fees
Chances are you’re not making a ton of money in high school and college, and if you’re not careful, ATM and bank fees can eat up a lot of what you do earn. When you open your high-yield savings and checking accounts, look for a bank with a wide ATM network (particularly near the places you frequent, and on your campus) and that reimburses outside fees should you need to use a shady bodega’s machine at 2 a.m. for energy drinks and snacks while studying.
Your bank probably offers a student checking account, which will have lower monthly minimums than the standard accounts. If you’re comfortable doing all of your banking online, then an online account will also likely have no monthly minimum requirements (and a modicum of interest).
Finally, turn off overdraft protection. Speaking from experience, no matter how carefully and meticulously you track your spending, you’re going to slip up a time or two and go over your checking balance. Overdraft protection will let you complete that transaction, but you’ll be hit with a fee as high as $40.
Learn What to Prioritize
One of the hardest things about being young is that most of us don’t who we are and what we really like yet. We just want to fit in. And fitting in comes with a hefty price tag. For example, in high school I wanted my best friend’s T-Mobile Sidekick (lol) more than anything, but Sidekicks were expensive. I was stuck with a dark blue Verizon flip phone that could barely send and receive text messages. She could go on Facebook and download music anywhere, anytime, and I could, well, send emoticons. :/
I never got that Sidekick, but I turned out okay (for the most part). It’s one silly example among many, but learning early on that you can’t always get what you want (in fact, you rarely do) has served me well throughout my life.
In fact, learning to say no to things that don’t really matter will be one of the most important lessons you can learn.
“It’s easy to get caught up in the fun of spending money when you’re just starting to enjoy your own income and independence, but it’s important to learn to say ‘no’ to yourself,” says Tina Hay, CEO and founder of Napkin Finance, a personal finance site. “Use your spending choices as a chance to express your values. If you’re a serious foodie, then maybe you’ll have a higher restaurant budget but spend less on clothes than your friends. If you want to travel the world while you’re young, you might need to learn to live frugally. Saying no to some experiences lets you say yes to others.”
But that goes far beyond cell phones, clothes and restaurants. You’re young, yes, but it’s never too early to consider what you really want out of life. Is a four-year college the right move for you, or would you be just as a happy starting at a less expensive two year institution and transferring later? Do you want to stay in your home town after you graduate, or move somewhere new? What are the living costs like there? How can you invest in yourself now?
Thinking about all of these things ahead of time can give you clarity on what your priorities are and how much money you’ll need to accomplish them.
And that will carry us to our next installation of What to Know About Money at Every Age.