Good financial habits are best when established early. Here are some tips for getting the best start possible.
Provided by Angel McCall CFP®
For many young adults gaining independence from their parents for the first time and getting a grip on how to be financially smart can have a steep learning curve. For someone who isn’t making a steady income yet, or doesn’t know about the potential pitfalls, how can you build a foundation for a healthy financial future? Here are some tips for young adults to establish good financial habits early.
Be careful with credit cards.
While it is important to begin to establish credit, be wary of the many credit card offers you receive. Not all credit cards are created equal. Look at the annual percentage rate, annual fee, grace period and penalty fees before deciding on a credit card, and then be careful with how you decide to use it. Credit cards are not free money, and it can be tempting to use a credit card when you are low on, or out of cash. Start with a credit card with a $1000 limit, and pay the balance off monthly. Carrying a balance on your credit card can hurt your credit score, and paying your credit card late will cost you in late fees.
Keep track of your credit score and credit report.
A credit report is a detailed listing of your credit history. As a young person, you may not have much of a credit history, but you will begin building it as soon as you are using a credit card or are taking out loans for school. Lenders use your credit rating to determine their level of risk when loaning you money. A bad credit rating can make it difficult to buy a car, a house, or even just rent an apartment. You are entitled to receive a copy of your credit report annually for free. Here’s how to get it.
Create a budget and stick to it.
Determine how much you need each month for food, any bills, pocket cash, and other expenses. Get into the habit of tracking what you spend and spending only what you have allotted for in your budget. Otherwise, you will run out of money before the month is over. Be careful with nightlife, recreation and eating out, as these activities can get expensive quickly. Decide what you are going to spend before going out with friends or going shopping. Your bank may offer budgeting tools online. You can also create a simple budget using an app like Mint, or even just creating a spreadsheet.
Start saving early.
Open a savings account and start contributing to it regularly, even if is only dollars at a time at first. Getting into the habit of doing this now will make you more likely to continue saving as you get older. You may also want to consider contributing to a ROTH IRA. If you begin contributing to a ROTH IRA in your 20’s, and contribute $3000/year, with a 7% average annual return, you will have $442,000 by the time you are 65. If you don’t begin contributing to a ROTH IRA until your 30’s, you will accrue less than half of that.
It is also a good idea to build an emergency fund. You should aim to save enough money to cover 3-6 months worth of expenses.
Borrow less money.
If you are a college student, aim to borrow as little as possible. When you take out a loan, start looking into loans early, and be sure that you understand the terms completely. Search online for scholarships based on gender, religion, race, ethnicity, the type of degree you want. There are many scholarships and grants out there that you may not know about, and could save you thousands.
Be frugal. It is easier to spend less than it is to make more.
Practice learning how to cook to save money on eating out. Consider any purchase above $50 carefully. Limit your $5 coffees. If you’re a college student, look into buying your books used, and resell them at the end of the year.
Build your professional image online and off.
Establish marketable skills, and find ways to use them with entry level jobs or internships. Build your network by meeting people and maintaining your connections.
Create a professional public image online. Potential employers will most likely Google you and search for your public facing information on social media sites such as Facebook, Instagram and Twitter. Any content that portrays you in an unsavory light could mean you don’t land the job. Double check your privacy settings on these sites, and remove any content that could raise a red flag to potential employers. Set up a profile on LinkedIn as well, add information about your work and education history, and begin building your professional image online.