What your 18-year-old self wish they knew about saving money
Life in the world of personal finance would have been so much easier if we had known at age 18 what we learned from trial and error over time as an adult.
Basic financial planning is not a subject taught at most schools. Our children learn about advanced subjects such as science, technology, engineering and math, but they are not given the same opportunity to learn about personal finance, a subject that affects everyone.
Unless children are taught by family how to manage money from an early age, it can become a challenging learning experience.
What financial management tools would’ve been helpful to know at 18?
Do you know how much income you earn and where you’re spending the money? Budgeting will help to better understand spending habits. Free apps such as Mint can help make this a simple task.
Track all income and expenses for a minimum of 30 days or, better yet, the entire year. Write out monthly expenses first, then add up any additional spending. After tracking expenses for a month, think about the following:
–Can you identify needs from wants?
— Are you spending more or less than the monthly income?
— Where can you reduce spending?
— How can you increase the amount being saved monthly?
— Can you identify short- and long-term goals for which you need to save?
Credit is borrowing money to buy goods and services with the promise the money will be paid back by a specific date. Credit cards are easy to access and, if managed, are an effective way to establish credit. When applying for a credit card, it’s important to understand the terms. Often, fees and interest rates are not obvious when you are signing the application and are much higher than you would think.
Unless you have an unexpected event such as expensive car repairs, budget to pay those credit card bills off monthly. As a part of your routine, take a few minutes every month to read billing statements. Understand that keeping a balance is expensive because of interest paid. The interest rate on credit cards is usually very high. And if not paid off, monthly credit card debt can quickly spiral into a much bigger problem.
Building and managing credit with credit cards can help qualify good users for a home purchase. When buying a first home, you will most likely need a cash down payment and a mortgage for the difference.
When applying for a credit card, a loan or insurance, a file is created on you and accessible to potential creditors. This file is managed by credit reporting companies, and the information is called your credit report. A payment history and the amount of credit that you have incurred is tracked over your lifetime. Credit history is important. Without a credit score above 720, it’s difficult to finance the purchase of a home.
Credit card reporting agencies know that when a consumer carries high credit card balances, their default risk increases, and the agency will penalize the consumer by lowering their credit score. A low credit score will cost you because lenders feel you could be a credit risk. If issued credit, the interest rate paid will be higher than someone with a credit score of 720 or higher.
Remember, if credit history is poor — perhaps because payments are not coming on time or at all — it can take up to seven years for the data to be removed from a credit report.
Accumulating wealth begins with setting money aside on a regular basis, usually monthly or more frequently. Saving monthly is the process of placing cash in a bank savings account. The bank will pay interest, and over time the value of the account will grow. An important practice is to pay yourself first every time you receive money. This means when you are paid, a certain amount is moved to your savings account before you spend any money.
Cash in a savings account allows you to pay for items or expenses instead of using a credit card. It also provides security for unforeseen emergencies and expenses. It is wise to keep at least three to six months of expenses saved in a bank account.
Eventually, you will acquire more cash than is necessary to keep in your savings account. After your short-term cash needs are met, investing in stocks, bonds, and real estate would be next.
Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains. This can be accomplished through a brokerage account, or the retirement account your employer provides. Investing is considered a long-term activity.
Insurance is a way to protect wealth. California drivers are required by law to purchase liability insurance with coverage limits of at least $15,000 for bodily injury per person, $30,000 for bodily injury per accident and $5,000 for property damage. This coverage is low. It only provides liability coverage at a cap of $15,000 per person. The total coverage per accident is $30,000.
If you injure four people and their medical expenses are over $15,000 per person, you are underinsured and will be personally responsible for the excess.
When you rent an apartment, you also want to consider renters insurance. Renters insurance is a type of insurance policy that covers your personal property if it is damaged or stolen. If someone breaks into your rental and steals your belongings, your landlord typically is not responsible.
Don’t forget about taxes
Taxes that individuals and businesses pay are how our government, both local and federal, collect money from people to pay for things, like schools and roads. When we earn money from a job, a certain percentage is withheld by the employer for taxes. If we have investments, capital gains and losses are reported to the Internal Revenue Service at the end of the year.
Each April 15, if your income is above a certain amount, you are required to file tax returns: one for the U.S. federal agency (IRS) and one for the state you reside in. When the tax returns are completed, you may owe more tax or qualify for a refund.
Living a financially secure, healthy, and happy life is what most people desire. Without learning personal finance skills, you can spend your entire life working but never get ahead.
The extra stress from poor financial decisions can then affect your health and happiness. Take the opportunity while you are young to learn and implement strategies to manage your personal finances. This investment will be worth your time and reap many happy returns over your lifetime.
Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.firstname.lastname@example.org.