While everyone can benefit from taking a more hands-on approach with their finances, young adults — including those just starting a career or a family, and others still in high school or college — have plenty to gain by learning to be smart about money, and a lot to lose by making uninformed decisions. Here are a few tips from the Federal Deposit Insurance Corporation (FDIC) to get you started.
Create a personal financial plan that will make it easier to boost savings and control spending. “It isn’t how much you make that’s important, it’s how much you keep,” said Paul Horwitz, an FDIC community affairs specialist.
Start by tracking what you earn, what you spend and where. Then take a sharp look at how much you spend on optional purchases, such as restaurant food and entertainment, and instead put some of that money to work for your future by saving or investing it.
“The key is to make some hard decisions about ‘needs’ versus ‘wants,’” added Horwitz, “because every dollar we spend on something we don’t really need is a dollar we don’t have to save or spend on something we do need.”
Start by taking these steps:
- Open a savings account and regularly add to it. Also pay yourself first with a set percentage of every dollar you get going to savings. “Set a realistic savings goal and remember that even $5 or $10 a week can add up over time,” Horwitz explained.
- Arrange with your employer to automatically transfer some of your earnings to a savings or investment account.
- Build an emergency savings fund you can use to pay for major, unforeseen expenses.
- Consider a separate account to save for big-ticket purchases, such as a new TV or bicycle, instead of charging them on a credit card and paying the money back over a long time with high interest.
- Limit the amount of money in your wallet or purse and in your checking account, so you’re less likely to spend it. Only carry a credit card when you plan to use it. Also do your best to limit regular living expenses, such as food, transportation and utilities.
Reynolds also advised that young adults protect against financial loss by making sure they have proper insurance (such as life, health and property insurance) and then reviewing the coverage at least once a year.
Start saving for both short-term and long-term goals, including retirement. “Thanks to the miracle of compound interest, even a small sum of money saved regularly at a young age can quietly grow to a surprisingly large sum over the years,” said Luke W. Reynolds, chief of the FDIC’s community outreach section. The sooner you begin saving, the easier it will be to reach your financial goals, which may include buying a home, owning a business or retiring, instead of having to save a high percentage of your income at an older age.
And if you are working, “it makes so much sense to start, on the very first day, to put money into a retirement savings plan, especially if your employer will match part of your contribution, which is like getting free money,” said Alberto Cornejo, an FDIC community affairs assistant.
Keep your banking and bill-paying costs down. Comparison shopping for financial services can save you from paying unnecessary fees. Open a basic, low-cost checking account at a bank and pay attention to your balance so you don’t spend more than you have in the account.
“Maybe you can download an app to your phone to help you track all money that comes in and out of your account, or you can request electronic notifications when your balance drops to a certain level. Of course, you should always maintain a register to help you monitor your balance,” said Reynolds. “Another way to save money is to avoid fee-based overdraft programs and instead ask your bank to cover any shortages by linking your checking account to a savings account.”
Build a good credit record. As you pay your own bills and debts, you are building a credit record. Credit reporting companies collect information on your history of paying debts, which is used to prepare credit reports and credit scores. In general, the better your credit history and credit score, the better your chances of borrowing money at lower interest rates. Your credit history may also be considered when you apply for a job, an insurance policy or an apartment. A good credit score will be particularly important when you decide to buy a house.
One of the best ways to build and maintain a good credit record is to pay all debts on time. To do that, don't charge more on your credit card than you can pay off in full by the due date each month. If you can’t afford to pay that much, at least be sure to pay the minimum due, consistently and on time, to avoid late fees and a bad mark on your credit record. And if you cannot qualify for a regular credit card, you may consider a no- or low-fee secured credit card, for which you keep cash in a deposit account that would serve as collateral.
Also obtain a free credit report once every 12 months from each of the three nationwide credit reporting companies at www.annualcreditreport.com. Review each report, correct any errors and check for suspicious activity that may indicate you are a victim of identity theft.
Stay safe online. Banking or conducting other personal business online is a convenient way to handle your finances, but you need to take precautions:
- Install and automatically update antivirus software and firewall protection on your computer.
- Never give your Social Security number, credit or debit card numbers, personal identification numbers or any other confidential information in response to an unsolicited email, text message or phone call, regardless of who the source supposedly is.
“Also, ignore online ‘friend’ invitations from people you don’t know, because these may be covers for fraud artists,” cautioned Michael Benardo, chief of the FDIC’s Cyber Fraud and Financial Crimes section. Likewise, he said, be careful about the profile and contact information you post on social-networking and employment-related websites, because in the wrong hands it can lead to identity theft and other crimes.
Keep important cards and numbers safe. Most experts suggest you carry in your wallet only the plastic cards (ATM, debit and credit cards) you truly expect to use soon. Don’t carry your Social Security card, either. Don’t leave your birth certificate or documents with your Social Security number unprotected at home, at school or anywhere else.
If you’re renting a house or apartment, consider whether it’s time to buy. Once you start earning a steady income, and you expect to stay in your community for a number of years, you may want to consider buying your first home. To learn more about homeownership and if it is right for you, consider talking to a U.S. Department of Housing and Urban Development-approved counselor. You can find a contact list by state here.
Information in this article was originally published by the FDIC.
