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.
Joeleen 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 per cent 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 Work
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 good credit history. While young adults have every right to be wary of them, 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 up a favourable credit history. Plus, increasingly generous rewards make some cards insanely good deals for cash back or travellers.
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 credit ‘score’
In Australia we don’t have a financial scoring system that assigns a specific score or number to potentiall lenders. However, your credit history is still recorded and can absolutely affect your ability to secure a credit card or loan. Here are some factors that you need to be aware of.
Payment History: The most important factor of your credit history is paying bills on time. That means your credit card, yes, but personal 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 years and make it much harder to get approved for loans and credit cards.”
Credit Utilisation: This is how much of your available credit you use at any given time. For example, if you have a $1000 limit and you’ve charged $300, your utilisation rate is 30 per cent. Incidentally, most experts advise not spending over 30 per cent of your limit at any one time to keep your credit history healthy. This and payment history are the most important factors by a wide margin — so pay attention to them.
Credit History: How long you’ve had accounts open, and when you last used them.
Mix of Credit: The different types of credit accounts you have opened.
New Credit: Or how frequently you apply for new cards/loans, and when your most recent accounts were opened.
You can get a free credit report from various online services in Australia including the ASIC MoneySmart website.
If you don’t trust yourself with credit cards, you may want to 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 authorised 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, so starting early can make a big difference down road.”
Track Your Spending
OK, 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: TrackMySPEND 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.
Set Up a High Yield Savings Account
You no doubt have a 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 and set up a direct deposit or transfer 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 university, and if you’re not careful, bank fees can eat up a lot of what you do earn. Your bank probably offers a student account, which will have lower monthly minimums than the standard accounts.
Learn What to Prioritise
One of the hardest things about being young is that most of us don’t know 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 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 mobile 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 degree the right move for you, or would you be just as a happy starting at TAFE and maybe 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.