Turning 18 is an exciting milestone in a young person’s life. It’s a steppingstone into adulthood and all the responsibilities that come with it. Learning to manage your finances wisely in your early adult years can prepare you for a bright future, both financial and otherwise. These six tips can help you avoid common money mistakes people make when they’re just entering adulthood and allow you to comfortably enjoy all life has to offer now and in the future.
1. Open checking and savings accounts
It’s time to bust open your childhood piggy bank and put that money to work! If you already have a savings account but it’s in a parent’s name or paired with their accounts, it’s time for you to take over your account and get it in your name.
Now’s the time to head to your local bank or credit union and open up your own checking and savings accounts. Once these are set up, consider these helpful tips:
- Keep a small cushion in your checking account with a little more than what’s needed to cover your basic monthly expenses and put the remainder into your savings account. Automate this process as much as possible so it’s even easier to save. This will cover you in the event that you have a small unplanned or overlooked expense during the month such as a gas station or grocery receipt.
- Use your debit card to make purchases and monitor your account so you can immediately see how much you have left after you buy something or after you pay your bills.
- Start building an emergency fund. While most young adults don’t have the same emergencies as older adults, starting an emergency fund now gives you a sense of security, knowing you can cover unexpected expenses like a flat tire, car repairs, or an increased bill payment.
2. Create a budget and stick to it
Good budgeting is a skill everyone should have. For young adults, budgeting will look essentially the same as it does for parents:
- Monitor your spending habits. Check your online banking regularly and track your purchases by keeping a digital notebook or saving your receipts. There are several apps out there that help with keeping your receipts in order, such as Evernote Receipts which is available for both Android and iOS.
- Avoid buying things you don’t need. Once you begin to understand the difference between what your needs are and what your wants are, you’ll become much better at managing your money by avoiding unnecessary spending, leaving you with more money in the bank at the end of the month.
Money experts suggest using the 50/30/20 rule as you plan your budget:
- 50% on necessities like gas, rent, food, credit card payments and other debt, etc.
- 30% on lifestyle choices like getting a gym membership, eating out, and going out with friends.
- 20% on savings.
3. Test out future job possibilities
There are many benefits to getting a job when you’re young:
- Learn important people skills and how to work with others.
- Build and understand solid work ethics.
- Determine the type of work that best suites you.
At 18, you might not land your “dream job,” but you’ll begin to position yourself closer to getting it. Plus, you will start getting a regular paycheck you can use to meet budget and savings goals!
4. Start building credit
Once you accomplish the basics of landing a job and opening bank accounts, it’s time to start working on building a good credit score. One of the quickest ways to do this is by using credit cards wisely. Along with always paying your bills on time, be sure to:
- Use credit cards responsibly. They’re a tool, not just an extension of your income. Try to avoid using them to make unnecessary purchases rather use them for things you planned on buying anyway and pay back the full balance as soon you have the money on hand. The goal is to build up good credit for future big-ticket purchases like a home or automobiles by showing you can handle debt responsibly.
- Keep credit use under 30 percent. Just because you have a credit limit doesn’t mean that you should utilize all of it. For instance, if you have a $3,000 limit on a credit card, your outstanding balance should never exceed $1,000.
- Check your credit score regularly. Credit agencies like Experian, TransUnion, and Equifax recommend checking your credit at least once a year. Still, it's always good to check on it more often to ensure there is no suspicious activity or if you’re planning to apply for some type of credit soon. These credit checks are known as “soft checks,” so you won’t hurt your credit by doing regular checkups.
4. Open an IRA and start saving for retirement
Most young adults aren’t thinking about retirement yet because it seems so far in the future, but that doesn’t mean you can’t start to plan for it now. You’re entitled to invest in Roth IRAs if you have a job and can max your 401K match with your employer, where your contributions and earnings can grow tax-free forever. Even relatively small investments made at age 18 can grow into significant sums after 50-plus years of deposits and compound interest. If you start saving for retirement now, you’ll be well on your way to setting yourself up for a comfortable financial future.
5. Start investing
If you’re old enough to have a job, your old enough to start investing, but there are some qualifiers that you must meet in order to get sound financial advice about your options. The recommendation is that you invest in the market on a regular basis at a fixed amount over time and speak to a financial planner about all your financial options. Not only will you get expert advice, but you will learn how to research what makes for a good investment. They will also help you gain valuable financial literacy skills that help you avoid too-good-to-be-true investments so you can focus on building true wealth.
6. Join and stick with a credit union instead of a bank
Because credit unions are member-owned, they aren’t accountable to investors. That means credit unions can typically offer higher interest rates on savings accounts and lower rates on loans, including car loans as well as fewer fees and better service. Fortunately, there are plenty of ways and options for becoming a member based on where you work or live.
Get Started on a Strong Financial Future
Learning and utilizing these smart money lessons today can help any young adult become financially savvy and successful for the rest of your life. You can learn more financial tips and speak to an expert at Community First today!