LETTER : Out on Your Own: How Young Adults Can Protect Their Financial Health
Entering the real world as a young person is flat-out scary. Perhaps the most important knowledge you’ll need is how to manage your money and credit. Options will vary from person to person, but here are a few ideas (presented below by Faboppa) on how you can enter the finance world with confidence.
Create a budget
Before anything else, you should create a monthly budget. You’ll need a budgeting plan, the simpler the better. NerdWallet suggests using a 50/30/20 budget: allow up to 50% for needs (rent, groceries), 30% for wants (trips to the movies), and 20% for savings and debt repayment. This is just a jumping-off point, and you can make adjustments as you need to. If, for example, you’ve got a busy few months ahead of you at work and won’t have time for recreation, you can move some of your want budget to your savings and debt repayment. Your overall budget should also include goals, both short-term and long-term.
Get a credit card
The point of a first credit card is to start building your actual credit. As a young person without any credit history, lenders will likely take a pause when considering your application. Start with your current bank and apply for a low-limit card. Having a limit of $300 or so will not only put the bank at less risk, but will also help you control your spending.
Consumer Reports discusses one low-risk option: applying for a secured credit card. You’ll put down a deposit, usually somewhere in the $250-$500 range, which will become your credit limit. As long as you consistently pay your balance for six to 12 months, the issuer will refund your deposit. Then you’ll qualify for an unsecured card with a higher spending limit.
Be consistent with payments
The best way to build your credit is to stay on top of due dates. Not only will a late payment result in penalties like a late fee or penalty interest rates, but it’s a major blow to your credit score. Take advantage of tools like online reminders and calendar alerts so you never miss a payment.
Most banks offer online banking, which is another way to easily keep up with credit card payments. You can pay on your computer via the company’s website or on their phone app; the money will be pulled directly from your bank account. Even better, set up automatic payments so you don’t even have to log on to pay.
Finally, pay off your card every month. Use it, then immediately pay off exactly what you spent. This saves you from paying interest while still building your credit.
Start your own business
Nearly every company vies for the patronage of young people, so use your youthful brain to come up with something brand new. It should be a stable, growing trend versus a temporary fad.
To start a business, you’ll have to apply for a business loan. Because of your age and lack of credit history, you’ll need a cosigner. This person essentially agrees to pay your debt if you don’t. It’s important to keep in regular contact with your cosigner; if you have an unexpected expense, let them know if you’ll need help making a loan payment. This way you won’t incur a late fee, nor will you take the hit to your credit score.
Invest in real estate
The most common real estate investing strategies are rental properties, fix-and-flip properties, and real estate investment trusts. Research your area, find a mentor and see what option is right for you.
There are pros and cons to investing in real estate. The benefits include having a sustainable business model, a steady stream of income, and a low barrier of entry. Downsides include marketing, maintenance, longer wait for returns, and the cost to finance an investment property.
Financial freedom is an essential part of adulthood. Whatever steps you take next should be slow and steady. Protect your financial health with these ideas in mind.
For more great content, explore the other articles available on Faboppa.com.
Guest Letter is a series of anonymous submissions published by Faboppa.com on behalf of Guest Authors who'd like to share their money stories to a bigger audience of like-minded folks.Submissions are preserved as much as possible in their original format, with touch-ups done to ensure consistent quality and reading experiences, as with other articles on the blog.