Financial Tips for Young People

As adults, it’s not always easy to make great financial decisions. Some of this comes from unforeseen circumstances we might face, some of it from unwise decisions or investments, and some of it stems from lack of experience. How many times have you thought about how differently you would have handled your finances if you had only known then what you know now?
These lessons that we learn over the course of our lives regarding our finances are ones that we can pass on to our children. Sure, we can’t expect that every bit of advice we give young people will be received with the utmost attention but, as all parents know, many of the lessons we teach will eventually stick. We can play a big part in shaping the base of knowledge and habits of our children. The more we can incorporate financial considerations into the lessons we give, the better equipped our children will be to handle their assets wisely.
Financial Tips for Young People

Create a Habit of Saving Money

Consider how much money you would have tucked away if you had starting saving just a small amount of money when you were a kid. This is a habit that is tough for many Americans, but the earlier you can become disciplined at saving just a small portion of your earnings every week, the easier it will become.

Find Ways to Reduce Bills

Whether you’re turning off lights when they’re not being used to save on the power bill or you’re making sure you eat food in your refrigerator before it goes bad, you can trim your expenses by looking for the little ways to save that accumulate into bigger savings. Make it a game that you play with your kids to look for ways to reduce the electric, gas, water and food bills.

Retirement Saving Begins with Employment

As soon as the young person in your life starts their first job, they should also start thinking about saving for retirement. This isn’t the easiest lesson to teach a person who has their whole life in front of them, but it’s one that will pay off in a big way once they reach retirement age. Make sure your child knows about 401(k)’s and IRA plans. Knowing about retirement plans at an early age can mean not having to work well into your golden years.

Smart Shopping

Cultivate the instinct in your child to look for savings when shopping for clothes, food or any household products. Pay attention not only to the cost of the goods you’re buying, but also the ways in which you can incorporate sales and coupons into your shopping routine. Just like lowering monthly bills, this can be made into a game – one in which everyone wins.

Avoid Buying on Credit

Steering away from debt is a necessary and frequently over looked habit in all stages in life. When we are young, we can easily dig ourselves into a hole that we spend the rest of our lives getting out of. While some forms of debt, such as student loans or mortgages, will be an inevitable part of life for many of us, we can certainly decrease our reliance on credit cards when we make purchases. Teach your children that buying any luxury product should be done only with existing financial resources. Credit card debt can create a number of challenges for the young consumer, but it can be avoided by establishing the principle of buying only what you can already afford.
Teaching your kids about finances is very much about creating a mindset, a paradigm that will dictate spending and investment habits over the course of an entire lifetime. Arm your children with the instinct of looking for value and saving whenever possible. The earlier these habits can be established, the better off a person will be later on in life. Create rewards for children to make the learning process more incentive-based as opposed to penalty-based. Eventually, they’ll come to realize that the reward is actually the money they’re saving by being a more astute, budget-conscious consumer.

How to Destroy Your Credit Score

Most people want to learn how to build their credit rating. Conversely, it also pays to learn how to destroy your credit score, if only to avoid doing so.

A high credit score is what everyone would want to have. You are granted loans easily and credit card companies are only too eager to have you for a client. Cars and a house – what American doesn’t aspire to have them? Auto financing and mortgages at lower interest rates won’t be a problem if your FICO score is high.

Destroy Your Credit Score

But did you know that, while building a credit score can take years, it takes only a few months to destroy it? Here are a few selected actions that can damage your financial name real fast and tear to shreds what you so painstakingly built over time.

DELAY YOUR PAYMENTS OR IGNORE THEM OUTRIGHT

Your payment history comprises 35 percent of your total credit score, so delaying or failing to make payments altogether is the quickest and most effective way to bring it down. Only one incident of not paying the minimum amount of a loan or credit card debt within 30 days of the due date can lower your credit score by 100 points. You can always get back that 100 points, or so you rationalize. True, but getting it back takes longer than letting it go in the first place.

USE YOUR CREDIT CARDS TO THE LIMIT

Credit cards set a maximum limit for the cardholder to spend. While charging everything to your credit card is so tempting, consider how it can affect your credit score. The amounts of money you owe, wherever it is coming from (credit cards, loans, etc.), make up 30 percent of your credit score. Thus, every dollar you charge to your credit card is seen as money owed by you. This increases your credit utilization ratio. A rise in your credit utilization is inversely proportional to your credit score and the bank or card company views you as a spendthrift. They may not grant you a loan and if they do, it will have a higher interest rate than someone with a better credit score.

Advice from authorities in credit card usage says you should keep the balance on your account at 35 percent of your credit limit or lower if you are aiming for a high credit score. This shows your maturity in debt control and you are perceived as a low-risk credit person.

CLOSE OUT YOUR OLD CREDIT CARDS

Get a new card, transfer the balance of your old cards to the new, and then close out those cards that you’ve had for years. Sounds like good business sense, doesn’t it? Banks don’t quite see it that way. Since 15 percent of your score is based on length of credit history or how long certain credit lines have been open, that old card you’ve been using is proof that you are a member of good standing in that card company. If you must close out credit cards because you have too many, choose the newer ones to preserve your credit.

Destroying your credit score is not a good option in the long run. Give it a lot of thought before you do it. You may live to regret it in the future.

Is It Better to Repay Debts or to Save First?

Once you finish college, get a stable job, find a place to live and start earning enough money a question inevitably comes up: “Should I start paying off my debts with the money that is left over every month or should I start saving up and then pay my debt once I have a substantial amount on my account?”. The short answer is that you should try and pay off as much of your debt before you start saving money. The long answer will include the “why” as well as the “what” you should do.
Repay Debts

Increasing debts

You see, it is all in the percentages that keep building up the amount of money you either have on your account or you owe. For instance, the money you have in the bank will have a very lowinterest rate, around 1%, while the interest rates on your debt can be anywhere between 5% and 21%, maybe even higher. So in the best case scenario, your debt is going to get bigger for about 4-5% every month, so when you get enough to finally pay off the original debt, the amount that you actually have to pay then will be much greater.

Profit for the bank

Another thing about banks is that yes, they are quite much into business and therefore aim for as huge profits as possible. And the major portion of profits for banks comes from your savings. The amount of money that you save with your bank is used to lend cash to other people or borrowers. The difference at which the bank borrows money from you and the borrowing rate it charges on other customers is their actual profit margin. In simpler words, it will always cost more to borrow money from the bank that what you would save.

Pay off your most expensive debts

Be sure you keep your credit cards after you have  paid them off in full, you will have a relatively good credit rating if you occasionally buy something with them and then pay it off quickly afterward. You can also get an interest free deal on a card and pay it off before the interest free period runs out. This will help you in case something unexpected comes up and you have used up all your savings.

Use your savings

If you have some money in your account right now, you should consider using as much of it as you can part with to pay off those debts with the highest interest rate first of all.  Therefore, you should take a look at your current debts, and mark the ones that cost you the most every year and focus on repaying them with the money you have saved – just leave enough money for your basic needs so you won’t have to take out another loan down the road.
There is something you should be aware of when trying to pay off your debt using your savings – not all debts can be cleared away efficiently using this method. For instance, certain types of mortgages will have actual penalties for paying before the set date. The best solution, in this case, is to take a part of your savings and put it into a different account that is specifically designated for the purpose of paying off the mortgage. The interest will keep building up and when the right time comes you can then use it to pay the debt. Be sure you are well informed about all the circumstances regarding your debt and read everything carefully before you sign.

Exceptions to the ‘paying-off-your-debts’ rule:

There are but very few occasions that can serve as an exception to this rule of paying off debts using your savings.  For example-

  • You can rule out the need to pay off your debts when the debts are cheaper than your savings. this basically means that if you feel that the cost of paying those debts are much higher than what you currently have in your savings account, then there is no point.
  • Penalty exception: if you already have debts that are incurring a stipulated amount of penalty on you, such as mortgages and other exclusive loans, you can consider not paying them until the penalty amounts have reduced. You can leave the cash in your savings account until the penalty is small enough.
  • Interest-free debt exception: This is specifically for those individuals who have constantly managed to pay off their debts so that they eventually become interest-free through prepayments. In such cases, if the interest rate on your debt is lower than the amount your saved cash earns after all tax deductions, you can easily earn from your savings and keep the debts as well.

Conclusion

The best is to make concerted efforts into paying your debts as quickly as possible. The sooner you pay off your debts, the happier and effortlessly you will be while managing your personal finances in the future. The advantages of paying off your debt first should be pretty obvious now – you will want to avoid letting the interest rate blow up and paying as much as you can right now.