There is nothing more exciting than gaining your independence.[cite::219::cite] Having your own space out from under mom and dad, getting to do whatever you want, living your life, your way. While your future is bright and shining, don’t let it blind you. In this blog series, we will explore the many things to think about aside from studying, working and having fun. This is the prime time in your life to begin your journey to your financial goals.

Now, I know “saving for retirement” doesn’t sound like a ton of fun, but if you think about it like you are paying your future self, it’s much more exciting.

Consider this: If you start saving just $100 per month starting at age 25, by age 65 you’ll have about $184,500 (assuming a 6% rate of return) because of compound interest.

If you start this just10 years later, this number drops to $93,670, which is close to HALF of your savings gone!

Build a budget

See, timing is everything. But, how do you save $100 per month? With a BUDGET.

The dreaded B-word. It really isn’t that bad if you have some tricks to work with like:

  1. Be healthy – Be healthy? Yes, be healthy! You will save money now by kicking bad habits that can drain your bank account and save money later by lowering your health risks, which in turn lower medical bills. Side note: being healthy will help you maintain your weight, which means not spending money on a new wardrobe (Freshman 15, it’s a thing)
  2. Don’t overindulge – A coffee or a drink here and there is not a terrible thing! But, understand it is a luxury, not a necessity to spend money on indulgences.
  3. Cook at home – Ordering take-out is very convenient, but it can get costly. For the same price as one take-out meal, you can make dinner and have left-overs for lunch

Time to budget! List out your expenses for an average day (be honest!) and add them up.  Take this total and multiply it by 30, this is, on average, how much you spend a month.  Now, think about the tips above are there places you can cut non-essential expenses? Once you have determined areas you can save money, the next step is to set up an automatic transfer from your checking to your savings account.

By automatically transferring $100 out of your checking account each month you create a habit of saving and This way you don’t even have to think about it!

Truly though, the best thing you can do for your future and your finances is TALK about them!  This is not a conversation to have with your parents, but a trained and experienced banker or financial planner.  Set your future self up for success today because it is never too early to start paying yourself.

The importance of building your credit

What is credit and why is it important? 

Think of credit like trust.  For example, your best friend asks you to lend them $100, they promise you that they will pay you back and because you trust this person (they have good credit with you) you hand over a hundred-dollar bill.  Over time they have built up trust with you and have proven that are responsible and they wouldn’t lie to you.  Now, imagine if they don’t pay you back.  How would this make you feel?  Well, one thing would be for sure, you won’t lend money to them again, and your friendship will probably end.

Credit works the same way with the exception that lenders can’t spend years getting to know and trust you, so they use a range of numbers (from 300-830) to determine what level of risk they face by lending you money. This is where your credit score comes from. The higher your score, the more they are willing to lend you. 

For instance, let’s say you borrow money form a lender, promising to repay what they lend you. When you do repay the borrowed money your credit score goes up, they trust you.  As your score gets bigger and better lenders will trust you with larger amounts of money to buy things like a car or a house. But, be cautious because the opposite holds true as well. If you don’t pay back the money you borrow on time then the lender working with you will stop lending you money and your relationship will end AND this lender will let other lenders know not to lend you money because you are not trustworthy by lowering your credit score. Side note: Your credit score can also affect things like interest rate, fees to startup your utilities, even getting approved for an apartment because it is an indicator of how responsible you are with making payments on time, no landlord wants a tenant that is late on rent! 

Establishing credit

So, the question is… How do you get credit when you haven’t established a credit score for lenders to look at?

Well, there are a few different ways:

  1. Have your parents add you to their credit card
  2. Get your own credit card
  3. Get a loan with the help of a cosigner

The first option, having your parents add you as an authorized user, is good only if your parents have good credit and the credit provider reports authorized users to the credit bureaus. (If the credit provider doesn’t report authorized users than this shortcut won’t work) Being an authorized user does have risks associated that parents may not want to take on, like the fact that you will have access to credit that they are responsible for. So, hopefully, your parents trust you.  In the event that they don’t, they can still add you as a user without giving you the card to use and your credit will go up based on good standing your parents have with the lender. This technique can have adverse effects on your credit if your parents cannot repay what they have borrowed, so trust needs to go both ways.

Secondly, you can open a secured credit card, which essentially you have to give the lender money up front.  For example, to get a secured credit card that has a $500 limit you must give the lender $500, so in the event that you don’t repay them, they aren’t out anything.  This is a good way to start so that eventually you can get an unsecured credit card.  An unsecured credit card is a normal credit card where you have a limit given to you based upon your credit score/credit history.

Finally, getting a loan with a cosigner means that the lender creates a loan in your name, but in the event that you cannot repay the note, the lender can go after the cosigner to repay the loan.  Again, this type of credit requires extreme trust because it can damage the cosigners credit if the loan doesn’t get paid back on time.

All of these options have pros and cons and that is why you should sit down with a professional to find the best solution for you and your family as you start building your financial life.

Disclosures