Managing Your Finances During Each Stage of Life
April is Financial Literacy Month. As you await your tax refund, this is a good reminder to review your financial health and make the necessary changes in the way you manage your money.
Every household is directly affected by finances, no matter how much money you make.
Here are financial management tips for each stage of your life:
Start saving now
Teenagers receive money for birthdays, allowance and jobs. At this early age, develop the habit of putting money into a savings or investment account. You can even collect loose change to add to this. Over time, small sums grow with interest. Starting the habit young will make it easier for them to save throughout their life, which can set them up well down the road.
Make a budget
Budgeting is important, even for teenagers. This is the time for them to start paying for entertainment, clothing, and cell phone bills. Keep a list of every expense, no matter how small so that you know where your money goes. This will make you think twice about the importance of each purchase. Review your budget each month to make sure you are staying on track and adding in any new reoccurring expenses that you have and adjust your budget to accommodate them. Making a budget is not a set it and forget it task, you will need to look at it often and adjust it as time goes on.
Begin To Build Credit
If you begin to build credit as a teenager, most states require you to be 18 or older to get a credit card, it can set you up for more favorable loans as you age. One of the ways your credit score is determined is by the age of your credit accounts. The older your accounts are the better, so in turn, the earlier you get a credit account and begin building credit history the more it can help down the road. With that said, it can be difficult for some teenagers to manage money and fully understand how credit cards work and because of that there are a couple of responsible ways you can teach your teenager about credit cards. One way is to have them as an authorized user on a parent’s credit card and the other is through a secured credit card. If you as a parent add your teenager as an authorized user, your credit could suffer if they overspend on your card and leave you to fit the bill so you will want to discuss some spending limitations with your child. With secured cards, your teenager can use the month they’ve earned from a job and put that as a security deposit to open their own secured card. The money they put as their security deposit will become their credit line and they can borrow from that and repay their balance every month. If they only use if for purchases such as gas and pay it off every month they stand a good chance to see their credit score develop as their usage is reported to credit agencies.
Save and invest
If you are single or married without kids, this is the least expensive time of your life. You have a job and are finally making money, but you have to be smart with how you use it. You can spend it all on clothes, cars and entertainment, or you can spend wisely and save for the future. You may have just graduated from school, but this is best time to plan for retirement. Maximize your retirement accounts because even though the stock market is volatile, time and compounding growth are on your side. Create an automatic deposit into your retirement accounts, this makes it easy and you wont be tempted to keep the money instead of saving or investing.
Pay down your debt
If you went to college, you may be starting out with significant student loan debt. On top of that, you may also have credit card debt. This can be overwhelming and you must develop a plan to pay it off. Start with the debt with the highest interest rate and pay as much as you can above the minimum payment. If you get extra money as a gift, bonus or tax refund, use this as an extra payment on your debt. Clip coupons and take your lunch to work, and use the money you save to immediately make micropayments on your debt. Paying down your debt now and not accruing any new dept in the future can open your finances to live a less stressful life. If you don’t have to worry about making payments every month and you are debt-free, it will also make saving and investing a much easier task.
Build up your credit score
Test scores are behind you, and now is the time to focus on your credit score. This score is more important than any exam because it is how lenders judge you. Your credit score affects the terms and interest rates for all loans–credit card, mortgage, and auto. The higher your credit score, the lower your interest rates, resulting in more money you can keep. Your payment history and how you handle money is so important that it may be used for an apartment rental or insurance applications. You can utilize a credit card to build your credit. Make only payments with your card that you know you would make anyways and pay off your balance every month. As you build your score you will be able to qualify for lower interest rates, cash back, balance transfer, and sign up bonus cards.
Full disclosure of debt, credit scores, and financial obligations
Before the wedding, tell your partner about all of your debt if you have any. Make a list of all student loans, car loans, credit card debt and even loans from friends and parents. Get copies of credit reports to verify all open accounts. One or both of you may enter the partnership with debt payments that will drain away money you could be saving to help you reach financial goals. There are a number of things that newlyweds need to keep in mind when joining finances, but the main thing is to be open and honest from the beginning.
Joint or individual bank accounts
Will you have one bank account for all income and expenses, or will you start with three accounts–yours, mine and ours? A joint account is easier to manage and will prevent some disagreements over dividing bills, but decisions need to be shared. It gives each partner some control over their own spending. Couples tend to gravitate toward joint accounts once they add children and major expenses. If you choose to have separate accounts, develop a plan outlining which account pays each bill before the payments of the first bills are due.
Save for college
The best time to begin saving for college is the day you bring the baby home. There are college savings plans with tax benefits. Look at state-sponsored 529 plans and educational savings accounts. Grandparents can also make contributions to college funds. The earlier you start a college fund for your children, the longer it has to grow. Making it a habit early on can make it easier to consistently do it throughout life.
Inheritance and windfalls
You may receive money from a home sale, inheritance or insurance payment. This is a great chance to pay off high interest debt, like credit cards or auto loans. It is also a good time to fully fund an emergency account–six months of household income–and put more money into your retirement account.
Teach children about finances
Children learn attitudes about money from their parents, so set a good example for your kids of saving, spending wisely, and charitable giving. Take them shopping with you and show them how to compare prices, find good deals, and walk away from a purchase because the price is more than you can pay. Open a bank account in their name and let them make deposits into their own account. Show them the interest they earn each month on their statement. Give them an allowance and let them make their own decisions about this money, paying for their own toys and games. This also gives them a chance to make mistakes with money. Help them understand that once the money is spent, it is gone.
PREPARING FOR RETIREMENT
Max out your retirement savings
You may still be paying for your children’s college education, but it is just as important that you save all you can for your retirement. If you retire at 65, will your retirement savings sustain you for at least 20 years? It is a good idea to save 10 to 20% of your annual income for retirement. Max out your employer’s retirement plans and your Individual Retirement Accounts (IRAs).
Pay off your debt
It is easier to pay off credit card and other debt now while you have income. The New York Federal Reserve says two million seniors in the United States who are age 60 and over still have their own student loan debt. If you have credit card debt on multiple cards, select the card with the highest interest rate and pay as much as you can above the minimum balance every month. You can even skip dinner at a restaurant and immediately log in to your account to apply that money to your credit card.
Have a plan to make your savings last
Today, seniors have a longer life and their retirement savings have to last longer. This may be difficult if your investments are still recovering from the recent financial turmoil. Developing a plan and a budget may require the help of a financial advisor. The FDIC provides some good information on how to help your money last after your last paycheck.