Women on Money and Mindset: 5 lessons for youths – Press

A five-step primer to help young people learn how to manage their money.

1. Learn to live within your budget

The first step in managing your money is learning how to budget. Budgeting is the process of documenting the amount of money you receive and spend within a specific period of time. Usually this is tracked on a monthly basis. The goal of a budget is to ensure you are meeting your basic needs — and some wants — without spending more money than you actually have or will receive.

Start by writing down all of your income and expenses. This income may come from a part-time job or possibly your parents in the form of an allowance. Next, write down how much you spend monthly on items such as lunches, Starbucks lattes, movies, clothes, music, etc. Do you have money left at the end of the month? Or do you run out before the end of the month and need to ask your parents for more? If you have money left at the end of the month, you are living within your budget. If you are running out of money prior to the end of the month, you are not. It is key to determine why.

Maybe you can afford to buy a Starbucks latte once a week, but not three times. Some of your expenses may be for a need, such as eating lunch. It is your option to bring a lunch from home or to purchase it. Some purchases are wants, such as buying a new outfit or that Starbucks latte. If you are not living within your budget and need to reduce your expenses, your wants are usually the first items to reduce or eliminate. But not always. Maybe in lieu of buying lunch you choose to save money by bringing your lunch from home. By making this trade off, at the end of the month you may have saved enough money to spend it on a new outfit.

Budgeting will help you prioritize your spending, earmark money to save for the future, and plan for your short- and long-term goals.

2. Open a bank account

Savings accounts are used to hold money at your bank for longer periods than in a checking account. Because you are lending your bank money, they will pay you interest in return. Banks will take the money you deposit in your savings and lend it to someone else, charging a fee or interest. They make money on the spread, the difference between what they pay you and the interest they charge on the loans they fund with your money. Savings accounts don’t typically have check-writing privileges or debit cards attached to them, making it a bit more difficult for you to access this cash.

3. Save for your future

Learning to be diligent about saving at a young age will make a tremendous impact on your lifestyle, especially when you are older. Accumulating cash or investments is empowering. Eventually, you may be able to purchase a car outright, buy a home, or retire earlier than planned. The more money you save, the more control you have over your destiny. And at some point, if you save and invest regularly, you should be able to live off the income generated by your investments; that saved money is now working for you! By starting early, you benefit from compounding — and your small sums of money can grow into large amounts over time.

Compounding is the process where the value of an investment increases because the earnings on an investment, earn interest as time passes. This exponential growth occurs because the total growth of an investment, along with its principal, earn money in the next period.

For example, if you save $100 per month for 50 years in an account that does not pay interest, you will accumulate $60,000. If you take that same $100 per month and place it in an account that pays 5 percent interest compounded daily for 50 years, you will have saved $269,547.84. That’s a huge difference!

An easy calculator to run compound interest calculations is found on Investor.gov, it is called the Compound Interest Calculator and Savings Goal Calculator. Here, you can see how much money you will earn if you invest a certain amount of money and it grows by a certain interest rate over time.

Eventually, you will accumulate enough cash in your account to consider investing. Investing involves putting money into stocks, bonds, mutual funds, or real estate, among other things. Sometimes these options are called investment vehicles, which is just another way of saying “a way to invest.” All investment vehicles have risk, so it is important to diversify your investments. The goal of investing in a diversified portfolio is to put your money to work for you so that it earns more money than a basic savings account will pay you. Even though this is a simple idea, it is an important concept to understand.

4. Establishing credit

Credit is borrowing money to purchase goods and services with the promise that you will pay the money back at a later date. This means you are making the purchase with a loan and not the cash in your pocket or bank account. Credit is important. Without credit, it is difficult or impossible to purchase a home or a car unless you have the cash saved to purchase the item outright.

When you apply for credit, it is very important to understand what you are signing up for. Often there are fees and charges that are not obvious to you when you are signing the application. Don’t be shy about asking questions when you are applying for credit until you are comfortable with the answers.

Credit cards are a good tool to use when starting out. They are easy to access and, if properly managed, are a good way to establish credit. Just be wary of the fine print.

Before you sign up for a credit card, make sure you understand the answers to the following questions:

What is the annual percentage rate (APR)?  (This is the cost of credit, expressed as a yearly rate.)

What is the periodic rate? (This is the rate of interest the credit card company is charging you for the loan if you do not pay your credit card balance off at the end of the month.)

What is the APR for cash advances? (A cash advance is when you borrow cash from your credit card. The interest rate may be much higher than the APR for purchasing items with your credit card.)

What is the grace period? (This is the number of days that you have to pay the bill in full before interest is charged.)

Is there an annual fee? (Sometimes the credit card company will charge you an annual fee just to have the card.)

What is the late payment fee? (If you make a late payment, you are often charged an additional fee.)

What happens if you default? (If you skip a payment, your monthly APR will likely increase and your credit rating may be negatively impacted. This  could make it more expensive or impossible to borrow money for a major purchase like a home or a car.)

5. Manage your credit

When you apply for a credit card, a loan, or insurance, a file is created on you. This file is managed by credit reporting companies and the information is called your credit report. Your payment history and the amount of credit that you have is tracked over your lifetime. Managing your credit is very important. If you have negative credit — perhaps because you are not making your loan payments on time or at all — it can take up to seven years to be removed from your credit report. Some negative credit issues, such as a bankruptcy, can take up to 10 years to be removed from your credit report.

Poor credit history can make it difficult for you to rent an apartment, get a car loan, or even find a job. To manage your credit:

Review the charges (debits) and the payments (credits) posted to your monthly credit card and loan account statements.

Pay your bills on time each month. Late fees will likely be assessed if a bill is not paid on time.

Be very careful about over-extending yourself with too much credit. Often people have too many credit cards and cannot pay off their balances at the end of the month. This can become a very dangerous cycle. Only charge what you can pay off in a short period of time. Excluding the loan for a home or a car, if you cannot pay off the debt in a short period of time, you probably should delay your purchase until you can better afford it.

Teri Parker is a vice-president for CAPTRUST Financial Advisors; she has practiced in the field of financial planning and investment management since 2000. Reach her at Teri.parker@captrustadvisors.com.

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