Taking Care of Your Money
Most adolescents understand the importance of money on some level. But real-world living expenses—such as rent and groceries—can be a big shock. Without good spending habits and realistic financial goals, adolescents may soon find themselves struggling to make ends meet. Here are some basics about handling money.
Opening a Bank Account
One of the first steps you can take in establishing your independence is to open a bank account. Why open one? It helps you to learn to manage your money. In addition:
- Your money will be in a safe place and is federally insured. So even if your bank closes, you will get your money back.
- You can pay bills by check versus paying by cash or money order.
- You can track your money through banks’ services, such as checking your account balances regularly online.
- You can have the convenience of direct deposit. Your payroll check can be deposited directly into your checking account.
- You will establish credit. Your chances of obtaining a home or automobile loan or student or personal loans are likely to improve because banks tend to favor their existing customers. Of course, you need to manage your money well and have a good credit report first.
- You can arrange to automatically pay your bills for routine expenses.
Be aware that you will need to provide certain documents in order to open an account, including a driver’s license/state ID, Social Security card, and proof of a mailing address. Also keep in mind that banks may require a minimum balance when opening an account, and may charge a fee if you fall below that balance. Be sure to research bank policies, and ask questions about all fees and services involved.
How to Choose a Bank
- Understand your financial needs and what is most important to you. Are you more concerned with depositing your paycheck into a checking account or saving money?
- Understand how much is needed to open an account.
- Read the fees disclosure statement, the form that completely describes the fees charged. If you are confused about the fees, ask your caseworker or another adult you trust for assistance.
- Understand ATM fees. These fees can vary widely between banks and can add up quickly.
- Ask about fees for accidentally taking out more money than is in your account, which is typically called overdraft protection.
- Understand checking account policies and fees. These, too, can vary widely between banks. For example, is it really free checking, or do you have to pay additional fees for services you don’t really need?
- Does convenience matter? Do you want a bank that has a lot of branches that are convenient for you, or are you willing to drive for lower costs and fees?
Ways to Manage Your Checking Account
- Balance your account every month. Try and do it as soon as you receive your monthly statement.
- Write fewer checks. The fewer you write, the fewer you have to account for. For purchases less than $20, consider paying with cash.
- Watch your ATM usage. Every time you use an ATM or debit card, you have to record the transaction. And if you don’t use your bank’s ATM machines, you will likely have to pay a transaction fee. Try to withdraw enough cash to last at least one week.
- Get overdraft protection. This will cover you if you make a mistake or run short and will save you money and embarrassment. Even if your bank charges for the service, it is cheap insurance.
- Use Internet banking. Banks have improved the quantity and quality of services offered electronically. You can get up-to-date information on your account online and correct any mistakes quickly.
Banks also offer credit cards. These are similar to ATM/debit cards, but are not connected to a bank account. Instead, credit cards allow customers to buy something now and pay for it later. But again, you may face steep interest rates for the privilege of borrowing this money. For those who charge more than they can afford to pay—or those paying only the minimum amount due each month—interest charges can add up quickly. The bottom line: Use credit with caution. Do not use credit cards for cash advances, make sure you only buy what you can afford to spend, and be sure to pay off all your purchases each month to avoid racking up costly debt.
If you keep overcharging on your credit card and can’t pay the card company back on or before the due date, you will owe the credit company more and more money. Having a big balance on a credit card can look bad on your credit report.
And if you have bad credit, you may not be able to borrow money later. Having bad credit can cause you to pay higher rates on mortgages and car loans and may cause you to be turned down for credit.
Some other ways bad credit can hurt you:
- Car insurance. Insurance companies use your credit score to determine your eligibility and what your premium will be. If your score is bad, your premium will be higher.
- Employment. Most companies run a credit report on job applicants before they hire them, and bad credit can cause you to be turned down for a job.
- Car loans. A low credit score may cause you to get a higher rate.
- Student loans. Bad credit can cause you to be turned down for school loans.
- Utilities. Many people are surprised to learn that utilities check your credit before extending service. Bad credit may cause you to have to put down a hefty deposit before service starts, where no deposit will be required for those with good credit. The same goes for cellphone and cable service companies.
- Rent. Bad credit may cause you to have to put down first and last months’ rent as well as a hefty deposit before an apartment management company will allow you to move in.
You can check your credit report for free once a year by calling 877-322-8228 or by going online to AnnualCreditReport.com.
Beware of Predatory Lending
The National Association of Consumer Advocates defines predatory lending as a transaction where a financial institution takes unfair advantage of a person’s financial needs by charging high interest rates and other unfair charges.
For example, a mortgage company might target low-income individuals with the promise of helping them obtain a loan to buy a home, when in fact the company is saddling the buyer with extremely high interest rates that will make it difficult for that person to manage the debt. Or a lender might conceal a “balloon payment”—a large sum that is due to be paid by the buyer at a specified time—in a purchase agreement.
The Tennessee attorney general’s office recommends that consumers take these steps to protect themselves.
- Always shop around. Examine the terms of the loan and compare to those offered by other lenders. Start with a traditional lender, especially one with whom a relationship already exists.
- Ask questions. Understanding the terms of a loan is the key to a successful transaction. The numbers and various terms are confusing to the average buyer. The lender must give a “good faith estimate” of the terms of the loan three days before the closing. Do not be afraid to ask someone, such as a lawyer, a representative of the bank or someone you trust, to explain anything that is unclear. Never sign a document without knowing the complete terms of the obligation.
- Be aware of the TOTAL payment amount over the life of the loan. Although the monthly payment amount may be low, extra fees increase the total cost of the loan. Borrowing more than is affordable per month is never a good financial decision. A mortgage payment should fit into a monthly budget for years to come, not just for a short time.
- Avoid promises to refinance at better rates in the future. There is no guarantee that interest rates can be reduced in the future. Interest rates depend on many factors such as income, credit score, collateral and market changes. The lender who originated the loan cannot promise a better rate in the future because they cannot accurately predict these variables. Even if the first rate is not the best, make sure it is a rate that is affordable for years to come.
- Never sign a blank document or anything the lender promises to fill in later. If a consumer signs a blank document, fraudulent lenders could change any term they previously promised. If a lender claims that an offer is good for a limited time, investigate and compare this offer to other lenders. If in doubt, do not sign. An honest lender wants new business and will not set unreasonable time limits on accepting the loan terms or use high-pressure tactics.
- Educate yourself on the homebuying process. Buying a home is overwhelming for most people. Be sure to learn as much as you can about the process before buying.
Keep track of how much money you earn, save and must spend so you know how much money you need to pay your rent, bills and other expenses. Live within your means: Don’t spend more than you have, and don’t feel pressured to buy the latest fashion fads or gadgets unless you can pay for them in cash. Know the difference between things you really need and things you want. For instance, needs are things like food and shelter, and wants are things like designer jeans or an iPad.
Here are some more tips on budgeting:
Create a realistic budget. Start by tracking all spending, including little things such as a morning coffee or lunch with a friend. This will help you understand where your money is going, and to recognize the difference between “needs” (food and shelter) and “wants” (concert tickets or a new outfit).
Make saving a priority. This could include saving for a specific goal (such as a down payment on a car) or simply building a safety net or emergency fund. A solid savings can help take care of unexpected expenses as they come up, rather than falling victim to credit card debt or payday lenders.
Set specific goals. It’s not enough to say, “I want to save for college.” Think about the dollar amount needed, and break it down into manageable pieces over a specific time frame. Be honest about how much money you can put toward that goal each month, and how many months it will take.
Develop a system that works for you. Whether it’s an online spreadsheet, a smartphone app, or simply a file folder and calculator, you need to have a system in place that helps you monitor finances and balance accounts.
Review weekly spending. Get into the habit of opening bills as soon as they arrive and writing due dates/reminders on a calendar. Set aside a few minutes each week to review deposits and spending activity, including purchases made using a debit card and all ATM withdrawals.
Do Your Homework Before Buying a Car
Purchasing a vehicle can be a major investment that affects your livelihood and quality of life. Whether you’re looking to buy new or used, you need to learn about the process to make sure you acquire a reliable vehicle at a good price. These are just a few of the questions you need to ask yourself:
- Can you afford to buy a car?
- Should you buy new or used?
- Should you lease?
- What kind of car is the best for your situation?
- Where should you look for deals?
From determining what kind of car you can afford, to shopping around, to negotiating with sellers, the process starts with reading up on the basics. There are many online resources for learning the basics of buying.
Protect Your Most Important Documents
It’s important to keep safe your key personal documents, such as your Social Security card, birth certificate and other personal identification, along with critical financial documents, such as a certificate of deposit or loan contracts. Consider renting a safe deposit box at a bank, or buying a small fireproof safe you can keep in your home.