Too many young adults who are already out of school have low levels of financial knowledge so we, as a society, need to come up with other alternatives. Employers could offer financial literacy programs or at least provide resources to help young people avoid some of these costly mistakes. Schools should offer basic financial planning classes.
If nothing else, the recession has made us brutally aware of what we don’t know. Here are some of the more common, and costly mistakes, and ways that people can avoid them.
1. Not having an emergency fund. Experts recommend that everyone have a three-month emergency fund—at least. You never know when you’re going to get a flat tire or a leaky pipe—emergencies that happen all of the time but that can become very costly if you’re not ready for them. Having to borrow money on a high interest credit card can cost you hundreds in wasted interest payments.
What happens if you lose your job and have to dip into your emergency fund? First, don’t stress. It’s ok to use the emergency fund for rent or food—for needs. It’s not such a good idea to use it for that pair of shoes you really want or a night on the town. During a recession it can be hard to have and maintain an emergency fund. That’s ok, as long as you save what you can.
2. Slow leakers. These are the people who spend money on bottled water and daily Starbucks runs. The people who use their debit card for everything, no matter how small, and then forget to include the little things when they balance their bank account or budget. Even that $2 coffee can lead to overdraft fees.
3. Bad budgeters. These are the people who forget about certain expenses and therefore don’t budget for then. Or, they don’t budget at all, then wonder why they don’t have any money.
4. Minimum wagers. Paying just the minimum on your credit card is another expensive mistake. The bigger the balance, the longer it will take you to pay off and the more you will pay in interest. If possible, only use your credit cards for emergencies and pay off the entire balance on time. If that’s not possible, pay off as much as you can each month.
5. Plastic life. Living off a credit card is one of the worst money mistakes that you can make. If you are living off your credit card this probably means that you are spending more than you’re earning, a big budgetary no-no. If you are out of work and out of money you may have to live off your credit card for a while, but, in this case, you should really tighten your belt and spend as little money as possible. In addition, try to find a credit card with a low interest rate. A credit card is like a loan, meaning that the money will have to be paid back, with interest.
6. No doggy bag. It is possible to have some money leftover from a college or personal loan. As tempting as it may be do not use this money for anything other than paying back what you borrowed. Loans have to be repaid. The longer it takes to repay them the more money you’re going to end up paying in interest. Instead of spending any leftover loan money, simply use it to pay back what you have borrowed. In fact, it’s a good idea to make a loan repayment plan and begin paying back your loan as soon as you possibly can.
7. Too much, too young. Many young people make the mistake of thinking that they need to build credit while they are still in college. While it is always good to have good credit, it is not always necessary to have credit at all. Remember, it’s a lot easier to turn your credit bad than to keep it good. Don’t open a ton of accounts just to build up your credit. In reality, it only takes three months to build credit.
No one can be perfect all of the time but if you can avoid making some of these costly mistakes you can avoid wasted time and money.
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7 Common (Expensive) Financial Mistakes
Ramit Sethi, Author of I Will Teach You to Be Rich was interviewed by certified financial planner, Cathy Curtis at the Commonwealth Club of California event.
Ramit talked about his book and some of his philosophies on personal finance management. I recorded the interview and wanted to share a few snippets from the discussion about his “Bulletproof Personal-Finance System”.
Watch the video and share in the comments your thoughts about his system. Have you tried it? Do you think it works? If not, why?
With the US facing its worst recession in 30 years, many are being reminded of the importance of financial literacy. In fact, many are debating whether it’s important enough to make it a requirement in our school systems.
Increasing the importance of financial literacy is new legislation that takes effect in February 2010 which prohibits anyone under the age of 21 from obtaining a credit card unless a parent, guardian or spouse is willing to co-sign. The one loophole to this is if you can prove you have sufficient income to cover your credit obligations, you may be approved.
There are several statistics that show the need for increasing the age limit on a credit card. According to a 2009 study by Sallie Mae:
- In this time of economic downturn, college students are relying on credit cards more than ever before with the average amount of debt increasing 46% since 2004.
- Half of college students have four or more cards and seem to use them to live beyond their means. Close to one-fifth of seniors carries balance greater than $7,000.
- Nine in ten graduates paying for direct education expenses with credit cards and the average college graduate owes about $19,000 in student loan debt.
- One-third of students rarely or never discussed credit card use with parents, and nearly all undergraduates would like more information on money management topics.
If those under the age of 21 can no longer apply for a credit card, it may reduce debt for some college students who are depending on credit cards, but what about those who want to become independent? How can they build a good credit history so they can ultimately rent an apartment or buy a car, when they can’t qualify for credit?
This is where the importance of financial literacy becomes even greater, as young adults will not only need to start building credit early but they’ll need to learn how to build their credit without actually having a credit card.
Here are 5 ways for parents to steer their teens toward financial responsibility and help them build credit:
- Start safe. Open up a checking account with a debit card. Depositing birthday and Christmas money into a savings account helps teach kids about savings at a young age, but once your child starts working or receiving an allowance, they should start learning about budgeting and the responsibilities of paying bills. Opening up a checking account and letting them have a debit card is a great way to start. While a checking and savings account do not begin your credit file, they will be checked as evidence that you have money and know how to manage it. Checks can be used to show that you pay bills regularly, a sign of reliability.
- Make your teen an authorized user on your credit card. There are two approaches to this idea. First, you can make your teen an authorized user and not give them an actual card to use. Just having their name on the account will help build credit. The alternative is to actually give them a credit card for use. While it can be scary, I’m actually a fan of this approach, as I think it’s important to give the responsibility to your teen. Show them how to read a credit card statement, what they should watch out for on statements and make sure bills are paid on time. Letting them go through the process is giving them the true experience of financial management. Of course the idea of making your teen an authorized user is only a good idea if you have a good credit!
- Open a joint credit cardYour teen can still get a credit card under the age of 21 if you co-sign on the card for them. If you believe your teen is ready to handle the responsibility of a credit card, than this is a great option. Be sure to talk with them about how joint accounts work and if necessary, set limits or expectations on the use of the card. LaToya Irby at About.com has some great tips for sharing a credit card.
- Open a secured credit cardA secured credit card is a card which requires the user to provide a cash collateral deposit that then becomes the credit line for that account. There are a lot of pluses and minuses to getting this type of credit card, but it is a good way for people who have no credit to build up credit. Throughout time you can add a cash deposit to give yourself more credit, or sometimes the bank will reward you for good payment and add to your credit line.
Bankrate.com has an article on 10 questions to ask before getting a secured credit card, which is a great read if you are thinking about this option.
- Get your child a prepaid debit cardThis is a relatively new type of card that enables parents to issue a debit card for their teen, but with built-in parental controls. The card gives parents several options including setting spending limits, receiving alerts and restricting certain shopping categories (i.e. tobacco or liquor). One thing to be cautious of is the membership fee, as these cards tend to have a sign on fee plus annual membership costs.
While it seems a little overbearing to me, it is a good way to start before diving into a full on credit card. The card will not actually help build credit, but it will help teach your teen about managing money and spending within their means. Some cards do offer special programs designed to help people with no credit or with damaged credit build positive credit history. More information on prepaid debit cards can be found here.
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5 Ways to Steer Teens Toward Financial Responsibility
The newest ways to manage your money don’t require expensive software. They are web-based—you can log into them anywhere—even on your phone. And, best of all, there are many free options to help keep your budget in check.
One of them is moneyStrands (moneyStrands.com).
moneyStrands.com is easy to use. You enter your account information and moneyStrands breaks every expense and deposit in each of your accounts into different categories (home, insurance, auto, shopping, groceries, etc).
Clicking on the details tab allows you to see your account broken up in a color-coded pie chart. Each “pie piece” is a different category and you can easily change the time period you are looking at (anywhere from the current month to “ever”). If you feel that you are spending too much in one category you can set up budgets and have moneyStrands.com track your progress. You can also schedule alerts—no more overdraft surprises!
But what makes moneyStrands.com really stand out is the ability to anonymously compare your investing and spending habits to other people within your demographic, or with similar traits.
Answer a few easy questions and the program compares your income and spending habits with relevant sub-groups (e.g. students) within the community to see how your expenses match your peers. moneyStrands.com uses social recommendation technology to help you find the best ways to invest and save money and to recommend things for you to buy. You can view your comparisons by category in either a bar graph or bubble chart.
moneyStrands.com offers a variety of widgets that you can activate, including: recommend financial products, tips, favorites and what to buy. Another neat widget is the “financial condition” widget.
It’s an easy-to-read graphical representation of your financial situation. If you hover over the graphic it offers an explanation: “Your financial condition is excellent when your average monthly expenses amount to less than 30% of your monthly income.”
Web-based means immediate access to all of your accounts: bank, credit cards, and investing accounts. You can log in at home, at work, or anywhere you have Internet access. moneyStrands promises that their site is just as secure at any other banking or investment site.
Their website promises that security is a top priority. moneyStrands.com is free. They also offer a free mobile app for the iPhone.
See more here:
Free online money management software: moneyStrands
Investing may seem daunting for a lot of people. Maybe you have tried it once and failed, or maybe you are simply frightened of losing your money.
To avoid losing any capital, you simply need to be aware of the main pitfalls and always avoid them. The simple, reliable rules for investing are:
1. Have a plan. Always ensure that you or your financial advisor draws up an appropriate investment strategy for you that incorporates your risk profile, timeframes and financial goals. As foolish as it seems, many people plunge headfirst into investing without thoroughly working through these fundamental issues.
2. Don’t put all your eggs in one basket. Obvious advice, but many people fail to follow it. Many people think that they are on the right financial track by paying off the mortgage on their family home and then buying another property for investment purposes.
Think about it! You have put all of your financial eggs in one asset basket – property. What happens if the property market collapses? Despite common thinking that this is a safe way to invest, the outcome is very risky. You have invested all of your well-earned money into only one area.
3. Build in appropriate timeframes. There is an old saying, “When the tea lady starts to invest in the stock market, it’s time to get out.” What this means is, when the share market is so high that everyone starts to clamber on board, it has probably reached its peak.
There are two ways of successful investment timing. The first is to always pick the low-end of the market to buy and the high-end of the market to sell. This is extremely hard to do. Even the best-informed experts have trouble. The second way is to choose good investments and stay with them over the long-term (say 10 years or more) and ride the waves of the market.
For safe, easy investing, choose the second method. Do not buy into the top-end of the market and sell once it starts to fall. You will definitely lose money this way.
4. Avoid high-risk investments. These include risky business ventures, highly speculative stock, tax avoidance schemes or too-good-to-be-true propositions that promise unusually high returns.
5. Avoid borrowing for your investments. Although some financial advisors advocate ‘gearing your investments’, this can be fraught with danger. Gearing means to borrow. If borrowing for investments takes you over your 40% fixed costs margin, you will be cutting it too fine, particularly if you lose your current income level.
6. Stay with the traditional and known. The best and surest investments are fixed interest, property and shares. Although all asset classes will fluctuate over time.
Work out the optimum mix for your investment profile, have a safe plan to work with and you can’t go wrong.
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6 Rules for Investing
