You may have already heard your parents going on about not spending all of your pocket money at once, or making sure you put aside some of your pay check each week, but in most cases, parents can’t offer much more advice than that because in reality most adults don’t have the money management techniques they need to control their own credit card debt or save an emergency fund – let alone the knowledge to pass onto you.
Plus, as much as your parents say they remember what is was like to be a teenager, memories cloud, and more importantly, changes occur in the banking and savings markets which they may not have kept up with. So why not take control of your financial destiny and find out exactly how you should be managing your money from the start, with these tips.
1 – Start earning
You need to have money to start managing it, and you will never have as much time or as much energy as when you are a teenager – even though it may not feel that way sometimes. Therefore, take advantage of the opportunity to start earning and saving young by getting a part time job, or even working around home mowing the lawn or cleaning the house for an allowance.
As a teenager, time is on your side when it comes to money management because you can start saving young, and set yourself up for the future you want – whatever that turns out to be. For example, if you are 15 years old and you start putting away $10 each week into a high interest savings account earning 3% interest (if you find it), by the time you are 25 and are ready to buy a house, travel the world or start your own business, you’ll have over $6,070.60 thanks to compounding interest.
The calculation works like this:
Your yearly contribution is $520.
You are earning 3% interest, or 0.03.
You are investing for 10 years.
With monthly compounding this will come up to be just over $6,000 after ten years. If savings of ten bucks a week will do that for you, imagine what can be done with a more aggressive savings plan.
2 – Budgeting and borrowing
As a teenager there are a lot of things you’ll want to buy, and just not enough money in your world, so you may be tempted to borrow the funds. It’s often easy to borrow from mum and dad, and while they may hand over the cash in most cases, you are not setting yourself up for successful money management. The other option is a personal loan, if you want to buy your first car for example, but in this instance, consider what the loan will cost you in application fees and interest charges.
Where interest is your new best friend when it comes to your savings, you will quickly learn that cash costs money on your borrowings. For example, if you wanted to get a personal loan for a car at 18, now that you’re out of school and living life, a $3,000 personal loan for seven years at a 9% interest rate will cost you less than $50 per month, but over the term of the loan you will pay more than $1,000 in interest.
However, if you were to budget to keep putting away your $10 each week, and save the $15 per week you would pay towards a car loan, your $25 contribution will attract good compounding interest and if you wait just two years until you are 20 years old, you will have over $6,000 saved and you can buy a car without worrying about interest charges, only interest income.
3 – Clever shopping
Part of the transition through teenage hood into becoming an adult is learning about clever purchasing choices managing your money successfully is about more than just good investments, it is about clever purchasing decisions. For example, ‘shop’ your friends and family for items you need before you go out and buy them new, this could include school supplies from older neighbours or cousins or books, toys or computer games which your friends don’t want or need anymore, and can be swapped with items you want to recycle from your possessions.
4 – Wants vs needs
While some of the new things you want can be found second hand through your network of friends and family, it is still important to be able to tell the difference between wants and needs. The truth is, you probably have a lot of clothes, shoes, accessories or games, and if there isn’t room in your budget for that new outfit, then don’t stretch your finances just for a luxury purchase.
5 – Protect your identity
Managing your money will inevitably see you using internet banking and this can make you a target for scammers and fraudsters. To make sure the money you’ve worked so hard for is kept safe, follow these few identity protection tips when banking:
• Never respond to an email from your bank asking for your details. Your bank will never email you asking for any personal or account details – after all, they have all these details don’t they! No, this is a scam and as soon as you send your account details, date of birth, credit card number, or even just the expiry date of your cards, you are at risk of your accounts being used fraudulently.
• Look for a secure URL. Before you enter your account details into any site, whether it be online banking or an online store, look at the address bar, and make sure it reads https:// as the ‘s’ means the site is secure, and your details will be protected.
• Protect your paperwork. Don’t write down your PIN or credit card number and especially don’t keep your card and your PIN together – even the bank will post them to you in two separate envelopes. Also make sure if you are throwing away receipts or statements that you shred them to avoid leaving your personal details in the trash for anyone to find.
6 – Choose the best transaction account
Your transaction account will get quite a workout when you start earning and managing your own money, so make sure you choose one with low or no fees. Start by looking for an account which doesn’t charge you monthly fees because you don’t need to pay just for the privilege of having the account. Then look for a financial institution which has inclusive transaction fees, or a flat fee for unlimited transactions in a month. This saves you from tracking your transactions and worrying about fees.
There are other conditions you should watch out for with a transaction account, such as conditions surrounding a minimum balance. For example, some banks will offer a fee free transaction account, if your balance remains above a certain value – which is just something else to worry about. There are also ways you can get more for your transactions, for example, instead of using EFTPOS in store and then going to the ATM for cash, make one transaction and ask for cash out in store.
7 – Credit cards
Whether you opt for a credit card as a teenager is a decision which will depend on your circumstances, and your own personality – whether you believe you have the discipline. The most important thing to remember about using a credit card as a teenager is that it should only be done to build your credit rating, never as a source of emergency funds.
If you have your savings plan set up in Step 1, you won’t need to fall back on a credit card to pay for an unexpected expense, and risk high interest charges. Plus, it is very hard to find a fee free credit card so you can be paying account keeping costs for a financial product you don’t need.
At the same time, using a credit card can help you develop a responsible relationship with credit, and to get more out of your money, you could use it in conjunction with your savings account. For example, choose a credit card with a long interest free period, and use it for all of your purchases during that period. When your pay check comes in, deposit it to your high interest savings account, as these accounts often compound interest daily, and the higher your balance, the higher your interest income. Before the end of your credit card interest free period, take the amount you need from your savings to pay your balance to zero and start fresh the following month.
In this situation you have been using the bank’s money while yours earns you interest, but this does require some disciplined budgeting, or a credit card with a limit which doesn’t exceed your monthly income.
Alban is a personal finance writer at Home Loan Finder.
(photo credit: partywounds)