I always look back fondly on my twenties. For the first time in my life, I felt like I was an adult, doing actual adulting. I moved away from home, got my first credit card, and purchased my first car. However, it wasn’t all sunshine and lollipops. I also managed to ruin my credit and live a fabulous life on ramen noodles and bologna sandwiches. There were so many things that I just didn’t know back then—so many situations that I just was not prepared for. Unfortunately, my parents didn’t teach me about some necessary life skills like finances, budgeting, and credit. If I could talk to 21-year-old me, here are some financial life hacks that I would teach myself:
- Student loans: Taking out student loans is a task that should not be taken lightly. I, for one, will be paying back student loans for the rest of my life—I am at peace with that. However, taking out student loans doesn’t have to be a negative thing, when done wisely and with purpose. It is important to choose a major wisely. Don’t pick a field in which it is almost impossible to find gainful employment just for the sake of earning a degree. The last thing you want is to spend the rest of your life paying off student loans for a useless degree, or a degree that you cannot or will not use. Also, take out loans responsibly. Although it may be tempting, do not take out more than you need—it is not free money, and it has to be paid back. Shop around for a loan with a competitive rate. Apply for lots and lots of grants to help offset the amount you need to borrow through loans.
- No credit: I thought not having credit was the same as having good credit—wrong. No credit is almost as bad as bad credit. Creditors have no way of knowing whether or not you will pay back your debt because you have no credit history. With no credit history, it can be difficult to get approved for credit, but you cannot build credit history until someone approves you for credit—it’s a vicious cycle! But here’s the hack: there are banks that will be willing to give you a secured credit card. A secured credit card is sort of like a prepaid card. For example: you can give the bank $300 and fill out a credit card application. The bank will in turn put that $300 on a credit card and issue the card to you. So although it is technically a credit card and can be used as such, the bank has assurance (your money) that you will not owe them anything, because they already have your money. Usually after 6 months to a year of on time payments and responsible spending, the bank will refund to you your $300 and front you $300 worth of actual credit, making your credit card unsecured. Keep making on-time payments and spending responsibly, and eventually they will even increase your credit limit.
- Bad credit: Beware of falling victim to the wonderful world of credit! It all seems so easy and magical at first: you get “free” money and only have to pay $15-$25 a month—what a great deal, right? Hell, no! As a college student, there are credit card companies that will prey on you by offering low monthly payments with high interest rates. Once your credit is ruined, it takes time and patience to repair. Use… it… responsibly. To start, just open one low-balance credit card, just to get accustomed to having one, making on-time payments, and to build your credit. Try to always pay more than the minimum monthly payment—this will help your balance decrease faster. Most importantly: don’t charge more than you know you can pay back in a timely fashion. Keep your balance low.
- Not checking your credit score: It wasn’t until I became interested in purchasing a home at the age of 24 that I even learned what a credit score was. Sounds ridiculous, I know, but that was in the age before Credit Karma and all the other companies that now openly advertise all over the place. It is important to know your credit score and what’s on your credit report for several reasons. First, this is the quickest way to spot if you’ve been the victim of identity theft. If you see charges and accounts that you know nothing about, contact the credit bureaus to report it immediately. Second, this is the best way to assess your creditworthiness. You’ll need to know this information in order to make major life purchases (such as a home or car), not to mention simple things like opening a credit card and even renting an apartment.
- Fast food: Seems like a dumb way to go broke, right? Although fast food is relatively cheap, it adds up quickly. If you’re spending $5 per breakfast, lunch, and dinner every day for 30 days, that’s $450/month—that’s a car payment! Do yourself a favor: put that $15 a day in a savings account (which we’ll discuss a little later) and learn how to cook.
- Partying: Let’s face it: partying is awesome, but it costs money—money that you don’t have. So limit your partying to maybe once a week while you’re on a financial come-up. I know this seems harsh, but trust me, you’ll thank me later.
- Not budgeting: This is an absolute must! Put together a spreadsheet or a simple list of your total monthly income and your total monthly spending. Make your budget accurate and realistic. In your spending column, make sure to include money for things like bills, food, gas, and other necessities. If you are fortunate to have anything left over after computing the essentials, budget a little out for a savings account and partying/entertainment. I know that saving may seem impossible when you’re living on a tight budget—but as we discussed in #5, if you can afford $15 per day for fast food, you can afford to have a savings account. Shop around at different banks or credit unions and look for savings accounts that don’t have a monthly fee or will waive the monthly fee (usually with certain stipulations, such as keeping a minimum balance in the account).
- Overspending: So, you have your first real job, got your first paycheck with a few zeros in it, and you’re ready to go to the club, right? Well don’t go popping bottles just yet, my friend. It may seem like a lot of money at first, but once you review that budget you created in #7, I think you’ll find that it really isn’t that much money. Stick to your budget! Don’t take more money with you to the club than you know you can afford to spend. If you don’t need that new pair of jeans, don’t buy them. Don’t act like a Big Willie and start lending money to all your friends. Stick… to… your… budget.
- Moving out: I couldn’t wait to move out of my parents’ house and into my own apartment. I was going to sleep all day and party all night. Yeah, right! Once reality hit, I realized that real life isn’t like that at all. Just like that, I had a ton of bills and no one to help me but me, myself, and I. If you’re thinking about getting an apartment with some of your friends, this is only a good idea if they are responsible and good with money, which they may not be. Keep in mind that if they don’t have their share of the rent, that does not mean that the full rent is magically not still due. The burden will then fall on you. Choose your roommate(s) very, very carefully; choosing poorly may ruin your credit as well as your friendship.
- Car loans: I usually do not recommend taking out a car loan in your early twenties; buy a cheap, used car and pay cash, if you can. But if you can’t, and you absolutely must take out a loan, look to your bank/credit union first. (Credit unions are better than banks for this.) If you have a good relationship with them, they may be willing to finance you at a great rate. "Buy here/pay here" places often do predatory loans with very high interest rates. Do some research and shop around before making a final decision.
You’re going to make some mistakes in your twenties; that’s just a fact of life. But it’s okay! Your twenties are a time to live and learn—society is a bit less forgiving when you make some of these mistakes in your thirties, forties, and beyond. Hopefully, this information will help you spot some of the most common financial pitfalls of youth and avoid them.
This article was originally published on August 15, 2016.
Cover Image by Jodeci Zimmerman