My sister graduated high school last weekend, so I thought I would prepare a basic financial primer for her and any high school graduate. Following these steps will help anyone start off on the right foot financially, and hopefully help them avoid debt and grow wealth.
Understand how personal finance works.
Personal finance is not difficult once you learn the basic principles. Learn how credit cards and debit cards work and the pros and cons of using credit cards. You should also know how to balance a checkbook, how to bank online, how to avoid credit card fees, and other basic principles.
Spend less than you earn
After knowing how to use financial tools, spending less than you earn is the most important thing you can do for your financial situation. It doesn’t matter how smart you are, how good your job is, or how much your earn – if you spend more than you take in, you will never get ahead in life.
A budget will help you spend less than you earn every month. There are a lot of ways to make a budget; some people prefer to track every penny, and others prefer a rough guideline. The important thing is to be able to have an accurate account of your income and account for your major fixed expenses. Find what works for you and your situation and stick with it. You will thank yourself later!
Be careful with credit
Credit is a useful tool, but only if you handle it responsibly. It is important to know and understand how your credit score is determined and how to improve your credit score. Your credit score is probably more important than you realize, and can affect your ability to get loans, the interest rates you pay on loans, and your ability to get a job, rent a house or apartment, or even enter a cell phone contract.
Be careful signing up for credit cards just to get free t-shirts, koozies, or other small dollar items. Many of these cards have high interest rates and low limits, and are designed to make you spend more money than you have. It is very easy to fall into the trap of never ending credit card debt.
Once you know how your credit score can affect you, it is a good idea to begin establishing your credit history. The easiest way to do this is to establish a regular payment pattern over a long period of time. This can be for a fixed loan or with a credit card. The important thing is to start small and stay within your means. Here is a list of the best student credit cards if you decide to get one.
Only use student loans for college expenses
Student loans are for one thing only – college expenses. This includes tuition, fees, books, tutors, and other similar fees. This does not include pizza, beer, out of town football games, spring break, parties and other frivolous expenditures. You may have your student loans for a long time, and you won’t be doing yourself any favors by adding fuel to the fire.
Start Dave Ramsey’s Baby Steps
Dave Ramsey created his 7 Baby Steps as part of his Financial Peace University. His methods are a great way to get on a good financial track by laying a plan to get current with expenses, start an emergency fund, get out of debt, and begin saving for the future. Even if you do not have any debt, Dave Ramsey’s Baby Steps are a great place to start. Before you know it, you will be graduating college and starting life on your own and having a financial plan in place will make your life less stressful.
Start an emergency fund
This is actually the first step in Dave Ramsey’s Baby Steps, but it is very important so I thought I would mention it again. An emergency fund is just that – a fund that you keep in a regular savings account and use only for emergencies. No, pizza and beer night doesn’t count. I’m talking about an emergency plane ticket home, car repairs, medical bills, or anything else that would be considered an emergency by normal standards. Your emergency fund will help you avoid racking up unnecessary credit card debt and let you sleep better at night.
Try to save money
Once you have your emergency fund in place and are current on all your expenses, try to add saving to your budget. It doesn’t have to be a lot, but you need to save what you can. When you graduate college, you will find yourself entering a world where you are responsible for all your choices – financial and otherwise. You will need money for a down payment on an apartment, furnishings for your apartment, a professional wardrobe for job interviews, a car, or many other expenses. A little money in the bank makes this easier, and again, will help you avoid falling into the debt trap.
You are entering one of the most memorable periods of your life. Have fun. The good news is that you don’t need a ton of money to have fun, especially when most of your friends are probably broke too. There are countless free and inexpensive activities centered on and around college campuses. Find them. Hang out with friends, have cook outs, watch movies, catch the university sporting events, volunteer, etc. The list of things to do on a college campus is as varied as the people who attend school.
Never stop learning – in school and outside school
Your college days are when you will learn more about yourself, others, and life in general than you ever have before. This is an amazing time to see and do everything you can. Take it all in and enjoy yourself. In my opinion, what you learn about yourself and life is more important than what you will learn in the classroom (but that doesn’t mean what you learn in the classroom isn’t important!). Take it all in and see and do as much as you can. You only get this chance once.
Do you have any tips for a recent high school grad? Feel free to share your personal finance tips in the comments section.