Young Adult Money Management

Sit down with your monthly bills and figure out your income and expenses. Write down everything you spend money on for a couple of weeks or a month. Be as detailed as possible. Include even small purchases. Try to find places to cut expenses and save money. Look for ways to change your spending plan.

The key is to spend less than you earn.

Many Americans live from paycheck to paycheck. Savings rates are less than 7 percent and have fallen near zero several times in the past few years. Personal finance experts recommend that you save at least 10 percent of your income. A savings fund will increase your financial security. One tip for saving is to pay yourself first by making a “savings bill” part of your budget. When you pay your other bills, pay your savings bill, too. Just deposit the money in your savings account. If your employer offers direct deposit, have part of your paycheck deposited into your bank or credit union savings account.

Save any "extra" or "bonus" income that you receive.
Things like tax refunds, overtime pay, gift money, refunds, and rebates that aren't a regular part of your income can add up to a lot over time when you save them.

If you coupon, save the money "saved" from using the coupons. For example, if you save $5 from coupons when you go to the store, put that money into your savings account.

There are many behavior and habit changes that can save you money. For instance, you can save money by taking your lunch to work and making your morning coffee at home.

Some other changes that can save you money include:

• Eating at home instead of eating out.
• Shopping sales, clearance, or secondhand stores as much as possible.
• Skipping on impulse buys like a candy bar and soda at the checkout line or expensive coffee when you drive by.
• Workout at home instead of paying for a gym membership.
• Only buying necessities, skipping on things you don't need.

Once you finishing paying off an installment loan, pay installments to your savings account instead. You will be used to life without spending that money anyway, so keep it up and just transfer it to your savings account.

Challenge yourself to not spend by having a "No Spend Week" where you don't spend any money at all. Go to the park to get some exercise, have a board game night instead of going on with friends, or check your local library for free events and opportunities. There are a lot of ways to have fun without spending.

Or have a "crash budget." Set a time limit, such as one month, and cut out any unnecessary spending during that time. Use that time to save as much as you can.

Check your free annual credit report at www.annualcreditreport.com.  Beware of copycat sites. You are entitled to a free annual report from each of the three credit reporting companies: Equifax, Experian, and TransUnion.  Check your credit report from a different company every few months to monitor your credit report throughout the year.  The report contains information from current and past creditors including lenders, amount of installment loan, limits for revolving credit, frequency and amount of payments, and late or missing payments. The report will also show your name, address, and employer – current and previous. Check for accuracy.  If you find an error, notify the credit reporting company and the lender.  If you suspect fraud, contact the Federal Trade Commission.

Your annual credit report is free but you must purchase your credit score. Credit scores are available from a variety of different sources.  Lenders rely on scores from the three main credit reporting agencies or they may have their own. The scores tend to be close. You typically won’t find vast differences from one agency to the next because they are all based on your credit management behavior. Most scoring systems range from 300 to 850. Higher scores qualify for lower interest rates. Most consumers have scores in the 600’s or 700’s. Check your score at www.annualcreditreport.com. Other sites may offer a free credit score but be aware that it may differ from the scores provided by the major credit reporting bureaus. Watch out for hidden costs such as credit monitoring offers. You need only purchase your one-time score but many websites will try to have you opt-in to a monthly fee to monitor your credit, email a monthly report, or some other service. 

Want to improve your score?  You’ll need to know what factors influence the score.  There are several good practices that are critical for any credit score such as making regular, on-time payments; maintaining a low debt-to-income ratio; and having a long history of responsible use of credit. There are some variations among types of credit scores.  The most commonly used types of credit scores are FICO® and VantageScore.

FICO® Score

FICO® Scores range from 300-850.  There are no hard rules about a specific number that ranks you as a good credit risk but, generally, credit scores in the mid-700’s and above are considered excellent.  Credit scores in the mid-600’s and below are often considered higher risk and these consumers may not qualify for conventional loans.

FICO® Scores are determined by credit payment history, amounts owed, length of credit history, mix of credit, and new credit.

35% Credit Payment History

A long history of making regular, on-time payments is the main component of a good credit score. A few missed or late payments may not be a deal-breaker for a good score. An overall good credit history can outweigh one or two instances of late credit card payments. However, having no late payments in your credit report doesn't mean your score will be a perfect 850 either.  There are other factors that determine a credit score.

Account types considered for credit history could include:

• Credit cards (Visa, MasterCard, American Express, Discover, etc.)
• Retail accounts (credit from stores where you shop, like department store credit cards)
• Installment loans (loans where you make regular payments, like car loans)
• Finance company accounts
• Mortgage loans

30% Amounts Owed

Too much credit may mean the consumer is overextended and at risk of being to repay debts. Scores are influenced by the total amount owed and the amounts owed by types of accounts (credit cards or installment loans).

The credit utilization ratio on revolving accounts is the percentage of available credit being used. Maxing out your cards can lower your credit score. Credit card lenders often report our monthly statement amount to the credit bureau; so, even if you pay off the balance every month, it may not be reflected on your credit report.

Paying down installment loans is a good sign that you're able and willing to manage and repay debt. For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you still owe (with interest) more than 80% of the original loan.

15% Length of Credit History

You have to use credit to have a credit history.  The longer your positive credit history, the better.  You can bounce back from a bad credit history and show a recent good credit history.  Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a credit score over time.

10% Credit Mix

Credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are different types of credit. Having credit cards and installment loans with a good credit history will raise your score. Strive for a healthy balance of types of credit. Too many credit cards or having only installment loans can both lower a score.  A closed account will still show up on your credit report and continue to affect your score.

10% New Credit

Avoid opening several new accounts over a short period of time.  New accounts lower the average account age, lowering your score.

An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although FICO^® Scores only consider inquiries from the last 12 months. FICO Scores have been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.

If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

It’s OK to request and check your own credit report. Checking your credit report won’t affect your FICO® Scores, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers, such as myFICO.

 

VantageScore

The earlier versions of VantageScore (Model 1 and Model 2) ranged from 501 to 990. The newest versions of VantageScore (Model 3 and Model 4) range from 300 to 850.

Extremely Influential:

• Payment History – make regular, on-time payments.

Highly Influential:

• Age and Type of Credit – use a variety of types of credit.
• Percentage of Credit Limit Used – keep balances low, less than 30% of credit limits.

Moderately Influential:

• Total Balances/Debt – reduce the amount of debt you owe

Less Influential:

• Recent Credit Behavior and Inquiries – avoid opening several new accounts over a brief period of time.

Available Credit – only open the amount of credit you need.

Money itself is not the end goal.  The purpose of money and all of our resources is to create the life you want to live.  How do you envision your life in 5 years? 10 years? 20 years? What’s important to you?  What are your values?  Money management is easier when you have specific goals. 

One of the most important things you can do to take control of your finances is to evaluate your goals. Goals give you direction and motivation for the use of your time. Take some quiet time to think about what you really want in your life.  Step back and reflect on your personal values. List the steps it would take to actively work on the accomplishment of these goals. Make your goals, and the steps to achieve them, as specific as possible.

Set short-term and longer-term goals.  For financial goals, we often say that short-term goals are less than one year, long-term goals are 5 years or longer, and medium-term goals are in-between.  You may set different time frames for other categories.  For example, if your goal was to buy a new car– your short term goal might be to save a certain amount from each paycheck. Your long-term goal might be to save a certain amount for a down payment or to pay full price for the car. 

Write down your goals. You’re more likely to achieve your goals if they are written down, stated in positive terms. Place your written goals where you can see them often. Most of your goals should be realistic and attainable but it’s okay to have some dream goals too. Re-evaluate along the way to determine if your goals have changed.  You can give yourself permission to release goals if you decide it’s not what you really want.

When used properly, debt can be used to acquire appreciating assets and can help build your credit score.  However, debt can easily become a trap. 

One way to check if your non-mortgage debt is too high is to calculate a debt to disposable income ratio.  Add the total of all monthly debt payments (excluding mortgage); then, divide by our net disposable income. Less than 10 percent is best. Higher than 16% and you may be getting in over your head. Aim for a ratio of 15% or lower.

Here are some other ways to tell if you are managing debt wisely:

• You’re able to make more than the minimum monthly payment on credit cards or you pay balances in full every month.
• You are easily able to make ends meet and pay all of your monthly bills on time.
• You maintain an emergency savings fund that is enough to cover at least 2-6 months of expenses.

Worried that you have too much debt?  Make a plan for repayment. There are many options available. One method is to pay off the card with the lowest balance first, then take the money you were paying monthly toward that card and use it to pay off the card with the next lowest balance.  Another method is to use all of your extra resources to pay off the card with the highest interest rate.  Pay it off as soon as possible and use the money that would have gone toward that payment to start paying more on the credit card with the next highest balance. Learn more about these and other repayment options at https://powerpay.org. Use the tools and calculators on Power Pay to determine your best repayment plan. 

Credit comes with the cost of fees and interest.  The higher the balance and the longer you take to pay it off, the more you will pay in interest.  Your monthly credit card bill will include information on how long it will take you to pay off your balance if you only make minimum payments. It will also tell you how much you would need to pay each month in order to pay off your balance in three years. For example, suppose you owe $3,000 and your interest rate is 14.4%.  If you make no additional charges and make only the minimum payment every month, it would take 11 year to pay off the balance and you would have paid a total of $4,745.  If you pay $103 every month, you would pay off the balance in 3 years and pay a total of $3,712.  That’s a savings of $1,033 over the amount you would have paid using only the minimum payment.

There can be many warning signs of trouble with debt.  One rule of thumb is the debt to income ratio.  A debt to income ratio is the total amount of monthly debt (NOT including mortgage or rent) divided by the total amount of monthly income.  Add up all of your monthly debt payments including car payments, student loans, credit card payments and any other.  Determine your average monthly income from all sources.  Divide monthly debt payments by monthly income to determine your debt to income ration.  A ratio or 10% or less probably means that you are managing debt okay.  If your ratio is around 15% you may want to be cautious about adding any new debt.  A ratio of 20% or greater could mean you are already in trouble.  Take a close look at your situation.  Don’t take on any more new debt.  Make a plan to pay off balances as soon as possible.

It’s important to remember that the debt to income ratio is just a guideline.  There can be other signs that you are in credit trouble.  For example, you might be in trouble if:

• You frequently make late payments and/or have late payment fees.
• You can only afford to pay the minimum amount due on monthly credit card payments.
• You frequently receive past due notices.
• Your credit cards are near the limit or they are “maxed out.”
• You frequently have overdraft fees.
• Your debt payments make it difficult to pay regular household expenses such as utilities and food.

Highest Interest - Pay off the credit card with the highest interest rate first. Each month pay the minimum payment on all your credit cards except the one with the highest interest rate. Pay as much as you possibly can on this card each month until it is paid off. Then start on the card with the next highest interest rate. Always pay the minimum balance on all of the others. Keep doing this until they are all paid off.

Lowest Balance - Pay off the credit card with the lowest balance first. Each month pay the minimum payment on all your credit cards except the one with the lowest balance. Pay as much as you possibly can on this card each month until it is paid off. Then start on the card with the next lowest balance, while continuing to pay the minimum balance on the others. Keep doing this until every credit card is paid off.

Pay more often. The sooner you make a payment, the less interest you pay. You can save on interest charges by making payments early. If you’re paid twice each month, you may be able to pay a little extra on one or more of your credit cards by making bimonthly payments.

Debt consolidation is one large loan used to pay off various outstanding debts. It stretches out payments over a longer period of time, and you pay more interest. The single payment is smaller than the total of the other payments, and it is easier to keep track of one debt. Be careful when considering consolidation loans. You may be tempted to add new credit obligations since your new payment seems so “small.” Be careful not to take on any additional debt.

Credit counseling services can be helpful but be cautious when choosing a service.  Some services may not be of much help with creditors while charging you high fees for their services.  Look for nonprofit agencies that charge nominal fees. Check reviews for the agency.

PowerPay is an Extension program that features an online financial calculator to help you design your fastest debt repayment plan. Go to https://powerpay.org and click on the “Arkansas” tab.

Here are some ground rules for the appropriate use of credit;

Use cash whenever possible.  Using credit adds the cost of interest to your purchase.

Don’t charge everyday expenses.  Don’t charge everyday expenses like shampoo or pizza.  Think carefully before you charge something. You may hear of some consumers who use rewards cards.  They charge every purchase and pay off balances in full every month.  They rack up rewards points while avoiding the extra cost of interest on balances.  This works for only the most disciplined consumers.  It’s really easy to end up overspending and one bad month can leave you with high balances and interest charges.

Which leads me to our next point - Charge only amounts you can pay off monthly.  Aim to pay off your balance each month or as soon as possible to save on interest charges.

Leave cards at home.  Reduce the temptation to make unnecessary charges by leaving your cards at home. 

Avoid cash advances.  Cash advances usually come with higher fees. 

Plan ahead and save for large purchases.  When you want a big ticket item – like furniture or a television – it’s best to save up and pay cash.  Be especially aware of rent-to-own companies where you can end up paying more than twice the value of the item.