Recently, I wrote about the financial goals I have as I begin my 30s. However, in the comments, there was a request for a list of things that can be done when just starting out. As a result, I’ve thought about 5 things that you can before you are 20 to start out on the right financial foot:
1. Get a Job
Learn the value of work. It doesn’t need to be full-time, but an after school job in which you work 10-15 hours a week can be a great way to learn the value of work, and to get some experience — even if it’s the experience that tells you that you don’t want to be doing something for the rest of your life. You can also learn the value of working for yourself. I taught piano lessons out of my home while in high school, and enjoyed that much more than working as a cashier at the local craft store. I learned early on that I wanted to be my own boss. It is also possible to learn to love a profession, as my sister-in-law did as a runner in a law firm. Now she’s on her way to law school. Plus, you can learn basic money management lessons when you have a job.
2. Start Saving
It’s never to early to start saving — my seven-year-old saves 20% of his allowance each week. Devote a percentage of your income to savings, whether it is from your allowance or a part-time job. This will get you in the habit of saving, and that is a good habit to be in. You can even contribute to a 529 (that your parents set up) if you plan to attend college. Saving now will also set you up later, since you will have even longer to benefit from compound interest earnings. I wish I had been more consistent about saving money in my teen years.
3. Open an IRA (TFSA/RRSP for Canadians)
Even if you aren’t 18, you can open an IRA. Your guardian (probably one of your parents) has to sign if you are under 18, but if you are earning an income, you can open an IRA — either traditional or Roth. I know someone who opened an IRA at 16, and his retirement account is waaaaay ahead of mine, even though he doesn’t put in more than I do. Starting early in a tax-advantaged retirement account, and being consistent about your contributions, is a great way to build for the future. You may only be able to put in a few bucks a month now, but as your earning power increase, so can your contributions. [NOTE by RAY: Canadians can accomplish this by opening either a TFSA account or a RRSP account
4. Be Wary of Credit Cards
While credit cards themselves aren’t evil, it is very easy to fall into the debt trap. Of course, the Credit CARD Act has made it so that those under 21 can’t get a credit card without a co-signer, unless they can prove they are capable of making payments. So if you are 18, and have a job, you might still be able to get a credit card. However, you should be wary. Keep track of your spending, and if you do use credit cards, be careful to pay the balances off each month. Do not spend money that you don’t have. I can tell you that I regret the maxed out credit cards I had by my third year of college. I have credit cards now, and I pay off what I spend, and work the rewards, but I wish I had been responsible when I got my first card at 18 — I could have saved thousands in interest.
You can also find other ways to build credit, including getting a small car loan (your parents may need to co-sign) or getting a small personal loan from your bank. Just make sure you make regular, on time payments.
5. Learn to Budget
Now is a good time to learn basic budgeting principles. Learn how to make a budget. This includes tracking your spending, setting spending priorities, and practicing discipline to follow your budget or spending plan. Sometimes it means learning to delay your gratification (which can be hard). Learning to monitor your habits, and adjust them to fit your financial goals is a vital part of creating a secure financial foundation.
Bonus: If you are planning to attend college, your teen years are an ideal time to place yourself in a position to save money down the road. Work on your grades, and extracurricular activities. Of course, you still have to be responsible with money, even if you have part of your schooling paid for. My full-tuition scholarship didn’t stop me from getting into debt through stupid money mistakes.
Can you think of additional money moves that can be made before you are 20?