r/personalfinance • u/yes_its_him Wiki Contributor • Jul 18 '16

ELI18: Personal finance tips for young adults (US) Planning

Are you just starting out your independent life, and looking for financial advice on how to adult? Have we got a forum for you! Here's a collection of pointers to topics of interest to many 18-year-olds; the specifics pertain to the US in some cases. These are topics we get a lot of questions about in /r/personalfinance.

If you don't see your favorite topic here (e.g. houses, retirement accounts, investments, etc), stay tuned for additional posts coming shortly, oriented towards 22-, 30-, and 40-year olds. (Here's ELI22.)

  • To start out, you can benefit from this article with planning and education advice for those in high school, and recent grads.

  • The big change in your life at 18 [19 in Alabama/Nebraska] is you are now legally an adult for contractual purposes, so time to get bank accounts in your own own name, i.e. not with your parents. You want a savings account and a no-monthly-fee checking account. Small banks and credit unions typically have better customer service.

  • You're not going to get rich off interest, sorry! But you can find better savings interest rates (1%!) at online-only banks. Put away savings as soon as you can, it's a good habit to get into, and starts your emergency fund. We'll cover investments and retirement savings in future posts; with limited or part-time income, savings are a better bet for now.

  • You can apply for a credit card once you have income. This is different than the debit card your bank will provide with your account. This has pros and cons, but is a reasonable move for many people. It's the best way to independently establish credit without paying interest. A secured or student card is probably your best option. Pay the balance in full every month! If you can't do that, then you are not ready to use a credit card.

  • If you need money to continue your education, learn about student loans. This is a complicated topic with many options. Be careful what you do here, since these loans will be yours / your parents until they are paid off! People who find themselves in trouble later usually took out bigger loans (~$100,000) vs. smaller loans (~$20,000).

  • For cost-effective education, it's hard to beat community colleges. If you're not sure what to do about continuing your education, look into two-year degrees, as well as taking credits that transfer to four-year colleges.

  • You may find yourself working part-time or even full-time. This is a good time to learn about your rights and responsibilities as an employee, including how you are paid and taxed, as well as what your employer can legally do with your hours and even when you can be let go. Fortunately, taxes are low for most young people (if only because their income is low...), and you may even get a refund if you file taxes! While your lifetime income is the single biggest determinant in your personal finance situation, at this age, your priority is not on current income as much as preparing for the future, thus the focus on education.

  • This is also the time to start learning about budgeting if you have significant responsibilities; more on this in future posts.

  • If you want to save money, live with your parents as long as you can. Seriously! But there comes a time when you want to / have to leave, and you'll need to rent a place. Landlords will want to see that you have income, so try to keep payments below 30% of your takehome pay. You may need a co-signer if you have minimal credit history. You'll need first month's rent and a security deposit up front, and even utility deposits sometimes. Read your lease before you sign it, and know your rights and responsibilities as a tenant, and what organizations can help you if you encounter issues.

  • Roommates are a popular way to save money on rent. Be aware of the issues that can come up with roommates though, since circumstances change, and you may be on the hook for their share. Have all roommates on the lease. You might even want a roommate agreement. Perhaps Sheldon Cooper has it right after all? Alternatively, consider renting a room from someone who owns their own house.

  • Aside from rent, cars are the biggest expenditure for many young people. You can save a lot of money if you don't need to pay for one! It's not just the purchase cost. There's gas, repairs, and especially car insurance, which is very expensive for young people, typically at least $100/month, and can even be $200/month in some places, or if you have a tickets / accidents.

  • Your best bet if you do need a car is to save up $5000 or so for a reliable used car, then pay cash, so you can avoid finance charges and make your own insurance choices. If you do need to finance a car, be very careful of financing offers for young people. Double-digit interest rates are a Bad Thing. You do not want to "build credit" that way! The loan and the car are different things. You can't give back the car and be done with the loan, since you will typically be "underwater" and owe more than the car is worth.

  • Choose your spending wisely. Money spent is unavailable for anything else. Make sure it was your highest priority use of that money.

That's all for now. Stay tuned for the next installment, ELI22, about more on these topics, as well as retirement accounts, repaying student loans, health insurance, and other such fun things.

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41

u/teetar7 Jul 18 '16

Ah okay, so a savings account is probably something I would look at when setting up an emergency fund, for example? Thanks for the clarification!

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u/CheeseZhenshi Jul 18 '16

I am a naive 19 year old, so this may or may not actually be useful, but rather than a separate savings account I keep my savings in a second checking account. This is because, in my state atleast, you can only withdraw from a savings account a certain number of times per month before you get fees.

I started having issues where I would be getting my check soon, but needed gas now, and a few days later I would need to get food, but my check hadn't cleared yet, so I would take out small amounts to keep my spending down before getting my check, and I would end up charged a bunch from my savings.

And the interest rate on a savings account vs checking is a pretty tiny difference when there's not all that much money in the account in the first place.

TL;DR You might just get a second checking account to separate you money, instead of a savings. But I'm not always a smart person.

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u/mmmmmmBacon12345 Jul 18 '16

The limit is 6 times per month and that's a federal limit. If you're running your checking account that low there are other issues to fix before a savings account

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u/Dnc601 Jul 20 '16

This is how I run mine as well. I basically transfer most of my paycheck into my savings after accounting for about half of it. If my check is 300 for a week, I take, say, 60 out for a couple bills, 25 for snacks and lunch at work and keep around 30 in my account for the fee groceries I need for that week. The rest gets thrown in a savings account. The only "solution" to running his account to zero would be to make more money, realistically.

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u/lonewolf210 ​ Jul 18 '16

While this is true you should look at your budgeting. Your emergency fund should be just that and only used for unexpected expenses such as car repairs or doctor visits. You should not be dipping into it regularly, either your trying to save too much or your not budgeting efficiently.

For the kind of situation your talking about I like to leave a little extra in my checking account that I try to never go below. Ie I try not to go below 500 in my checking account but if I do its okay. That's the money you use for the days the check hasn't cleared yet. I think it's a bad habit to get into dipping into your emergency fund at the end of the month.

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u/PandaLark Jul 18 '16

I keep my emergency fund in two parts- worst possible months expenses (car insurance + full health insurance deductible + maximum allowable vet bill + one month's normal expenses) in checking, then 5 months normal expenses in the saving account, and then invest whatever else accumulates in the savings account at the end of the year.

But I very intensely value having to only look at my money once a month, and it took me a decent length of time making good money, and not screwing up financially to get to the point where there is no situation whatsoever where I must look at my accounts other than on bill pay day.

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u/vegeta_bless ​ Jul 18 '16

You make a good point mentioning the limited number of withdrawals per month on savings accounts - some probably don't know this.

IMO, that actually helps people from touching their emergency fund. The whole point of that savings account is that it shouldn't be touched except for emergencies - this does not include little bits here and there like food or gas.

I think having 2 checkings accounts would cause a lot of confusion and encourage you to continue your habit of dipping into your emergency fund here and there - something that actually isn't a good idea. You're essentially enabling your behavior.

It seems to me like you just weren't handling your money responsibly, or living beyond your means. You should be able to plan ahead for things like food and gas if you're already able to put extra money into an emergency fund.

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u/jay9909 ​ Jul 18 '16

These cash flow problems are exactly what credit cards are actually good for (assuming you can be responsible with them).

Credit cards also have much better fraud protection than checking accounts. You might still get your money back if someone drains your checking account, but my understanding is that the process is far more painful than disputing fraudulent credit card charges.

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u/xrazor- Jul 18 '16

Depends on your bank really, some banks take no responsibility when it comes to fraud(usually mega banks) and some are willing to take full responsibility to keep your business (small local banks)

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u/jay9909 ​ Jul 18 '16

I'm sure you're right. I should've qualified my statement with something like what you said.

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u/wyclefjohn Jul 18 '16

If you ever need to draw on your savings, take a big enough amount to float you to your next check. If your bank will do it, convert the savings checking account to an actual savings account and have your debit card overdraft it in amounts of $250-$500. This way you stay away from the transaction limit and keep the benefits of the savings account.

P.S. Open accounts at Ally Bank. It's online only and has decent interest rates for its savings instruments, so you can feel like your money is actually doing something.

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u/apoliticalinactivist Jul 18 '16

My credit union has a "super" checking account, which is just a checking account that gives returns (at 1.99% last i checked) up to $25000 if you have $300+ in transactions with the linked credit card.

I invest 300 in peer to peer loans, but others have been known to buy store gift cards -> buy prepaid debit cards -> cash.

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u/itonlygetsworse Jul 21 '16

Why not just have your income source be direct deposit into your checking account so you can worry less about gas, and more about how much money you should keep out of your checking account by moving it to savings?

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u/CheeseZhenshi Jul 21 '16

It is now, this was more of a problem when I had my first job which didn't offer direct deposit. Now I don't really pull from my 'saving' account all the time, but I still like to keep it a checking account just to keep it from being a problem.

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u/sonaworks Jul 24 '16

I actually do the same thing. I have two checking accounts, and a savings account.

15% of my direct deposit goes to my savings account, and I split the remainder of the money into my checkings: one for expense money, and the rest spending money.

This way, if I need to transfer a bit for a purchase that I hadn't calculated, I don't have to wait three days for it to transfer from the savings, and I'm still able to save money effectively.

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u/mmmmmmBacon12345 Jul 18 '16

Yup. Most people keep their EFunds in savings accounts. You have quick access to it and no penalties to accessing it while still getting some interest. I dropped mine in a CD because the rate was so much better

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u/asukar ​ Jul 18 '16

Really? What kind of rate are you getting on your CD?

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u/mmmmmmBacon12345 Jul 18 '16

2.2% 5 year CD from Capital One 360

There's a 6 month interest fee for early withdrawal but after 10 months it beats a 1% savings account even with early withdrawal

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u/jvonbokel Jul 18 '16

When did you get that? I'm looking at their rates now and it shows 1.25% for 60mo (5yr) CDs. At that rate it takes 15mo to beat the 0.75% they're giving me on my savings account (including the early withdrawal fee).

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u/mmmmmmBacon12345 Jul 19 '16

I got mine in January when it was 2.2%

They dropped the rates a lot very recently, the wayback machine is showing they were flipping between numbers for what would be effective starting 7/18/2016 and it went anywhere between 1.5% and 1.9%. I'm sad to see them lowering CD rates, that was the only rate they were really in the lead with.

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u/bacon_music_love ​ Jul 19 '16

Back in February I got 1.3% on a 1-year CD from Capital One 360, and rates dropped soon after. Now I just keep everything in Ally because I don't want to tie it up for longer than a year.

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u/mtbt Jul 18 '16

was so much better as ING orange. still use it but nothing what it was...

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u/EskimoMedicineMan ​ Jul 18 '16

What changed about it?

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u/mmmmmmBacon12345 Jul 18 '16

Mostly just rates, but everyone's rates have dropped

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u/mtbt Jul 19 '16

Also their promotions, my kids all got $50 just for starting an account. They ran Cashback bonuses all the time especially during black Friday week. Customer service was snappy and proactive, seems like a normal call center now.

That and I didn't get a freaking flood of capital one garbage mail that I had to actively opt out of.

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u/apoliticalinactivist Jul 18 '16

You're getting into advanced territory, with tiered emergency fund to maximize the returns.

People do this based on the idea that the bigger the "emergency", the more time you usually have to pay it. So they break it down into three levels of liquidity.

  • Cash is instant, but rarely do you need more than 1000 in cash (ATM limits are around 400 anyways). Ex: Flat tire -> Tow truck.
  • CD is medium, few days to access, with a moderate return. Estimate 4000 or so. Ex: Plane ticket for a funeral.
  • Brokerage account tied to Bond index. Takes about two weeks to access, but gets best returns with low risk. Keep rest of the fund in here (keep at least the maximum out of pocket cost for your health insurance).

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u/mmmmmmBacon12345 Jul 18 '16

CDs were a few days to access when I was a kid. Now I can whip out my phone, liquidate the CD, push it to my checking account, and pull it out at an ATM 5 minutes later. There is only 2 minutes of delay between money in my CD and money in my checking account

Not that any of that matters anyway because 99% of the time I've got 30 days to move the dollars around

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u/Riversn ​ Jul 18 '16

Bingo bingo!

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u/pdevito3 ​ Jul 18 '16

Suggest looking at a high interest savings account. Normal rates are like 0.01%, but high interest can be close to or just over 1%; better than mostCD's and gives you more flexibility in case you get in a bind. Ally and Discover are two common ones. I have discover personally, but suggest just using it for savings and not necessarily using a checking with them for day to day items, their transfers take a while.

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u/zedauj Jul 18 '16

I wasn't really sure where to ask on this thread but it seems like you might know what you're talking about. If these are the savings rates for my local credit union, would it not be worth it to put my savings in an online bank. Clearly the first $500 should be kept with my credit union but the 0.05% is clearly lower than the 1.05% or 1.00% shown in the article linked in the post. However, the fine print says I'd earn 1.53% APY for a $1000 balance which confused me. Is my credit union better for a savings account than the online banks?

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u/pdevito3 ​ Jul 18 '16

Indeed. Seems like if you can get 3% on the $500, I would do that and then put the rest of your savings into a high interest savings account like Ally or Discover to maximize your savings and still have good access to the money if something comes up.

Good luck. Let me know if you have any more questions.

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u/zedauj Jul 18 '16

That makes sense. What does my credit union mean with the 1.53% APY for the $1,000 though. Where does thay number come from? Wouldn't that be more than the ~1.00% APY at these online banks?

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u/SnowWhiteMemorial Jul 18 '16

I like Discover also but I think you have to be a "discover customer" to use the banking. But don't forget local credit unions... A few around me currently offer 4% cash back checking accounts!

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u/pdevito3 ​ Jul 18 '16

Not sure what you mean by discover customer. Anyone can call them and apply for an account.

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u/SnowWhiteMemorial Jul 18 '16

Just like it sounds-

https://www.discoverbank.com/newaccount/app/index.html?prodType=#/productselection

Click on "Cashback Checking" it says very clearly; "Cashback checking is available EXCLUSIVELY to DISCOVER CUSTOMERS."

Not much to not understand about that...

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u/pdevito3 ​ Jul 18 '16

Not sure how you can be a discover customer before opening an account is what I am saying. Only thing I can think of would be them requiring you to have a Discover CC first, which would be silly. The page I'm seeing just says that you need to be a us citizen 18+ old with tax id and us address. Makes sense since when I applied for a checking and savings account with discover I had no affiliation with them prior and only had to call and give them my basic info to open the account.

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u/itonlygetsworse Jul 21 '16

I suggest creating a spreadsheet (download one from this subreddit wiki) or getting cheap buy effective software like You Need a Budget.