r/personalfinance 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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u/your_moms_a_clone Jul 18 '16

Ha, I'm 28 and still only have a $500 limit on my card. Nowhere near buying a home though. Student loans were too high, no one (reputable) would give me card because my income to debt ratio was so bad.

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u/[deleted] Jul 19 '16 edited Jul 19 '16

Has your income increased since getting that 500$ limit?

Requesting a credit line increase is generally risk free. They'll probably ask for your current income and cost of rent, and then they'll probably do a "soft" credit check. A soft credit check doesn't effect your credit score in any way, but a hard pull will.

If they only require a soft credit check the worst that will happen is they'll deny you a credit increase. If they do deny you, they're required to list there reasons why.

If you've had the card for over 6months and have always made on time payments it's definitely worth looking into.

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u/immoralatheist Jul 19 '16

Though some companies will do a hard pull, so you should double check whether your cc company does. I know USAA does from experience. (And then denied it despite my ~730 credit score and my other cards with $3500, 2000, and $1000 limits--which had all been increased before with only soft pulls--compared to the $300 on my USAA one. I'm not bitter.)

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u/[deleted] Jul 19 '16 edited Jul 19 '16

Whoops. You're right. I meant for that to say, "and then they'll probably ask to do a "soft" credit check."

I just requested an increase the other day from Capital One and they were very clear on the submission page that they would be doing a soft pull, and that if they then decided they needed to do a hard pull they would ask for permission before doing so.

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u/immoralatheist Jul 19 '16

Yep, also somewhat recently got an increase from capital one and they were clear about it as was amex. Just wanted to clarify that not every company is going to do a soft pull and to read whatever it says!

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u/zelliez Jul 19 '16

If your debt to income ratio is that bad, based on student loans...You may want to look into various repayment options. If your income is low enough, you may qualify for income based/income driven repayment plans that will have a much smaller monthly minimum (~10-15% of your "disposable income"). You can still pay what you're paying now (if you can), but the required monthly payment may be much less. From my understanding, it is the income to required minimum payment ratio that is actually used, not your entire debt to income.

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u/your_moms_a_clone Jul 19 '16

I said "were". They are paid off now. And I knew all the options, I was very educated in regards to my loans.