With graduation, comes independence—and financial decision-making. You need to be prepared to handle your money without Mom and Dad watching your wallet. Here are four steps to financial freedom:
1. The Expense Report
Until now, you may have had it all paid for, from new school clothes to the latest Twilight saga flick you saw five times. Bottom line: you have no idea how much you’re spending. The time has come to track your expenses, writing down everything you regularly spend. Do you buy a can of soda for $1.50 before school every day? Write it down. Do you get your hair cut for $30 once a month? Write it down. Car payments, hamster food, DVDs, a two-pack a day M&M habit? Write them down. If you are moving into an apartment, don’t forget to figure in the amount of monthly rent. Once you have a handle on your expenses, then you need to compare that to your monthly income to make sure you don’t overspend. This is the first step in setting your personal budget, a guideline of spending and earning that will keep you in the black.
Freedom Tip: Expenses should never exceed income.
2. Big Tickets, Big Bucks
If you’re driving to your new home away from home in your own car, Mom and Dad are probably expecting you to pack up all the expenses and take them with you. Big-ticket items—like cars and apartments—come with all sorts of costs. In addition to monthly car payments, you will have to pay for gas expenses, oil changes and car insurance premiums. If you’re renting an apartment, you may be required to pay cable and Internet charges, utilities like gas and electric or pay for maintenance. Make sure to figure these expenses into your personal budget.
Freedom Tip: Owning a car is expensive business, and the costs don’t end the day you buy the car.
3. Debt Is Such a Drag
Overspending can only lead to one thing: debt. Setting limits on your spending is so important. Debt is when you end up owing money, and that amount can grow if you’re not careful. Credit cards are often to blame for getting people deeply into debt. It may seem like free money to use plastic to pay for that new sound system, but it’s not. When you use a credit card, you’re borrowing money from the credit card company to make a purchase. If you don’t pay the item in full within a certain number of days and instead pay what’s called the minimum balance, the outstanding balance collects interest charges—and suddenly you owe more than you even paid for the thing. A rule of thumb is that your total debt should be less than 20% of your take-home pay. Your credit record will follow you through life. If you have a bad credit history because you pay bills late or don’t pay toward your credit card loans, you may someday be denied a loan to buy a car or even a house.
Freedom Tip: You should only charge what you can afford to pay back.
4. Banking 101
If you haven’t taken the time to get to know your bank, now’s the time. You should have a checking account and some kind of savings or money market account. You definitely should have a savings account to tuck money away for future purchases or unexpected expenses. Saving only $20 a month is worth it. Make sure to find out minimum balance requirements on your bank accounts so you don’t get charged penalties, and ask about hidden fees for using bank tellers or debit cards. The good news is that online banking is more secure than ever. Make sure your bank uses encryption on its site, and you should be safe to sign up for online services, including fund transfers, paying bills and monitoring your accounts with a mere click of the mouse.
Freedom Tip: A disciplined savings plan can help you achieve your financial goals.
Sidebar: Five Signs of Overspending
1. Always paying bills late.
2. Only making the minimum payment on a credit card.
3. Exceeding the credit limit.
4. Working overtime to keep up with credit card bills.
5. Using one credit card to pay off another.
Source: Family Education Network (www.familyeducation.com)
How long would it take for a college freshman to pay off his credit debt if he spends $1,900 and pays only the minimum payment each month?
Answer: It would take 23 years to pay off that credit card debt!