Christina is a counseling manager for a non-profit financial counseling organization with certifications in credit and housing counseling.
Why Financial Health is Important
The more self-sufficient you become financially, the more opportunities you will be able to take advantage of throughout your life. Two major steps in obtaining good financial health include learning to maintain a solid budget and building a good credit history.
Building a Solid Budget
It's not as hard as it may seem, it just takes time and dedication!
By learning to build a livable budget, you are taking control of your money. You budget will show you where your money should go and include your expenses, savings as well as spending money.
Creating list of your monthly expenses is a great way to start. You will want to track your bills, but also things like your food expenses, your expenses for clothing, hair and personal items, any hobbies, clubs or subscriptions, as well as your expenses for entertainment. Of course you do not want to forget to make room in your budget for savings. Building a substantial savings is important, especially in case of an emergency.
Budgeting will help you separate your wants from your needs. Once you identify what absolutely must be paid, you can then identify your unnecessary expenses such as eating out or other recreational spending.
Once you have your budget in place it also becomes easier to look into ways to cut down on your expenses and save even more money each month. For instance planning out your meals and preparing them rather than dining out. Sometimes saving money can be as simple as changing where you shop, avoiding shopping sprees and planning for sales. You can also consider looking for the most affordable phone and insurance plans. Most people can in fact take a safe driver course in order to lower their monthly auto insurance payments.
For a lot of people the challenge does not really lie in making a budget, but to sticking to it.
Remember that the basic rule of budgeting is to never spend more money than you make!
To begin planning out your budget you will want to list all of your sources of income.
Next you will want to make a list of all of your costs that are fixed such as your tuition, your books and equipment, a car loan, car insurance, a phone bill.. (I would also include a set amount to put into savings into your fixed costs.)
Once you have your list of fixed costs you can deduct that amount from your income which will leave you with your disposable income that can be spent on your flexible costs such as food, recreation, transportation, and other personal expenses.
When you first begin budgeting, it’s a good idea to review your budget every week. You will have to track all of your expenses to determine where you may be over your budget and look for ways to revise your spending so that everything balances out over time
Building a Good Credit History
The Financial Decisions you make now, will follow you long into the future.
The sooner you begin building a financial plan, the easier it will be to stick to it and set yourself up for better financial management throughout your life. Aside from budgeting and maintaining living expenses, building a good credit history is something we do not often tend to focus on as young people, but we should.
As I mentioned earlier, the financial decisions you make now will follow you long into your future. Making unhealthy financial choices could lead to situations such as: inability to afford monthly living expenses, a possible delay in setting aside savings for retirement, a delay in purchasing a home and poor credit history.
You may not be ready to think about things such as purchasing a home or a vehicle however, what you do now affects what you can do later. Benjamin Franklin said “By failing to prepare, you are preparing to fail.” That is something I always try to keep in mind when I find myself procrastinating!
Remember that credit is part of your financial power. In order to borrow money, your credit history is used by the lender to determine how likely you are to pay it back. Your credit score reflects your willingness and ability to repay debt. So when you apply for things like a loan for a car or a credit card, the lender will look at your credit history.
But Credit history is also used for other things as well. Sometimes you will have to undergo a credit check in order to rent a house or apartment. Employers are also often checking credit scores of potential employees because statistically speaking people with better credit profiles tend to be better employees. A good credit score can even help you get better rates on auto insurance, and it will definitely give you lower interest rates on loans and credit cards.
The biggest thing your credit score is based on is your on-time payment history. Even one late payment to a creditor can do detrimental damage to your credit score. Which is why budgeting for your expenses is so important.
Another major factor that plays a part in your credit score is the amount of credit you have available as opposed to how much you are using. This is determined by your credit card utilization rate. So when you have a credit card you want to keep your balances as low as possible. Try to keep that balance below 25% of your credit limit, or lower!
For instance if you obtain a credit card with a $1000 limit, it is best to never charge more than $250. However I would advise keeping the balance as low as possible in order to ensure low credit utilization. Also remember, the more you have on your balance, the more interest you will pay on that amount and interest is what typically becomes unmanageable for most people. You also always want to make sure you make that monthly payment on time.
What I believe is the third biggest thing that your credit score is based on is the length of time your accounts have been open and in good standing. There are a lot of good credit building programs available.
One thing I always suggest to my clients who are just starting to build good credit is to see if they have a trusted friend or family member who would be willing to add them as an authorized user to a credit card with a high limit, low balance and lengthy on-time payment history. The card holder does not even have to give an authorized user access to the card, simply by adding them as an authorized user, all of that good credit history will transfer over. I have personally seen young clients with good credit histories that were older than them because a parent had added them as an authorized user to a credit card.
So, its good to have a credit card to start building good credit.
However, that does not mean you should go apply for ten credit cards later today. Keep in mind that each time you apply for credit whether it’s a loan or a credit card, this will cause a hard inquiry to be added to your credit report.
Hard inquiries decrease your credit score by 3 points each time and remain on your credit report for 2 years. So not only would applying for multiple cards at once drop your credit score but it also adds a “too many inquiries” alert to your credit report which many lenders will find suspicious and may base their decision on that alone.
Talk to a certified credit counselor near you
- NFCC Nonprofit Free Credit and Debt Advice
The National Foundation for Credit Counseling is the most trusted nonprofit financial counseling organization. Get out of debt in 24-60 months.
Consider credit building programs
- Self Credit Builder Loans (formerly Self Lender)
Whether you need to establish credit from scratch or are rebuilding credit with a specific goal in mind, the Self Credit Builder Account can be a good option for you.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2021 Cristina Cakes
Dora Weithers from The Caribbean on February 03, 2021:
Very helpful advice for the young ones and for everyone else.Thanks for laying this out so clearly.