Many teenagers or even young adults do not understand the basics of finance, and it is really not their fault. Taxes, bills and investments usually signal adulthood and often times are ignored by high schools who do not offer basic economics classes, which causes teenagers to think that ‘money stuff’ is for adults. Unfortunately, the most important part to spending money is starting early, regardless of age. So, to fill in for the flaws of public schooling, and in hopes that you get started now, here are some things you need to know to be a wise consumer
1) Spend Wisely
Start off: Before you start transforming ‘seed money’ there has to be a way for you to earn that seed money. The first place to try to get your seed money is an adult you trust — a parent, relative, friend, or guardian — who wants to help you have a financially secure future. You can get a job if you’re over 16, and if not babysitting and tutoring are good starts as well. Hopefully you can get at least $5.00 from a trusted source, which is really all you need to get started!
Debit Cards: If you’re the kind of person who checks the pockets of your jackets and back pockets and finds some random bills that have been there longer than the crusty french fry in your other pocket, maybe cash isn’t for you. Cash is the most accessible form of money, but it can be easy to lose and hard to keep track of. Especially when you’re starting, losing money due to carelessness is terrifying. Instead, you can use a debit card, which takes the money from your personal bank account when you purchase something, so that you do not have to worry about the hassle of cash. You can use debit cards to set a daily or monthly budget to make sure you’re spending as much as you can afford.
Credit Cards: Unlike debit cards, charge to a line of credit through the bank. The money used to purchase an item is ultimately your money, but the bank basically gives you a head start. You have generally 30 days to pay the bank back, and if you don’t meet the deadline the money you owe is increased by a certain percentage interest. The most important of credit cards is the credit score. The credit score is used by banks to evaluate how reliable you are in paying back on time and in proper form. Building a good credit history involves paying out your credit on time (usually at the end of the month), paying in full instead of taking out further loans, and not overcharging yourself to the point where you can’t pay it back. Ruining your credit score can have big repercussions later on, when you’re trying to buy a house or a car, so be careful now.
2) Secure Money:
When you can, you must start saving a portion of your money after every paycheck or opportunity. There are many different ways to secure your money most commonly: (1) cash, (2) checking account, (3) savings account, (4) a money market account (MMA/MMDA) and (5) Certificates of Deposit (CDs). Starting at (1) cash and down the list to (5) CDs the accessibility (liquidity) goes down and the ‘risk’ and interest rate go up. There is virtually no profit from saving your money in a cash or checking account, as there is no interest. Moving up to a savings account, where you’re expected to deposit money for a longer time than a checking account, the interest rate is relatively low at ~.06%. Once you save $1000 or more, you can open a MMA where you will have a higher interest rate (~.5%+), or profit return from the bank compared to cash or savings account. CDs offer the highest interest rate (.71%+), but there is a ‘term length’ (usually upwards a year) that your money has to stay in the bank for: if you withdraw it you’ll have to pay a fee. Everything except cash is FDIC (Federal Deposit Insurance Corporation) insured, meaning the banks are regulated with their use of your money and their responsibility is somewhat guaranteed. Using these different methods of holding onto your hard-earned dollars, you can make sure that when you deposit money, you’re getting the highest return possible depending on your needs.
3) Invest for your future:
There are many kinds of investments you can make a few of the common investments include bonds, stocks and retirement plans, such as a 401(k).
Bonds are when you purchase the debt of someone or something else. There are government, corporate, and municipal bonds. When you buy a bond, you expect the debtor to pay you back and usually they will (think of Bail Bonds). You can buy government bonds, and the government will pay you back, virtually guaranteed. However, it is important to realize that bonds are usually safer than stocks because the chance of you getting paid back is high (and often insured), so the interest rates will be lower. Another fun fact is that if a company goes into debt, bondholders will be paid back first, before stockholders.
Stocks are parts of a company. Each set of stocks is called a ‘share’: a company divides itself up into an arbitrary number of shares that it picks. Think of a share as currency: each share converts to a certain amount of money which will then be the value of the stock. By buying a share, or investing money into that share you trust that the company will earn more profit so the value of the share goes up (demand goes up, so prices go up). For example, say you buy a company’s share for $7 and after successful months in which the company turns a profit and accrues more stockholders, the company’s share value goes up to $11. Then you can sell your share and earn a $4 profit for each share that you have. Often, you’d buy multiple shares, so your $4 profit is multiplied by the number of shares that made that profit and that you sold. Keep in mind, if the company you invest in loses sales or profit, or if people sell off their stocks (reducing demand, thus reducing prices), your stock value can go down and leave you at a loss. Generally you can sell and buy shares freely with public companies. A good policy that almost everyone in the stock market knows is to “buy low and sell high”: if the stock is valued low, purchase it so you spend less money, and when the price increases, sell it so you make the difference in profit.
401(k). When you get a job and your employer asks if you want a 401(k), just say yes. A part of your paycheck will be kept aside and slowly begin to gain interest every year you leave it in the retirement plan account offered by your employer. This retirement plan account is usually managed by the “plan administrator”: usually a company that your employer contacts. The administrator puts your 401(k) funds into very secure investments, such as real estate (which, except for the 2008 recession, is considered a secure investment), because it’s money saved over a long period of time, for people’s retirements: short term variations in the price don’t matter as much as a long term increase. The earlier you start your retirement plan, the more it will pay off in the future. A difference of a couple of years at the beginning of your employment can result in a difference of thousands of dollars.
Apps. Although this isn’t a substantial investment of money to download these apps, you should know about these apps that can easily boost your investment opportunities.In this day and age there are unlimited resources available to you. For example, RobinHood helps you with your trades for no commission, and the amount you invest can be less than $5! Acorn is connected to your debit card and every time you buy something, it’ll round up the amount and charge the next whole number, ($7.38 will round to $8) and invest those cents into different stocks, earning a profit. Before you get started with the Stock Market, you can use stimulators like the app Wall Street Survivor and websites like Investopedia to practice investing wisely. To keep track of your finances, Mint is a great app that will help you manage your money by helping you with your bills and checking your credit score!