LINCOLN, R.I. (WPRI) — Soon after the caps and gowns are tucked away in a closet and the pomp and circumstance of high school graduation is over, the real world happens.
For some, life post-graduation means the beginning of a full-time job. For others, the next step is college. Both paths require recent graduates to manage their finances, so we tapped into the expertise of financial planner Donna Sowa Allard to discuss the 12 things high school grads should know about money.
Web Extra: The importance of managing your finances
1) Money isn’t scary: Think of money as a tool, something you can use to work for you.
“Don’t be afraid of your money,” Sowa Allard said. “Understand that you’re in charge of it.”
“You don’t need to be emotional about it and you can use it to your advantage if you start off by establishing healthy habits early on,” she added.
2) You need a budget: Whether you’re collecting a paycheck or your “income” is parental support and graduation gifts, you need to know how much money is coming in and how much money is going out.
“Start that budget off of your net income,” Sowa Allard said. “Your net income is your paycheck after state and federal taxes, after FICA, and after other voluntary withholdings which could be insurance or your retirement account.”
“If you start budgeting after that, you’re going to start off with great savings habits and find yourself on track ahead of time,” she said.
3) There’s a big difference between fixed expenses and discretionary expenses: Fixed expenses are costs you have to cover, such as rent, utilities, car insurance, and textbooks.
The fun stuff is discretionary. You may want to go to dinner with friends but it’s not a necessary expense, and you can politely decline if it doesn’t fit into your monthly budget.
4) It’s not too early to start saving for retirement: If you have any income, you can contribute to an IRA or Roth IRA (short for “individual retirement account”).
The difference is when you pay taxes on the money. Sowa Allard says a Roth IRA is a good financial tool for young savers.
“It’s after-tax money going in that grows tax-free for withdrawals in the future,” she explained.
IRA and Roth IRA contributions are capped at $6,000 for 2019, and you must earn at least as much as you contribute.
And if your employer offers a 401(k) retirement plan with a company match, take advantage of it.
“Even if you’re only putting in a very small amount of money, you’re getting an automatic 100% return in the form of that match,” Sowa Allard said.
Some companies offer 401(k) plans even for part-time employees, so be sure to ask about any benefits that may be available to you.
5) An emergency fund is a must: Financial experts agree you should have three to six months of living expenses saved in case of an emergency, like the loss of a job or a sudden illness.
“You are in charge of yourself and protecting yourself, so you have to make sure that you’re putting money away for a rainy day or an emergency,” Sowa Allard said. “By doing this, you avoid putting emergency expenses on credit cards, which I would say leads to some bad financial habits.”
6) It’s a good idea to have separate checking and savings accounts: If you have two accounts, you’re much less likely to dip into savings to cover everyday expenses.
7) You can build a good credit score without a credit card: If you pay your bills on time, you are having a positive impact on your credit score.
FICO credit scores are regularly used by lenders to determine whether you qualify for certain offers or interest rates. Scores range from 300 to 850 and are calculated using five factors: payment history, amounts owed, length of credit history, new credit, and credit mix.
8) Credit cards can be good financial tools: Credit card offers are probably flooding your mailbox, but don’t rush to sign up for one.
If you want a credit card, choose a card with rewards that work for you, then swipe with caution.
“Make sure that you’re only spending an amount that falls within your budget so that you can pay it off at the end of the month,” Sowa Allard said.
Total consumer debt is a staggering $3.9 trillion, and according to ValuePenguin, 41% of households carry some sort of credit card debt.
A note for mom and dad: you don’t have to be a co-signer if your child has earned income.
“This is a big deal,” Sowa Allard said. “As a parent, I don’t want to be a co-signer. I don’t want to be putting my financial life in jeopardy because of my child.”
9) Compound interest is powerful, and it can work for you or against you: With compound interest, you earn interest on interest, so your money can grow exponentially.
But Sowa Allard warns that compound interest can also work against you if you’ve racked up credit card debt. Ultimately, you’ll end up paying interest on interest as you try to pay down debt.
10) Technology is useful: There are many apps that can help you track your saving and spending. Others will keep your budget in focus.
“Teens graduating from high school are more at an advantage than ever because their financial life can be at their fingertips,” Sowa Allard said.
11) Health insurance will be a factor in your finances: Under the Affordable Care Act, you are eligible to remain on your parents’ health insurance plan until you’re 26 years old. That may be the most affordable option for you, but each family’s situation is unique.
“You’ll want to find out, does it change the cost to your parents if you come off their insurance, and if it does, does it make more sense for you to pay to stay on theirs or to go on your own?” Sowa Allard said.
12) Fun is a factor, too: “Save some money for fun,” Sowa Allard said. “Work that into your budget. Whether that’s a goal coming junior or senior year to travel abroad, or if you’re just looking to be able to do stuff with your friends, that should be part of your budget, too.”