A walkthrough of personal-finance issues for young people, especially young people with tech careers.
The below references an opinion and is for information purposes only. It does not constitute tax, investment, nor financial advice; this is simply a walkthrough of personal finance issues to consider as a young person with a tech (primarily software engineering/computer science career. Seek a duly licensed professional with a fiduciary duty for official advice.
If you see anything from a spelling error to a mistated fact, please send a pull request fixing the mistake ASAP.
Credit unions -- smaller than banks, often offer higher interest rates on accounts (good) and lower interest rates on things like loans and credit cards (good), and are run by members (some people view this as more risky, as there are sometimes less government restrictions on what the credit union can do).
Banks -- larger than credit unions, typically offer lower interest rates on accounts (not good) and higher interest rates on things like loans and credit cards (not good for loans, N/A on credit cards if you're not running a balance--and it's recommended by many financial experts that you don't. See the below section on credit cards for more info), and are run by the bank itself (some people view this as safer, as there are sometimes more government restrictions on what banks can do).
Brokerages -- also commonly referred to as custodians, brokerage firms, etc. These are financial institutions that offer and sometimes also manage funds (some brokerages manage their own funds and also offer others, some bring in outside management, etc: there are many combinations). Unlike banks which ensure your money up to 250k under FDIC Insurance, and credit unions which often offer similar assurances through other agencies, brokerage firms are regulated by parties such as FINRA/the SEC but promises about actual returns cannot be made; there is a fundamental risk in investing.
There are many ways to save and invest money; note that these two actions are distinct.
"Savings" is a liquid or semi-liquid way to store money. This means that you are able to immediately or near-immediately withdraw money, within conditions: some savings accounts have minimum balance requirements, and for U.S. banks, official savings accounts are typically limited to 6 withdrawals per month (checking accounts typically have no such restrictions, but also typically earn no interest). Savings accounts typically earn very small amounts of interest -- usually less than 1%, or between 1-2% if you're really lucky (more common with credit unions or online banks, which tend to impose additional restrictions to earn these higher rates). However, inflation typically averages between 2-3%; this means that money stored in a savings account is typically losing value over time, not gaining it, even though the balance is higher each year (because inflation typically outpaces interest).
Though this may make it seem like it's a bad idea to have a savings account, there are still advantages; they are safer than storing money under a mattress/in a box/etc, as banks ensure basic financial vehicles like checking and savings accounts (NOT investment vehicles) up to $250,000 per FDIC Insurance. For their safety advantages, savings accounts are widely regarded as a wise choice for emergency funds.
"Money market" accounts are a category of savings accounts that typically earn a bit more (0.5-2% APY) than an average savings account, because the minimum balance required is typically far higher. Many brokerage firms offer money market accounts as an intermediate step between sending your money to the firm, and actually using that money to buy a mutual fund (see below for more detail on those). Additionally, if you choose not to re-invest dividents from investments automatically (you probably should choose this option), most brokerages will send those dividends to a money market account (in this context, also called a "settlement account").
Emergency funds are a lump of money that many financial leaders recommend all adults have: the specific amounts vary based on your expenses. For adults who have graduated from college and are in the workforce, it is commonly recommended to have between 6-12 months of expenses (total of rent, utilities, food budget, insurance payments, etc etc etc) saved as an emergency fund. Doing so allows you to maintain your lifestyle if you lose your job, and/or help you 'weather the storm' if a medical disaster strikes, your home or car requires an emergency repair, etc. Essentially, emergency funds give you a cushion for unexpected events. Here are some approximate guidelines that I've seen work for people:
- Especially anxious adults: 12 months of expenses
- Especially anxious students: 6 months of expenses
- Adults who have graduated from college and are working: 6-12 months of expenses
- Students who are in college and are working with some parental support: 1-3 months of expenses
- Students who are in college and are working with no parental support: 3-6 months of expenses
- Students who are in college and have full parental support (trust fund, etc): 1-3 months of expenses or N/A
The amount you need in your emergency fund naturally varies wildly on personal circumstance. Students who have heavy support from their parents and have no risk of losing that support (regardless of performance in school, etc) may want to only keep a month or two of expenses on hand, if that (students with a family credit card may feel that this is unnecessary). Students who are working their way through school but would have parental support if a true disaster struck may also only need a month or two of expenses (or enough for a flight home, etc). Students without parental support of any kind typically want to provide themselves with a greater cushion should a serious emergency strike; however, meeting your emergency fund goal can be hard for anyone. Ideally, you set a realistic goal, contribute as much as you can to it over time, and keep that money somewhere safe--like a checking or savings account--and leave it untouched (NO drawing from it for splurges, etc--that stuff should be budgeted for and kept separate).
CDs are another financial vehicle that most banks and credit unions will offer where you earn a higher interest rate on your money in exchange for not being able to access that money (without penalty) for a period of time. The longer that period of time, the higher the interest rate typically will be. For instance, CDs with durations between 1-3 years typically carry interest rates of between 0-2%; CDs with durations of 3 years and longer are more likely to have interest rates between 2-4%. At the higher end of this scale, the interest earned by your CD may slightly outpace inflation. For this reason, when saving for further-off purchases (but less than 10 years away) such as down payments on a house, etc, a CD may be an appropriate financial vehicle.
Bonds are the last category of typical vehicles offered by banks et al. However, they are not necessarily as low risk as the previous vehicles discussed: they can even be considered investment products depending on what kind of bond they are. You can buy bonds in companies that offer them (more risky, as they depend on the company not going under/honoring the bonds), or bonds from the government (less risky, as they are assured a certain value by the government, which essentially stands unless a cataclysmic World-War-II-but-where-the-axis-powers-win-instead-level event occurs). Bonds typically work in the following way, though of course the exact mechanism and terms will depend on the source of the bond (corporate or government) and series of the bond (basically what specific "product" of bond you bought); you buy a bond for a certain value X, you wait a certain number of years Y, and it matures to a certain value of Z after the number of years Y has passed. For instance, Series EE bonds could be bought at different denominations: a bond could be bought for $25, and would be worth $50 after a "full maturity period" of 20 years; the bond could be held for another 10 years on top of that (so 30 years total) and continue earning interest at the bonds interest rate (series EE bonds are currently fixed at 0.10%). If you cashed the bond before those 20 years, you would earn whatever the interest had pushed the total balance to (if you had held it for at least 5 years for Series EE bonds, known as the penalty duration--withdrawing before 5 years would incur a penalty). Note that there are both fixed (interest rate doesn't change) and variable (interest rate can change) bonds. A quick bulleted breakdown if the above example was confusing:
- You bought a $50 Series EE bond on January 10, 1990 for just $25.
- If you try to cash the bond in 1993, you will pay a penalty.
- If you try to cash the bond on January 10, 1995, you will earn the $25.
- If you try to cash the bond sometime after January 10, 1995 but before January 10, 2010, you will earn the $25 + interest accrued.
- If you try to cash the bond on January 10, 2010, you will earn the $50.
- If you try to cash the bond sometime after January 10, 2010 but before January 10, 2020, you will earn the $50 + interest accrued.
- If you try to cash the bond on January 10, 2020, you will earn the $50 and interest accrued since 2010.
- If you try to cash the bond after January 10, 2020, you will earn the $50 and interest accrued from January 10, 2010 - January 10, 2020: not more.
Bonds typically earn very low interest, and so have gone relatively "out of vogue" in recent times. However, they are a common mechanism used to transition between major life stages. For instance, many family members will buy newborns government bonds, because the bonds will have matured by the time the child would like to cash them, and that money will have spent its time relatively safe. Bonds are also often used to transition people approaching retirement out of the market and into liquid cash again (these people gradually sell their index funds--collections of stock--and buy bonds instead as they approach retirement, as bonds tend to be substantially less risky than the stock market).
This page will not cover intensely risky investment types and strategies like options/futures/etc, as many financial experts consider these types of investments to be unwise and unncessary for the vast majority of people (even very smart and well-educated people).
Investments, meanwhile, are distinct from savings and checking accounts, etc, most critically by level of risk. Where most bank/credit union vehicles are considered relatively innoucous in comparison (due to the FDIC insurance), investment vehicles (recall that some types of bonds are in fact investment products!) are exposed to a high level of risk--the market can swing however it wants within complicated limits that this page won't get deep into because the finer points of U.S. financial legislation won't impact the average person's investment decisions.
The most important take-away of this entire page is that you are probably not suited to trade individual stocks -- and it's probably not wise, either. NOTE, CRITICALLY, THAT INVESTMENTS IN ANY CRYPTOCURRENCIES CURRENTLY CARRY THE VERY SAME INTENSE AND VERY-PROBABLY-UNWISE RISK AS INDIVIDUAL STOCK TRADING. When you say the word 'investing', you probably think of the rise and fall of Apple stock, or how you would've loved to own Google stock before it erupted. That kid in class, or your second-cousin-twice-removed, or your Uncle Steve, might go off on a rant about how they "lost all their money playing the stock market." Here's the truth, kids: the stock market is not a game. You don't "play" it. There are entire teams of very educated, very dedicated, very smart people on Wall Street et al that dedicate their entire lives to picking stocks, and they usually lose (often very badly) to these things called index funds/mutual funds (and in this way, picking individual stocks is very akin to gambling).
Index/mutual funds are collections of individual stocks. Investing in a mutual fund is considered less risky, and often more profit-generating, than investing in individual stocks. This is because your money is diversified across a much broader range of individual stocks. By investing in a mutual fund, your money gets distributed across entire slices of the market. If one stock falls, it can be balanced out by the rise in another. In this way, index funds more approximately follow the overall trend of the U.S. and/or global markets (depending on which mutual funds you choose). For this reason (and because the liklihood of bad stocks being balanced out and overcome by good ones rises as your exposure to the total market rises) many financial experts consider it wise to invest in mutual funds that focus not on specific industries, but on the total U.S. stock market, with some more minor exposure to total international markets as well. As a result, there are two main strategies that most people find suit their needs:
- The "target retirement date" fund strategy. If you're currently 18 as of 2017 and you plan to retire at 65 (and wanted to go with this strategy), you would pick the Target Retirement Date 2065 fund (offered by all three low-cost firms that are widely regarded as the best custodians to invest with -- Vanguard, Fidelity, and Schwab). These funds are offered in increments of 5 years (so 2055, 2060, 2065), so you pick the one closest to your intended retirement date, whenever that may be. These target retirement funds are made up of a mix of mutual funds and bonds that automatically start out with riskier investments when you're young and have many earning-years left, to less risky investments when you're old and can't expose yourself to the risk of losing everything if the market takes a downturn. As a result, you can "buy it and forget it" if you go with this strategy; just buy the fund and sell it off when you're ready to retire, no adjustments or monitoring needed from you (in fact, you probably shouldn't monitor your portfolio often or ever if you scare easily: huge downturns in the market are common and tend to smooth themselves out--and continue to gain again--over long periods of time. The key to recovering from temporarily turn-downs in the market is leaving your money there untouched so it's there to capitalize on gains when the market turns upwards again. In short: losses are only realized when you sell (the same is true for gains).)
- The "three-fund portfolio" strategy. This is essentially the way target date retirement funds are composed behind the scenes, but instead of automatically being adjusted as time goes on, you have to adjust them yourself as you get older. This may be the appropriate choice for people who want to have a greater degree of control over their finances, but are not tempted to day-trade (i.e. make the very-likely-a-mistake choice of trading individual stocks). A three-fund portfolio is made up of some percentage of the U.S. Total Stock Market fund, the Total International Stock Market fund, and the Total Bond Fund, all three of which can be purchased through any major investment custodian like Vanguard, Fidelity, or Schwab. The percentage of each is up to the investor; the total international mutual fund is considered the most risky, followed by the total U.S. market, followd by the total bond market--investors can adjust these holdings to their personal risk tolerance. Some common portfolio weights are listed on the Bogleheads Wiki (google "Bogleheads wiki and three fund portfolios").
Mutual funds come with fees, however, called the "expense ratio". Because interest compounds overtime, the affect on an expense ratio of 1% may sound small, but it can actually be several hundreds of thousands of dollars over a long period of time. As a result, you want to find the lowest expense ratios possible for the mutual funds you want. Here are some approximate guidelines on good and bad expense ratios:
- over 1% = RUN
- 0.75 - 1% = bad
- 0.50 - 0.75 = mediocre
- 0.25 - 0.50 = good
- 0.01 - 0.25 = excellent (this is typical of many mutual funds offered by Vanguard, Fidelity, and Schwab)
Sometimes bad expense ratios can sometimes be unavoidable through a company 401k plan; see the section below on 401k plans to help you decide when it may be worth investing in funds with bad expense ratios.
Now we've touched on the risk and strategy disadvantages of individual stocks and cryptocurrencies, on bonds and index/mutual funds and the two main strategies for building a portfolio with them. You may find yourself asking, but where do I put this portfolio? The answer is in a brokerage account, preferably wrapped by an investment vehicle.
There are two main types of vehicles, and they both require that you be employed: the 401k and the IRA. There are also standard brokerage accounts without the perks of the 401k and the IRA, and people who somehow manage to have disposable money without employment can buy securities to be held within those accounts instead. The 401k and the IRA can be thought of as "wrappers" that hold investments; you can usually hold the same securities in a regular brokerage account as you can a 401k or an IRA, the latter two just come with additional perks if you hold securities within them--but they also come with restrictions.
While it is usually not a good idea to buy and sell individual stocks ("daytrading"), tech employers often offer a stock purchase plan, where employees can buy their company's stock at a reduced rate, and sell it (some requirements and restrictions will apply). Usually it is wise to elect to take advantage of these plans. For instance, someone at Microsoft [I don't have a direct citation for this, but by quick mental math it sounds about right] calculated that by buying stocks at 10% discount and selling them as soon as they were able, the profits from that amounted to about a 1.33% bonus annually. This person, by level, would have had a base salary of about 180k -- so 1.33% is no joke.
Stock purchase plans are typically not extended to interns.
The 401k is a type of retirement investment vehicle that your employer must choose to offer. There are a couple key things to understand:
- In a traditional 401k, your contributions go in pre-tax (you avoid taxes putting the money in; when you withdraw from your 401k eventually, that's when you will incur the tax).
- In a Roth 401k (much less commonly offered than a traditional 401k), your contributions go in post-tax (you pay taxes as usual and then put the money in; when you withdraw from your 401k eventually, you do not have to pay taxes on that withdrawal).
- Most employers choose to offer a "401k match", which is really what makes 401ks special and makes their impact go far on your retirement planning. A company may, for instance, choose to contribute 50% to the plan for every dollar you put in. So if you contribute $18,000 to the plan, your company will "match" $9000 of it, and contribute that $9000 to the plan: so you finish the year with $27,000 in the plan, 9k of which you didn't have to shell out. Without a company match, a 401k is not very special, but it does add another option for you to avoid taxes now and defer them to later, which makes sense for some people (especially, but not limited to, people who are in a higher tax bracket now than they will be in retirement).
If your employer does not choose to offer one (and you aren't self-employed, etc -- you can google all the special cases of 401ks), you simply don't have the option of investing in a 401k plan. Accordingly, most "white-collar" jobs will offer a 401k plan (so tech workers need not be very worried--your employer probably offers a plan), but many "blue-collar" jobs will not. This is because a 401k costs your company money to sponsor; the fees the company pays, and the fees you pay, will vary by the plan your company chooses. Let's define "plan": the 401k plan is the list of mutual funds and other securities being offered as choices by the brokerage company your company chooses as the 401k administrator. Your company pays this company some amount of money to administer the plan; where you incur fees goes back to the topic of expense ratios. Top tech companies will usually choose a low-fee fund administrator and/or eat a lot of the fees themselves, to provide employees with low-cost options; less cash-heavy companies may choose less good plans with higher expense ratios. Whether or not you want to invest in high-expense-ratio choices is a decision that most people find comes down to the company match; for high expense ratios, it is sometimes worth investing as much as you need to to get the full company match, but usually not more (some companies will offer a match like "50% on the first 12k the employee invests", so in this case you'd invest 12k instead of the 2019 401k total limit of $19,000/yr, because the "free money" of the match is worth it, but investing past the match only incurs that huge expense ratio with nothing to offset that portion beyond that 12k). This is an analysis you will have to do for yourself, based on your companies' matching offer (if any), and the expense ratios of the securities you want to hold in your 401k.
401k participation is typically not extended to interns.
Unlike the 401k, the IRA ("Individual Retirement Account" -- not the Irish militant group) is not something offered by employers; you alone chose whether or not to invest in this retirement investment vehicle, and whether or not you can depends on if you have earned income (basically whether or not you make money from work: there are a few other minor categories of earned income, and you can google to find them). Like the 401k, there are two kinds of IRAs, but this time you get to choose which you invest in (you can also invest in both, but the total overall limit of $6000/yr as of 2019 for ages up to 50 stands -- the limit for ages 50 and above is $7000 as of 2019). These types are the same as in the 401k case:
- In a traditional IRA, your contributions go in pre-tax (you avoid taxes putting the money in; when you withdraw from your IRA eventually, that's when you will incur the tax). This is typically adviseable for people who are in higher tax brackets now than they will be in retirement.
- In a Roth IRA, your contributions go in post-tax (you pay taxes as usual and then put the money in; when you withdraw from your IRA eventually, you do not have to pay taxes on that withdrawal). This is typically adviseable for people who are in lower tax brackets now than they will be later, such as students.
However, there are additional limits on which kind of IRA you're allowed to directly invest in. People with high incomes, such as many tech workers, will find that they cannot deduct the amount contributed to a Traditional IRA from their taxes, as they make too much. Additionally, they will find they cannot contribute to a Roth IRA directly, as they make too much to be eligible. To get around these problems, they have to do a maneuver called a backdoor Roth to reap benefits from an IRA; you can google how to do a backdoor Roth and execute the steps with your chosen brokerage firm. It is important not to have previous contributions to a traditional IRA if you want to executive a backdoor Roth maneuver; so please research the backdoor Roth maneuver and talk to a representative at your brokerage before taking steps to invest.
Some employers will offer an HSA, a Healthcare Savings Account. In this vehicle, money is invested pre-tax, much like with a regular IRA or a regular 401k (non-Roth), and the HSA balance rolls over from year to year if not used. The money can also earn interest while in the HSA, and the principal + earnings can be used to pay for qualified healthcare expenses (see your company's documents for more details). The HSA another way to optimize your tax situation and save for future expenses.
HSAs are typically not extended to interns.
Credit scores are a bit like the SAT; they frustrate a lot of people, but for better or worse the scores are used pretty heavily in calculations by third parties -- except this time, it's landlords, employers, and financial companies judging you, not colleges and scholarships. You can think of credit scores as pretty analogous to SAT scores in terms of what's considered good, too: just shift up about 100 points. So where a 525 SAT math score is about the national average, 625 is about the national average credit score. However, just like the SAT, having an average score doesn't get you much -- in fact, it can hurt you. To get good rates on critical loans like car loans, mortgages, etc, you really want a credit score of 700 or above; the best rates go to folks with scores over 720-740.
The credit score, also commonly referred to as the FICO score, is calculated by three separate agencies (Experian, Equifax, and TransUnion) based on information reported to them from banks, lenders, etc. Anyone using the FICO score model will be using these weighted criteria:
- 35% payment history: you ALWAYS want to pay at least the minimum payment on-time, or it'll hurt your score a lot.
- 30% amount owed: you want to make sure you don't have too much debt, and that you're not utilizing your credit cards' total limits too much -- experts advise keeping your utilization ideally to 10% or under of your total credit line, or at least under 30% if that's too hard.
- 15% length of history: having a credit card when you're young and using it responsibly (read the section below on what that means) can really help your score. The more data they have, the more reliable their prediction gets on whether or not you'll repay your debts.
- 10% new credit: applying for lots of new credit at one time can make it look like you're about to go on a shopping spree. If you were -- well, don't do that. If you're simply shopping around for the best rates, make sure you do all your inquiries on the same day, or only spread across a day or two. This sometimes leads to the three agencies above bundling all those inquiries together as only one inquiry, which won't hurt your score much.
- 10% types of credit used: having a mix of credit lines open can help. For instance, good usage of a credit card coupled with on-time repayments of a student loan can lead to higher credit scores than just using a credit card correctly. However, folks without student loans need not worry: car loans, mortgages, etc, also count, and you're likely to have at least one of those after graduation. Just be sure to pay everything on-time (and credit cards in full every month!)
There are a couple of free online tools to help you check your credit score. CreditKarma is my favorite, as you can check it whenever you like, and it only uses "soft pulls" to check your credit with those three agencies -- so their checking won't affect your score at all. You can find them at www.creditkarma.com
You're also entitled to one free official credit score report every year: you can view that at www.annualcreditreport.com
But I've seen lots of ads on TV for other sites: should I check with those too?
Nah. CreditKarma is a really reliable third party tool, and AnnualCreditReport.com is owned by those three major agencies: you can't get more accurate than that. Remember: you should never pay to see your credit score (just like there are lots of scammy FAFSA sites, there are lots of scammy credit report sites -- so just stick with the reputable ones).
Like credit scores, budgets are much misunderstood. A good budget gives every dollar a job: your budget's last line should be a 0, because you've already "budgeted" your savings, investments, etc. This will help you make sure you don't overspend, because leaving a balance to do with what you please can be very tempting. Instead of just leaving a floating balance of left-over money, budget your "misc fun stuff" or "clothes", etc, so you know what you're limited to every month. If the purchase you want to make exceeds those amounts, save that monthly amount in a checking or savings account until you reach your goal; or, if the purchase is critical and unforeseen, you can dip into (and then replenish) your emergency fund.
There are a number of good free digital tools out there to help you budget: www.mint.com is one of them; www.youneedabudget.com is another, which is free for students (with email verification; you'll have to send them a pic of your student ID, or a transcript, or something else that proves you're an active student).
It's hard to recommend limits for commonly-overspent categories, as everyone's situation is different. But there are some rules and tips that can help you make sure your budget is sane:
- As a general rule of thumb, rent shouldn't be higher than 33% of your gross income. If it is, it's likely you've either chosen something unaffordable OR out of necessity you're living somewhere expensive like the SF Bay Area, in which case you may have to go over this limit -- but do so very cautiously, after considering options like living further from work, sharing with more roommates, etc.
- No matter the cost of living, students should typically be able to stay under $100/week for food, unless there are extenuating necessary dietary issues. Eating out a lot adds up -- and this includes small things like coffee, etc. Be sure to budget your eating out and your Starbucks, or you might be surprised how quickly your lattes add up.
- With all the options online, cable AND internet is often not needed. If you're a student trying to pick one, go with the internet + Netflix or Hulu, or something similar. You can still use a TV or a monitor to stream your shows on a bigger screen.
- No-contract mobile services like Straight Talk, Republic Wireless, etc, can help you cut costs from your cell phone plan.
One of the major benefits of credit cards are the cash back benefits: I'll address those below in the Credit Cards section.
Apart from cash back offers, also make sure to make good use of coupons and rebates. Here's some helpful sites that I use (referral links are disclosed):
- www.RetailMeNot.com will show you the most popular coupon codes other people have used on particular sites.
- https://ibotta.com/r/ohxanlh (Referral) lets you add rebates to your cart, and redeem them when you take a picture of your receipts and upload them to the site's team for their verification that you really did buy the items or brands offering rebates. I've gotten back over $80 in the span of about two months, especially because Ibotta has a $1-off every Uber ride rebate, which I use a lot. Your milage may vary (literally).
- http://www.swagbucks.com/refer/Thurscon (Referral) gives you cash back on top of any credit card cash back offers you may have, when you shop through their link. The annoying thing here is the cash back is given in the form of a gift card of your choice (from whatever they offer on their site), but I still use it a lot when Honey or WikiBuy (see below) aren't able to find cheaper offers elsewhere (because then Honey and WikiBuy offer their own cash back, but they're both pretty small and so far I haven't been able to figure out how cashing out/redemption really works).
- http://www.joinhoney.com/ref/jdbtyz (Referral) Honey and its extension offers some coupons, but mostly is a good service for automatically finding better deals on the same item through other sellers online, and automatically testing coupon codes for you. If it can't find better offers, often they'll reward you for a purchase through "Honey Gold"... usefulness to be determined. I mostly recommend using this just to find out if there are cheaper offers elsewhere.
- https://wikibuy.com/ Same thing as Honey, really. Automatically tests coupon codes and tries to find better offers on the item you're looking at buying. Also offers cash back of its own sometimes, but again, usefulness to be determined. So I mostly just use this for automatically scanning for and applying coupon codes, etc.
- https://www.joinpiggy.com/r/111 (Referral) Piggy: basically Honey and WikiBuy. Coupons and cashback.
- https://paribus.co/ Skims your email for receipts (with your permission) and automatically checks to see if the items you've bought have dropped in price since. If they have, it automatically files claims with the companies you bought from, which often results in them "price-matching" the purchase and refunding the difference.
Not all debts are created equally: some of them are even "good" as long as you pay on time every month, like a mortgage or low-interest-rate student loans (mostly older people or people who have refinanced from higher-rate student loans have these). These can be "good" when the interest rates are low, and you know you can pay the balance in full with reasonable monthly installments over time. However, credit card debt is an example of a "bad" debt; interest rates are typically very high relative to other forms of credit, and correct credit card use doesn't constitute carrying a balance (you should let the amount hit your statement and then pay it in full every month to avoid using it incorrectly).
If you have accrued a debt, as mentioned above, make sure to pay your potion (the minimum or above -- your creditor should tell you what those figures are) to avoid going to 'collections'. Debts go into collection when you haven't paid them in a while, or haven't set up any form of payment plan with your creditor. In this case, the creditor often "sells" the debt to a collections agency to deal with, and they have the legal right to take you to court and get a judgement against you.
Even financially-on-top-of-it people may find themselves in collections once, especially with old medical debt (like an Emergency Room visit) that it may not have occurred to a young student that they had, etc. In the case that you do end up in collections, typically you'll want to follow these steps:
- Contact the original creditor (like the hospital where you were treated, in the case of medical debt) and ask if you can still pay them, in return for them telling the collections agency to drop it. Sometimes, but not always, this is possible. If they say it is, make sure you get that in writing. Pay the original creditor, keep that record, and send via certified mail a letter to the collections agency requesting verification of the validity of the debt & saying you've already paid the original creditor. If that doesn't work or isn't an option, see step 2:
- Send via certified mail a letter to the collections agency requesting verification of the validity of the debt. If the debt is valid (they can prove it's yours, it wasn't paid yet, etc), you'll need to pay up to avoid them getting a court judgement against you, where they can garnish your wages, etc.
Be sure to get all correspondances in writing (phone calls are fine, but insist on also getting what the person at the other end said in writing as well, from them) and send all letters from your end as certified mail ONLY: this ensures someone on the other end has to sign for your letter, which means they can't pretend they didn't receive it, or act like you haven't tried to respond. This covers your butt a little.
Most of all, DO NOT ignore collections notices. Nothing good will ever come of it; especially because derogatory marks on your credit report will stay there for seven (7) whole years before dropping off. That's a long time to have bad credit.
For a reminder on what factors into the credit score, scroll up to 'Credit Scores' or click here: https://github.com/CourtneyThurston/personal-finance-memes-for-tech-teens/blob/master/README.md#credit-scores
Correctly using a credit card means you pay your balance in full, every month, before the payment due date. Ideally, you're also keeping your credit utilization low, etc, as described above. These practices help to optimize the factors that go into calculating your credit score, and by paying in full, you avoid all interest (so it doesn't matter if your credit card has a 105829548% interest rate: you don't pay a cent of interest if you pay on time, in full).
There are a number of myths about credit cards, including that having them isn't good (they're GREAT as long as you're not going to be irresponsible and charge more to them than you can afford), or that carrying a small balance month-to-month improves your score (it doesn't; as long as you're paying your minimum, it also doesn't bring your score down, but by carrying a balance you also incur interest -- you don't incur any interest when you pay in full on time every month).
As a general rule, you should avoid credit cards with annual fees, unless the benefits end up outweighing that cost (for instance, one of the cards I hold enables me to check bags for free, and with the frequency I do that, it saves me more money than the annual fee for the card costs me). Otherwise, avoid annual fee cards.
If you can use a credit card correctly, you'll reap a lot of benefits:
- Credit cards, especially cards for folks with good or excellent credit, typically come with cash back bonuses. For instance, on a card offering 1% cash back, you'd get 1% of the purchase price of each item you paid for with the card back as "cash back". This is especially helpful to stack with coupons and good spending habits in general, letting you effectively stack discounts on discounts. Typically, the best way to use your cash back is by applying it as a statement credit -- reducing, dollar-for-dollar, the amount you owe at the end of the month when your credit card statement comes out.
- Credit cards are also way more secure than debit cards; if your debit card is stolen and something gets paid for with it, most banks will... eventually... refund you. But for that period of time (which can take a while), you're out your own money. If your credit card gets stolen and things get charged to it, it's the creditor that's out that money, not you -- it's easy to close the card, order a new one, and go on with your life without as much liability.
- You also have many more avenues for merchant disputes with a credit card. If you buy something and it arrives not-as-advertised, etc, and the seller refuses to refund you, you can issue a "chargeback" on your credit card: that's where the creditor refunds you, and then pursues the seller for payment. Like in the case above, this removes a lot of hassle from your end, giving it instead to the creditor to handle.
- Many credit cards come with sign-up bonuses, especially with referrals. These can be dangerous if you're not discliplined (but then again, if you're not, you probably shouldn't touch credit cards to begin with), but great if you have regularly scheduled purchases you need to make. For instance, many credit cards have offers where you'll give you a $300 statement credit if you spend $1000 on the card in your first 3 months; in cases like these, I'll charge my flights to and from school to the card (because I was going to purchase them anyway), pay it off with my financial aid refund for transportation, and get that $300 statement bonus (so suddenly $1000 in flights only really cost me $700). This is sometimes referred to as "churning", and is something you should only really consider when you're really comfortable with your spending habits and how credit cards, etc, work. If/when you're ready, you can learn more at https://www.reddit.com/r/churning/
Tagging onto the above note about leveraging sign-up bonuses for credit cards, here are links to the ones I use (some of them are referral links):
- Amazon Prime Rewards Visa Signature Card (5% cash back on Amazon.com purchases with a Prime membership; 2% on restaurants, gas stations, and drug stores; 1% back on everything else; also comes with a one-time Amazon gift card): https://www.amazon.com/Amazon-Prime-Rewards-Visa-Signature/dp/BT00LN946S
- Amazon Prime Store Card (5% back on Amazon.com purchases with a Prime membership -- had this in my wallet before the Amazon Prime Rewards Visa Signature Card, obviously; this one is easier to qualify for, if you have a lower credit score; also comes with a one-time Amazon gift card): https://www.amazon.com/iss/credit/storecardmember
- Chase Freedom Card (5% cash back on quarterly-rotating categories like Grocery Stores, Restaurants, Drug Stores, Gas Stations, Department Stores, Amazon, and more; 1% cash back on all other purchases): https://www.referyourchasecard.com/2a/W6DMJ2C216
- Discover IT card (good for students; doubles all the cash back you earn in your first year; 5% back on rotating categories like with Chase Freedom, and usually they don't align so if you have both cards, you'll have 5% back at any one time on multiple categories; 1% back on everything else): http://refer.discover.com/s/uuf35x
Note (1) that American Express often has the best benefits (with the trade-off that it isn't accepted everywhere), (2) currently has a cool home improvement credit for applications through 5/5/2021 and better perks for now due to COVID impacting credit applications, and (3) you can also use these referral links on a card that isn't the same one being directly referred (click the tab to the left of the one it pops up to view all offers -- some cards will allow you to use the referral more than others, so check all the links, and (4) sometimes the best referral bonuses pop up in an Incognito tab, so even if you already have an Amex account, apply through an Incognito tab (it's fine to associate your account with the aplicatin through that Incognito tab.)
- Amex Blue Cash Preferred (has a small annual fee but makes up for itself with the right category spending: 6% cash back on grocery stores, 6% cash back on streaming services, 3% cash back on transit, 3% cash back on gas stations, 1% cash back on everything else. Also has a cool home improvement credit for applications through 5/5/21, and better perks for now due to COVID impacting credit applications): http://refer.amex.us/MATTHDlLHN?xl=cp1001
- Amex Blue Cash Everyday (no annual fee; 3% cash back on grocery stores, 2% cash back on gas stations and department stores, 1% cash back on everything else. Also has a cool home improvement credit for applications through 5/5/21, and better perks for now due to COVID impacting credit applications): http://refer.amex.us/COURTTBOpG?XLINK=MYCP
- Reserve Delta SkyMiles card (big annual fee, so not worth it unless you're already loyal to Delta and travel enough. Also has a cool home improvement credit for applications through 5/5/21, and better perks for now due to COVID impacting credit applications): http://refer.amex.us/COURTTjfsJ?XLINK=MYCP
- Platinum Delta SkyMiles card (has an annual fee, so not worth it unless you're gonna check a bag more than twice a year or so, in which case it pays for itself basically; double Delta miles on purchases. Also has a cool home improvement credit for applications through 5/5/21, and better perks for now due to COVID impacting credit applications): http://refer.amex.us/MATTHDHgzo?xl=cp1001
- Blue Delta SkyMiles card (no annual fee and therefore no huge perks, but worth it for higher priority etc on Delta flights. Also has a cool home improvement credit for applications through 5/5/21, and better perks for now due to COVID impacting credit applications): http://refer.amex.us/COURTTxy9p?XLINK=MYCP
The things I save money for come down to these things:
- My emergency fund (see also Emergency Funds under "Common non-investment vehicle types": https://github.com/CourtneyThurston/personal-finance-memes-for-tech-teens/blob/master/README.md#common-non-investment-vehicle-types)
- Things I want (see also Budgeting: https://github.com/CourtneyThurston/personal-finance-memes-for-tech-teens/blob/master/README.md#budgeting)
I also keep some minor cash in checking to pay bills that require direct payment, like my internet and electric.
Beyond that, I don't keep much liquid, because generally you're most risk-tolerant when you're young, making it the best time to invest for the long-term (like for retirement). For that reason, I keep the rest of my assets tied up in investments.
Situations in which you'd want to keep more money liquid in savings include:
- Saving for a downpayment.
- Saving for a wedding.
- Basically saving for anything large with a time horizon of less than 10 years.
How much you'll want to invest for retirement, or for large events with time horizons of over 10 years (like having a kid and wanting to invest for their college education -- which, spoiler alert, you should probably use a 529 Account (google it)) will come down to the work you did in your budget (see https://github.com/CourtneyThurston/personal-finance-memes-for-tech-teens/blob/master/README.md#budgeting for a reminder; see also https://github.com/CourtneyThurston/personal-finance-memes-for-tech-teens/blob/master/README.md#common-investment-products-and-vehicle-types for a reminder on how to invest wisely).
I often get asked how I determine how much I put away from internships. Again, when I was younger, I didn't have to budget for as many things, as I was still a minor with partial parental support for my first internship or two. In these situations, I put away about 90% of what I netted. Now, as an adult paying for everything, I invest about 62% of my net earnings. This is still quite high, and a reflection of both my aggressiveness in investing for retirement and lack of student loans/other debts: your mileage may vary as everyone's situation and goals are different.
A great place that I learned a lot about personal finance comes from Reddit's /r/personalfinance FAQ. A lot of the advice listed on the page helps to build a solid foundation. Depending on your own goals and lifestyle choices, the amount you dedicate in following the advice of the page may vary, but I've found that the page has helped me form a solid financial foundation. The page also has a very popular flowchart detailing various decisions you can make to help keep yourself on track with personal finance, which is more or less a graphical depiction of the FAQ.
For investing purposes, subreddits I've found helpful are /r/financialindependence and, if you're into retiring luxuriously, /r/fatFIRE. /r/financialindependence hosts a daily FI discussion thread which can be used to help you with your own decisions, but be sure to read up on the FAQ before posting something you think has already been asked before.
