Bad Money Ideas of the Young

You found the one to start a life with. You now share home, love – and your financial backgrounds with your new partner and family. Here’s what to know and how to tackle debt, budgeting and other aspects of your newly merged money matters.

Young couples and families often begin the journey together with a large amount of debt from student loans, car payments and perhaps one or both partners’ past credit card usage. The responsibilities of starting a family only deepen the hole.

If you are a young adult still looking for a high-paying job, who can’t afford a home or car and who constantly struggles with debt, then financial planning and effective debt management can help you. So can dispensing the following preconceived money notions common to young families.

We don’t need professional help. Young families with debt – especially those with children – need to think hard about meeting a financial planner to put finances in order. A planner can not only set a proper budget for you, but also advise you on how to invest for the best possible returns.

For example, planners can advise you on saving for a home, setting up a college fund for your kids and establishing a fund to handle unexpected emergencies.

What’s wrong with a little credit card debt? The greatest financial blunder a young family can make is carrying too many credit cards – and the accompanying huge bills and balances.

Mitigating and managing credit card debt becomes particularly tricky when these balances typically carry one of the highest rates of interest (often more than 17%). Inexperienced new adults with fresh plastic frequently make the mistake of paying only the monthly minimum. Continuing to do this means paying off the entire balance – assuming a family racks up no more debt on a given card, which is unlikely – will take more than a decade.

Attempt to make at least $100 more than the minimum payment on each card account and try to use cash instead of plastic as much as possible. If you or a member of your family has difficulty controlling card use, you can look for assistance from a credit counselor.

Let’s fly without a budget. Poor budgeting is close kin to any debt issue. Young couples tend to overspend mostly because they often underestimate expenses and practice the flawed habit of spending first and then planning to save what’s left. Unfortunately, spending incessantly rarely leaves anything at the end of the month.

Make (and follow sincerely) a frugal budget, keeping in mind all your daily expenses and saving plans, needs and intentions.

Retirement is far away. Many young adults just don’t understand the significance of saving for retirement and so skip investing in 401(k) workplace retirement plans or individual retirement accounts. These youngest wage earners literally labor under a misconception that the future is too far away to worry about, and instead focus on such short-term goals as buying a new car.

If you invest at least 15% of your income in retirement savings consistently from an early age, you’ll remain far ahead financially after retirement. Here’s timeless advice for all young adults: You’ll need that money sooner than you think.

4 Must-Reads on Debt

The lack of financial education is often the main reason behind debt problems. Here are some awesome books that help grow your financial knowledge and give you all the necessary tips and tricks to manage your debt.

Americans are drowning in credit card debt. Families in the U.S carry $600 billion in card debt, Equifax, one of the three credit bureaus, estimates. Millions of people looking for debt relief are feeling helpless.

Debt-strapped people should always keep themselves updated about the possible ways to get rid of debt. These four great books filled with tips and effective strategies to avoid and eliminate credit card debt can help you in a major way.

Building Wealth and Eliminating Debt. This exceptional book by Charles Carradine is your ticket to financial prosperity. It discusses many personal finance issues in a comprehensive manner. It is a literary manual which endeavors to improve your financial condition.

The author shares tips on a wide range of topics including avoiding debt, its impact on your credit score and protecting yourself from credit card scams. Carradine says that his aim is to educate the readers on how to stay clear to debt and correct poor financial behavior.

How to Settle Your Debts without Committing FinancialSuicide. Author Norman Perlmutter has the predicament of people who struggle with credit card debt in mind. Being a “get-out- of-debt coach,” Perlmutter treats topics like elimination of credit card debt, repairing of credit and reorganizing your finances with considerable expertise. He lists the dos and don’ts when dealing with creditors so that you can successfully settle your credit card debt and avoid bankruptcy.

The Total Money Makeover. Your financial education cannot be complete without reading this acclaimed book by Dave Ramsey. The immensely popular financial expert suggests a slow but steady seven-step strategy for you to attain financial freedom.

Ramsey advises maintaining a rainy day fund of at least $1,000 and following a snowball approach to get out of debt. The book also gives you 50 real-life examples as encouragement.

Life or Debt 2010: A New Path to Financial Freedom. This book by Stacy Johnson is dedicated to helping the debt-stricken get back on their feet. Here, Johnson discourses extensively on money management. He particularly emphasizes how to avoid money traps that push you toward debt. His no-nonsense approach to financial education will keep you from indulging in indiscreet use of credit cards.

Financial education is something that you cannot afford to slight, particularly during times of debt troubles. You need to know all the possible options available to keep yourself afloat. If you read the above books, staying clear of debt and avoiding debt relief programs like debt settlement and consolidation will be much easier.

Holiday Spending and Staying Out Of Debt

Are you ready for the holiday rush and buying spree? Traditionally, the holidays bring us a time of sharing and giving. But the cost of giving has increased over the years and you need to be aware of the burden it could put on your financial situation. With the change in most individual’s financial situation over the past year, this is a good time to reevaluate your holiday gift giving.  

Most families spend around $500 on holiday gifts. If you put all those gifts on your credit card, the end result may surprise you. Do you have any idea how long you will be paying off those holiday gifts if you can only make the minimum payment each month?

Let’s do some math:

$500 of holiday gifts: Let’s say you charge $500 on your credit card and only make the minimum monthly payment of $20. Some credit cards now are around the 19.99% interest rate for long period payoffs, you will be paying on those holiday gifts for 3 years! And to top it off, you will be paying the credit card company an additional $153 in interest (see Federal Reserve website - www.federalreserve.gov/creditcardcalculator).  

What if your gifts top the $1000 mark: Now you have an after-the-holidays credit card bill starting at $1000, with the same $20 of minimum monthly payment and 19.99% interest rate. Are you sitting down? It will take you 9 years to pay off those gifts you purchased! The credit card company will be happy because you will pay them $1,167 in interest. Yes, that is correct you will be giving $1000 worth of holiday gifts to your friends and family, plus over time more than a $1000 gift to your credit card company.

Not to be a Scrooge, but there is a downside to credit card use if you can not pay it off in a month or two. Another option is the cash envelope and gift list method. Make a list of people you will be buying for, a dollar amount for each person and some great gift ideas you know they will love. Now hit the mall with list and cash envelope in hand. Your goal is not to purchase more than you have in your envelope.

A last tip to remember: the holidays are not always about the purchased gifts. Think back on all the unwanted, unneeded or forgotten gifts you have received over the years. If you were able to have something different from the giver, what would it have been?  What were the best holiday gifts you have received? Was it the homemade cookies, the framed children’s art work or just being able to spend time with your family and friends? The holidays are truly about sharing and giving; think about using your heart and mind instead of your credit card. 

Have a Happy and Financially Safe holiday!

Kimberly J. Howard, CFP®, CRPC® is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice located in Newton, MA and Denver, CO (781-413-4879). Please visit us at www.kjhfinancialservices.com or email Kim at kim@kjhfinancialservices.com. Follow us on Twitter @KimHowardCFP. 

Check Out These Tips for You College Students

When Credit is a Necessity

The fact that borrowing on credit can be costly is a fact that everyone needs to understand but especially young people who may be more impulsive in their spending. How monthly interest is calculated should be demonstrated using simple math equations and how interest compounds should be explained. The importance of having a lengthy credit history and a high credit score should be stressed.

Lesson #1: How you handle a credit card will affect your future in ways that may not be obvious now. Over time everyone establishes a credit history that reflects how well they handle money. This information is collected into credit reports that are used to calculate your credit scores.

Lesson #2: Handled with care a credit card can have a positive effect on your credit scores.
Lenders use your credit scores to decide whether to approve an application for a mortgage, automobile loans, personal or other types of loans. Mismanage a credit card by maxing out your credit limit and making late payments, and the often, repeated advice to young people to avoid using credit will prove true. If, however, you’re responsible and conscientious in paying the balance in full each month and on time, the benefits to your credit scores and the ability to get credit in the future will be vastly improved.

Lesson #3: The financial success of life on your own lies in taking a genuine interest in the details. Whether you’re choosing a bank, investment firm, employer, credit card or anything other situation that deals with money, what are vital to understand are the details in the fine print. With credit cards, the terms and conditions of each agreement vary and can mean the difference between reasonable and outlandish charges incurred for the privilege of borrowing. Fees and rates can add up quickly.

Factors that should be examined to make a wise decision when choosing a credit card:

• Annual Percentage Rate (APR): Look for a low rate; a high one will cost more.
• Annual Fees: Rates range from $25 to $300. Look for a no or low fee card.
• Penalty Fees: Pay late and you’ll be charged a maximum $25 fee. Go over your credit limit and pay another fee. A penalty rate increase can be imposed for late payments of more than 60 days and remain in effect for six months. Make three late payments and you’re stuck with the penalty rate.

Lesson #4: Using a credit card responsibly takes discipline and commitment. Limit yourself to one card for purchases you can pay off when the bill comes due. Never use a credit card for an impulsive purchase; if you can’t afford to pay with cash, you simply can’t afford it. Frivolous spending will result in an out-of-control balance that may be hard to pay down. Carefully examine every billing statement for errors before making the each payment on time.

Good Luck and Start Your New Life Off On The Right Track!