Money Management 101: Financial
Tips for Avoiding Money Pits
The world of credit cards, checkbooks, monthly statements, debit cards,
minimum balance, monthly fees, and savings accounts can be overwhelming if
this is your first time handling your own financial affairs. You will undoubtedly
face many financial issues, ranging from smaller expenses such as going to the
movies and photocopying to larger expenses such as paying for tuition, rent, and
car payments.
Everyone’s financial situation is different, therefore the best question is
how can you make the best financial decision for you? A good place to start in
making smart financial decisions is to first have a basic understanding of how to
create a budget, as well as banking and credit issues.
Budgeting
The most important thing you can do to protect your financial situation is to
budget! Creating a budget will help you see how much money you receive and
how you spend your money. Make a list of your current and anticipated
expenses. Think about your weekly expenses such as gas, food, childcare, and
entertainment. You also want to consider your monthly, quarterly, and annual
expenses such as rent, utilities, and car insurance.
You should also make a distinction between your fixed expenses and your
variable expenses. Fixed expenses remain consistent from month to month.
Examples of fixed expenses are rent and car payments. Variable expenses are
expenses that can vary greatly from month to month. Examples of variable
expenses are entertainment and clothes.
After you tally up your expenses, list your income. What are your sources
of income? Do you receive a monthly allowance from a family member or do you
work part-time? If your expenses exceed your income, then you may need to
adjust your expenditures or find a way to acquire some extra money to help you
pay for major non-negotiable expenses like tuition and housing.
One thing you want to avoid is going into debt, which can create additional
stress and worry in your life. One way to steer clear of debt is to think about how
much you spend on variable expenses. Can you think of creative ways to reduce
your expenses and save money? If you find that you are not able to reduce your
expenses substantially by finding spending alternatives, you may need a “plan
B,” which can be increasing work hours, getting another job, searching for
scholarships, or taking out a loan.
Loans
While having a balanced budget is the best advice, it may not be practical.
If you decide you need additional money that you do not have right now, you
might consider taking out a loan.
All loans are not the same! When you choose to borrow money from a
bank or other financial institution, you should always read the information they
give you, especially the fine print, before you sign an agreement.
“Many people think that the cheapest loan is the one with the lowest
interest rate and the lowest payments. But that’s not the whole story. The length
of the loan and the fees you pay are essential in figuring the loan’s real cost,”
according to the Wall Street Journal’s Guide to Understanding Personal Finance.
Lenders are required to tell you what a loan will cost per year in terms of the
annual percentage rate (APR). APR is the combined fees of the loan with a year
of interest charges. Knowing the APR is useful because it gives you a way to
make an accurate comparison between loans.
Be careful to note any additional fees such as application, attorney, credit
search, and origination fees. The best way to protect yo urself when taking out a
loan is to ask questions of the lenders and make sure the lender is reputable.
Some common types of lenders are commercial banks, savings and loans, and
credit unions. Keep in mind the old saying “if it’s too good to be true, it probably
is.”
Credit Cards
As you walk around malls at various times of the year, you may see tables
with cool prizes or gifts on them such as water bottles, rainbow slinkies, or pens.
Often there is someone behind the table saying, “All you have to do is fill out this
credit card application and you can get one of these!” Twelve water bottles and
three weeks later, you have a pile of new credit cards sitting at home.
“It is getting to easy for students to get credit,” says Erika Cohen, former
assistant manager and loan officer at a major bank. Many people do not realize
the problems credit cards can cause until they are thousands of dollars in debt.
Cohen suggests signing up for only one card.
You should pay attention to the minimum balance fees and be sure to ask
exactly how the minimum balance is calculated. If you pay off your credit card
balance each month, you will avoid paying high interest fees and building up a
large amount of debt. Cohen says, “In my years at the bank I saw a lot of people
who had amasses a large amount of credit card debt.” Don’t let this happen to
you!
So what do you do if you have hit your credit card limit one too many
times? “Go to the bank and talk to the customer service representative. They
are there to help,” Cohen says.
Debit Cards and Checking Accounts
Debit cards differ from credit cards in that they work like checks. They
take money directly from your checking account and transfer it to the seller’s
account. Although they may have a major credit card company’s logo on the
front, debit cards do not create a separate balance with the credit company, like
a credit card. The logo simply means that you can use your debit card anywhere
that the credit card is used.
You need to be careful when you use a debit card. You still must record
each purchase you make with a debit card just like you would with a check. So
keep you check book around so that you can maintain accurate records and
know how much money you have left in your account. Cohen suggests that
students keep track of their checkbook and checking account balance carefully.
Each month you will receive a statement from you bank that should balance with
the amount of money you have recorded in your checkbook.
In addition to tracking your debit card withdrawals, you should also write
down every Automatic Teller Machine (ATM) withdrawal into your checkbook.
According to The Wall Street Journal’s Guide to Understanding Personal
Finance, “Most regional banks belong to a system that gives their customers
access to every bank in the region and beyond.” However, many banks differ in
the fees they charge their customers to use these machines. Some charge $5-
10 to withdraw money and these charges can add up.
There are many banks from which you can choose. Some banks even
have special packages for college students like no minimum monthly balance
requirement or no fees per check you write. You have to read all of the fine print
to be aware of al the fees. Remember, if opening a checking account is a new
experience for you, you may need to ask a lot of questions so you can make a
wise decision.
Managing personal finances can be confusing to people of all ages. As
you make your financial decisions, be sure to carefully read the information you
collect from financial institutions and the documents you sign. Even with careful
planning and research, anyone can make a mistake. Remember, you always
have options and choices.
This article was reprinted with permission of the Commuter Connection. Jennifer
Greenhalgh wrote the original article. Revisions written by Leslie Perkins.
(Revised 06/28/05) |
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