By Andrew Housser

 

April is Financial Literacy Month, and fittingly, in just a few weeks, thousands of students will graduate from high school and college. Moving on to work or higher education in the tightest economic climate our nation has experienced in many decades, these young people and their employed peers need to understand how to manage money.

 

These tips will help young adults make positive choices to avoid excessive debt and build a strong credit profile.

 

1) Learn to create and use a simple budget

 

It's not exciting or sexy, but it is the No. 1 tool to manage spending and control debt. No matter how much or how little income you have -- and whether you earn it or receive it from your parents for the school year -- get in the habit of budgeting, using software, a spreadsheet, or a simple paper and pencil.

1. Total all your incoming money, even if it is a fixed amount you receive from your parents. Categorize spending as fixed expenses (like rent), variable "must buy" expenses (food, gas, medicine, books, supplies), savings and spending money. The total is your cost of living.
   
   
2. Subtract expenses from income. If that number is negative, take a hard look at your budget. You must either increase your income or reduce your expenses, no matter how hard that is.
   
   
3. At the first of the month, map out how you will spend your money in the coming month. That is a budget.

2) Live within your means

 

Borrowing to pay for an education can be considered an investment in the future. But do not go further into debt to fund your lifestyle. Plenty of people who have the latest fashions and tech toys, or drive the newest cars, do so under a tremendous debt burden. Staying out of debt is immensely more satisfying in the long run.

3) Get into a savings habit

 

Commit to yourself that you will deposit 10 percent of any paycheck -- no matter how small -- directly into a savings or money market account. That includes any money received from parents. The goal should be to accumulate enough funds to cover expenses for three to six months in case of an emergency. The key: Establish a percentage you can stick to, and be consistent.

4) Pay bills on time

 

Open every bill as soon as it arrives. Pay immediately or create a simple system to make sure you pay on time, whether that involves a folder on your desk or an online calendar. Simplify the process by signing up for online bill payments that can be scheduled so you never forget. Just make sure funds are available in your account on the bill due date. In the process, you'll be building a good credit score while also avoiding late payment fees and penalty interest rates. 

5) Start saying "no"

You will be deluged with credit card offers throughout your life. While most adults can use one credit card for personal business, multiple cards will not lead to a better financial future. Saying "no, thanks" and learning to shred unsolicited credit card offers must become standard behavior.

6) Manage a credit or debit card

To manage personal business, most adults need that one credit card -- if and only if they can handle it responsibly and charge only what they can pay off in full each month. With the passage this year of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, credit card lenders can no longer solicit students in person and on campus to open credit cards. Credit card companies can issue cards to applicants under age 21 only with an adult co-signer or proof of adequate income. Consider complying with these rules to obtain one credit card IF you can learn to use it responsibly.

7) Pay credit cards in full

Paying the full balance every month will help avoid finance charges, build a good credit score and stay out of debt. Paying less than full payment each month begins a cycle of fees that is difficult to end. In addition, paying less than the full amount means that the original purchase will end up costly significantly more than its purchase price. For example, if you make a $1,000 purchase, and make only the minimum monthly payment (assume the higher of 3 percent or $10), on a card with 19 percent APR, the total paid on the $1,000 debt will be $2,735 over almost 15 years. New credit card statements include this information. Read the statement carefully to learn how your actions will impact your debt.

8) Build and manage your credit score

A credit score can affect your ability to borrow money as well as the interest rate you will pay. Credit scores also can affect the ability to rent an apartment, lease a car or even get a job. Check your credit report once each year for free at www.annualcreditreport.com. If you find any inaccuracies, correct them right away.

Young people are at a critical time in their lives, when their finances are a clean slate. Learning how to manage money responsibly will make the difference between a healthy financial path and a life of money struggles.

Also by Andrew Housser 

Bills.com Budget Guide

Download this free guide which shows how to manage a budget. (PDF - 548KB)

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC and its wholly owned subsidiary, Freedom Debt Relief, a national consumer debt resolution firm that has served more than 40,000 clients and manages more than $1 billion in consumer debt. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.