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Published: September 24, 2010
Updated: January 06, 2011

Money Management 1-2-3: ONE: Getting a Strong Start

The “Money Management 1-2-3: Be Smart about Money All Your Life” series focuses on basic money skills at the beginner, intermediate and advanced level. Getting a Strong Start addresses how to manage money, use credit wisely and live within your means. Topics include setting up a bank account, learning about credit, building a credit history, using credit cards, budgeting and saving, and working and career.

Wise choices about how to use your income and credit when you’re young help you build a foundation for a lifetime of financial security. Prioritizing spending, establishing a savings habit and keeping consumer debt to a minimum enables you to achieve important financial goals sooner. And once you understand the basics of taxes, borrowing and banking, you’ll be well prepared for even greater financial responsibilities and opportunities as you get older.

Earning a paycheck

Many first-time workers are surprised to find that their take-home pay is less than what they thought they earned. They receive their net pay rather than their gross pay, which is the net amount minus various deductions.

Federal and state income taxes typically take the biggest bite out of earnings. How much is withheld from your check depends to a great extent on the number of allowances you claim on the Form W-4 your employer provides. Follow the instructions on the form or use the calculator at the Internal Revenue Service (IRS) website to determine the correct number of allowances.

If too much is withheld, you’ll receive a refund when you file your tax return between Jan. 1 and April 15. If you need help completing and filing your tax forms, contact Volunteer Income Tax Assistance (VITA), a free tax preparation program, at www.vita-volunteers.org/index.htm. Or call the IRS at 800-829-1040.

If you use a paid tax preparer, avoid expensive “refund anticipation loans” because you can use free “e-file” and get your refund in several days.

Social Security (FICA) and Medicare (MedFICA) taxes pay for government-sponsored retirement benefits and health care benefits for eligible seniors. These taxes are nonrefundable.

There may also be state-mandated deductions for things such as state-sponsored disability insurance.

Other deductions are voluntary, such as your share of the cost of your health insurance and contributions to an employer-sponsored retirement plan.

Budgeting and saving

How do you manage your income so you can pay for the things you need, buy the things you want, and still achieve financial goals? You set priorities.

First, pay for necessities—rent or mortgage, food, utilities, insurance, transportation, credit payments and other needs. Second, contribute to your savings for important goals such as paying off debt, retirement, or buying a home. Make it your goal to save three to six months of living expenses in an easily accessed emergency account.

To help your money stretch, create a monthly budget. Include all your expenses, fixed and variable, essential (needs) and discretionary (wants). Break down annual and occasional expenses (car registration, insurance premiums, and holiday gifts, for example) into monthly amounts. Include savings as a fixed monthly expense. And don’t forget to include money you “fritter” away on things like coffee, snacks, and newspapers or magazines. (For a real eye-opener, track your daily spending for a month.)

You might find that your income doesn’t cover all your wants and needs. To balance your budget, you can make cuts in spending, increase income, or do a combination of both.

Checking and savings accounts

A checking account allows you to write checks or use a debit card to access money you deposit. A savings account provides a safe place to keep your money, and pays a small amount of interest.

You can set up your accounts at a bank or a credit union. Before opening an account, shop around. Compare monthly and transaction fees, initial deposit and minimum balance requirements, interest rates, and other account terms.

Though you can order checks directly from the institution, mail-order check printing services typically charge less (unless your bank or credit union offers free checks). Two sources are:

• Checks in the Mail: 800-733-4443
• Current: 800-848-2848

The debit card that comes with your checking account allows you to withdraw cash and make deposits at automated teller machines (ATMs). If the card has a Visa or MasterCard logo, you will also be able to use it as a debit card where those cards are accepted. However, the money for each purchase you make will be deducted directly from your checking account.

Check your monthly account statement as soon as it arrives to verify that all deposits, withdrawals, debits and checks are accurate. Reconcile your account by following the step-by-step instructions on the statement. This will help you avoid overdrawing the account and having to pay high overdraft fees.

If you are denied an account, ask why. It may be because your name is in the ChexSystems database, which collects information about mishandled checking and savings accounts. You have the right to one free copy of your ChexSystems report each year. Request yours at www.consumerdebit.com or call 800-428-9623. In addition, if you are turned down for an account, you can get a free copy.

SCAN (Shared Check Authorization Network) and Telecheck are databases of returned checks. If your check was not accepted at a store you can order a free report from SCAN at 800-262-7771, and Telecheck at 800-835-3243.

Learning about credit

Credit can help you handle a financial emergency, achieve financial goals, and establish a credit history. But credit can also get you into financial trouble if you don’t understand how to avoid high finance charges, growing debt, and unmanageable monthly payments.

There are two types of credit. Installment credit requires you to make fixed monthly payments until you repay the full loan amount. Car loans and home mortgages are examples of installment credit. In these cases, the loan typically is secured by the property you purchased with the borrowed money. If you default on the loan (don’t pay), the lender can repossess your car or home.

Revolving credit allows you to borrow money over and over again, up to your “credit limit.” The amount of your available credit fluctuates as you use it and then repay it. You have the option to pay the entire outstanding balance when the bill is due or to pay a part of the balance and carry over the remainder to the following month. You can avoid interest charges by paying it off each month. Examples of revolving credit include credit cards and lines of credit.

The cost of credit includes interest—what the lender charges for allowing you to use its money—and various fees.

Banks, credit unions, credit card companies, retailers, mortgage companies and others offer credit.

Some types of credit, such as pawn loans and payday loans, are best avoided because of their exorbitant interest rates and fees. With these and similar types of loans, you are at high risk to lose pawned goods or get locked into a cycle of refinancing an ever growing debt.

If you are denied credit, you have a legal right to know why. You also have the right to upfront disclosure of all credit terms and costs (truth-in-lending). Learn more about your rights from the Federal Trade Commission at www.ftc.gov/credit.

Building a positive credit history

If you have never had credit, or if you didn’t pay your bills as agreed, you may have a poor credit history or no credit history at all. Without a good credit history, it can be difficult to buy or rent a home, start a business, get insurance, set up utility service, borrow money, or even get a cellular telephone. Some employers reject job applicants with bad credit.

Here are some ways to establish credit:

Use an alternative credit bureau. Check out PRBC, a national credit bureau that captures consumers’ history of paying rent, utility, and other recurring bills.

Find a cosigner. Ask a friend or relative with good credit to cosign your credit application. Be aware that if you don’t make payments as promised, your cosigner will be fully responsible for the loan.

Get a secured credit card. This type of card is easier to get because you deposit money that will be used by the card issuer if you don’t pay your credit card bill.

Here are some ways to improve your credit:

• Keep your total outstanding debt to 50% or less of each credit line.
• Make at least the minimum payment by the due date.
• Don’t charge over your credit limit.
• Make up past-due payments.
• Apply for new credit only when you need it.

Your credit report is a detailed record of how you’ve paid your bills and managed your credit over the years. The information about your payment history is provided by the companies that gave you credit or loans. Some information, such as a bankruptcy filing or a tax lien, comes from public records.

Your credit score is a three-digit number that summarizes the information in your credit report. Rather than review your entire credit report, businesses make a decision just by looking at your score.

Be sure to check your credit report regularly to catch any errors. You can get one free credit report every 12 months from each of the three major credit reporting agencies—Equifax, Experian and TransUnion. Request your reports at www.annualcreditreport.com or 877-322-8228. You’re also entitled to a free report if a company denies your application for credit and you request your report within 60 days.

Do not fall prey to credit repair scams. You can do anything these companies can do—free. Only discipline and time can repair damaged credit.

Using credit cards

Credit cards offer users many benefits, including:

• an interest-free loan on purchases if you pay your balance in full each month
• greater safety and convenience than carrying cash
• protection against fraud, undelivered or damaged goods, and billing errors
• the ability to shop safely online, buy airline tickets, or rent a car or hotel room

But credit cards can also be expensive:

• Interest rates are high relative to some other loans.
• Purchases cost more if you carry a balance from month to month.
• Cash advances begin to accrue interest immediately, even if you pay your full balance by the due date.
• It’s possible to remain in debt indefinitely and waste much of your income on finance charges.

Before applying for a credit card, shop around. Interest rates (fixed and variable), fees, and other terms and conditions vary widely. Rewards cards—those that earn you points, miles, cash back or other rewards for spending—can be tempting, but they can cost more in annual fees and higher interest rates than the rewards are worth. You can compare credit cards at www.CardTrak.com or www.CardRatings.com, or by using Consumer Action’s annual credit card survey at www.Consumer-Action.org.

Charge cards are different from credit cards in that they set no limit on purchases but require you to pay your balance in full each month, and they typically charge an annual fee.

When you do use a credit card:

• Make at least the minimum required payment by the due date each month.
• Pay your balance in full as soon as possible.
• Avoid fees and penalty interest rates by paying on time.
• Avoid cash advances.

To avoid accumulating debt, try to use cash to purchase everyday items such as groceries and gas. Wait until you have enough money saved up to make a major purchase. And if it’s getting difficult to make monthly payments, stop using credit and consider contacting the National Foundation for Credit Counseling (800-388-2227) or the Association of Independent Consumer Credit Counseling Agencies (800-450-1794) for help.

 

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Money Management 1-2-3: ONE: Getting a Strong Start
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Notes

This publication was funded by Consumer Action’s Managing Money Project, founded with a cy pres award from the Griego v. Rent-A-Center class action settlement.

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Money Management   ♦   Mortgages   ♦  

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