When you’re young and most likely living with your parents, financial terms such as compound interest or tax-free savings probably aren’t very intriguing, and the thought of taking your finances seriously isn’t too high on your priority list. But, one of the most essential tips to becoming financially independent is starting early. The earlier you begin to understand your spending habits, the closer you are to working towards reaching your financial goals.
Thinking about your finances can seem overwhelming, so to help you get a head start, here are 5 money tips to know before you’re 21:
1. Open a bank account
If you don’t already have one, you need to have a bank account to begin taking control of your finances. Many financial institutions have special offers for student bank accounts that have incentives for opening an account with them. Ideally, you should try to find a bank that has no monthly fees and provides you with whatever your specific banking needs might be. Keep in mind that to apply for a student bank account by yourself, you need to be at least 17 years old and, if you are younger, you will need a legal guardian to accompany you.
2. Create a personal budget and track your spending
Creating a budget that is catered to your personal needs is an important step in understanding where your money goes and allows you to see how your spending can be adjusted to support your financial goals. Most banks have their own apps which can help you complete tasks like checking your account balances, sending and receiving electronic money transfers, and paying bills. Apps for budget tracking (like Mint) can be especially helpful by allowing you to track your spending and set savings goals.
3. Benefit from compound interest
Saving now can make a huge difference in your financial journey. With the help of compound interest, the sooner you start putting money aside, the faster you can accumulate wealth. In a nutshell, compound interest is interest earned on interest. For example, if you put $100 in a bank account that offers 5% interest, that $100 will turn into $105 by the end of the year. If you keep that money in the bank account, your balance will increase to $110.25 when the second year is up. Over time, your account balance will continue to grow without you having to do anything but keep it in there. Look for banks or financial institutions that offer high interest savings accounts to get the most out of compound interest.
4. Avoid debt
This tip might seem obvious, but it can be one of the hardest to follow. Some credit card providers can approve you immediately with just the click of a mouse, and while this is a convenient tool, it can also be very dangerous. Credit cards are useful and necessary for many reasons, but it is crucial to keep track of how much you are borrowing and make sure you have the funds to pay it back. To avoid racking up large amounts of debt, avoid impulse purchases and make it a point to pay off credit card balances as soon as you can.
5. Explore opportunities to make money
Finding a part-time job or trying out a side hustle are some great ways to start earning an income in your teens. Not only do they support your financial goals, but they can also help you develop skills that can be valuable later on in life. Part-time jobs and side hustles can also help you discover what you’re passionate about or explore unlikely industries that you wouldn’t typically be interested in.
Creating a budget and abiding by it can be a rewarding experience, and the younger you can start, the easier it will be to establish healthy spending habits and figure out what works and doesn’t work for you. Keep in mind that, while it’s helpful to start young, becoming financially independent is an ongoing process and you certainly don’t have to have everything figured out. Don’t be too hard on yourself if you make mistakes along the way, and don’t be afraid to ask questions or reach out to trusted individuals for advice.