We all want to grow up quickly. I mean, most of us have been anticipating this moment since we were in elementary school. We’d play dress-up in our older sibling’s or parent’s clothes and try to listen to adult conversations. Sometimes we’d even set up our own businesses to make us feel like the breadwinners our parents are. But now that some of us are getting to the age to fly the coop it’s time for some real talk. Adulting is hard. It’s weird and confusing and it turns out there is a lot more to being an “adult” than simply dressing up and having money to spend. In fact, having money to spend comes with a lot of responsibilities and considerations like how to manage and budget money, file taxes, build credit, and invest.
Luckily, this adulting series has four Adulting 101 articles to help us with the financial basics of adult life. The truth about adulthood is that no one actually knows what they’re doing. Most adults learn from mistakes— whether their own or those of friends and family—and they’re still learning, just like us!
Adulting 101 Class: Budgeting
Finally! We’re an adult and making our own money. We’ve been waiting for this day forever. But, we weren’t quite craving the responsibility that comes with adulthood as much as we were the lack of a curfew. Now we are taking home paychecks (yay!) but we are also responsible for bills. How can we make sure our paychecks cover our needs?
Budgeting is about investing in yourself, setting goals, and assessing needs and wants. Whether we’ve been taught about healthy financial management from an early age, or are just now learning, everyone can achieve budgeting success! With a little discipline and intentional spending, we can all learn to live within our means.
It’s helpful to think of budgeting as goal setting, and creating a budget starts with these steps:
1. Track your income and expenses. Get clear about how much money you bring in, how much you spend, and what’s left at the end of each month. Budgeting is effective whether your income is fixed (consistent pay from particular source/s, like an allowance or a full-time job) or variable (from events that occur irregularly, like birthdays and holidays, or a part-time job).
2. Categorize and track your spending. Common categories include bills, eating out/groceries, entertainment/leisure, beauty/hygiene, etc. Which expenses are consistent each month? And which ones can be cut down or eliminated? Consider utilizing an app to track spending, keeping a spending journal, or creating categorized spending envelopes. Mint and Wally are top-rated free apps that help with budgets and spending and the Fempreneur demonstrates the envelope system for cash budgeting on a modest income.
3. Assess your needs and your wants. This includes thinking about your short- and long-term goals. Are you saving for something in particular? While you may not be thinking as far ahead as retirement, perhaps you’re dreaming of getting your own apartment after graduation, becoming a homeowner before the age of 30, or traveling overseas for your twenty-first birthday. Budgeting with a specific goal in mind can produce positive results in other aspects of your financial life.
It’s common to feel like you’re mastering your budget sometimes and completely failing at other times. Maybe you balled out on a celebratory dinner that didn’t need to be that celebratory. Whatever the decision was, remember to be patient with yourself. Honestly reflect on what’s at stake if you don’t meet your budgeting goals this month. Don’t give up! Try and incorporate what you learn into next month’s plan for success. We know that you’ve got this!
Adulting 101 Class: Building and Protecting Your Credit Score
We’ve all heard about the importance of building good credit and some of us may already have a credit card. (Don’t brag, we know it’s cool.) When used correctly, credit cards can help you establish a good rapport with credit bureaus and build the high credit scores that will allow you to borrow in the future and get low-interest loans on big purchases like a home or car.
What are credit bureaus?
Credit bureaus are groups that keep track of whether or not you paid your bills on time. If institutions—like banks and lenders—see that you pay your bills on time, they are more likely to trust you with borrowing their money in the future. This will make it possible to finance things like your phone, apartment, and school loans. This post is not to encourage you to get a credit card now, but to introduce you to the ins and outs of credit before heading into the “real world.”
What is credit or a credit score?
When adults refer to credit, they’re usually referring to their credit score. This score is used by many institutions to make decisions regarding how much money they can loan to you and trust that you will pay back. Experian.com says the best way to build credit is by utilizing a credit card and paying your bills on time.
A credit card is like a loan. The bank that gives you a credit card sets a certain amount of money that they believe they can trust you to pay back. You then have the “freedom” to use this money under the assumption that you’ll pay it back over time. According to Equifax.com, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
What’s the difference between a credit card and a debit card?
|Debit card||Credit card|
|With a debit card, you’re pulling money straight out of your checking account.||With a credit card, you’re borrowing your bank’s money and then, paying them back.|
Here are some pro tips on credit cards and a few more below.
- Look out for interest rates. If you want to apply for a credit card, shop around to see which ones have the lowest interest rates and don’t be surprised if the rate on your first card is pretty high. The good news is that you’ll be able to apply for better cards with better rates as you improve your credit score.
- Pay your credit card balance in full each month. If you do not pay off your credit card balance in full each month, a monthly interest fee will be charged to your account until you can pay your full balance. The interest will just keep accumulating on whatever you can’t pay at the end of each month and what you will have to pay back will just get bigger and bigger.
- Remember, credit is debt, not income. Make sure that when you use your credit card, you either have or will have the money you’re spending in your checking account before the month ends. This way you won’t be digging yourself into a hole you can’t get out of. You want to be able to pay at least 50% of your bill each month but paying the whole bill every month looks even better to credit bureaus and increases your credit score. With responsible credit card ownership, you can start building your positive credit score as soon as you’re ready!
Adulting 101 Class: Taxes
We always hear that the only guarantees in life are death and taxes. (Pretty weird joke from our parents, but it’s best to just roll with it.) Given this strange phrase, we can assume that we will be paying taxes at some point in your life, if not yearly. So remember, that every time you earn money through your paycheck, you also have to pay taxes to the government.
Why? The government collects taxes in order to conduct many activities that require money to keep running. These range from services you may already use like the Post Office or the roads you drive on, to more specific services like funding Medicare/Medicaid or Social Security.
To finance these public services, the government collects money from individuals and corporations by generally levying a percentage of your income (and other taxes we will talk about) to be directed towards the government budget. The government always collects these taxes on your income during tax season, so you have to know how to plan accordingly
What type of taxes are there?
There are several kinds of taxes and you have likely already had to deal with some in your life. Here’s a brief overview of some of the most familiar taxes:
- Income tax: a percentage of your earnings is taxed to fund the federal government.
- Corporate tax: similar to the income tax except it is on the profits of a corporation.
- Sales tax: a tax that is applied to most consumer purchases (like the tax you pay on an Amazon order) and the rate varies state to state.
- Property tax: a tax on things like owned land and real estate.
There are certainly other taxes out there, but these four are the most common ones. They are also the most likely to be in your day-to-day life. It is also important to note that there are taxes from both the federal government and your state government.
Who pays taxes?
Almost everyone will have to pay taxes at some point in their life. However, there are certain criteria that will require you to pay some taxes as opposed to others. The most important one, that applies to many high schoolers and college students, is that you do not have to file taxes if you earned less than a certain income (which changes each year), although you may still want to. For example, in 2019 if you earned less than $12,200 you did not have to file taxes.
Why file taxes?
There are two important reasons why you should file your taxes while you are employed.
- The first being that if you earned more than $12,200 and do not file taxes, you are committing a crime called tax evasion that can result in you being fined or even imprisoned.
- The second reason is that taxes come with things called deductions and tax credits, so you can actually get something called a tax refund based on the calculations of your income, withholdings, tax credits, deductions, and several other factors.
What are withholdings?
When you start employment at any establishment, you should be asked to fill out a form regarding your withholdings. It is critical that you pay attention to this form.
Essentially, filling out this form allows you to choose the rate at which you withhold a portion of your income to cover the cost of your taxes. In other words, you can choose whether you want to withhold a high amount, the standard amount, or a lower (or 0) amount of withholdings. Withholdings allow you to take a small portion of your income away automatically so that when you file taxes, you will have already paid your taxes.
For example, let’s say you earn $2,000 a month and have your withholdings set to 5%. You would pay $100 a month in withholdings, or $1,200 a year. When you go to file taxes, depending on your circumstances, you could have owed more than $1,200, such as $1,350, and you will have to pay the difference ($150). In this scenario, you should probably increase your withholdings for the next year if you do not want to owe money upon filing taxes.
You could also owe less than $1,200 in taxes, such as $1,050, and you will get a refund from the government for $150. In this scenario, you could keep your withholdings the same so that you do not end up owing money next year, and likely will get another refund when it comes time to file again.
What are tax credits?
Tax credits are something you can earn to subtract from the amount of taxes you owe to the government. There are non-refundable tax credits, that will only subtract from what you owe until the amount you owe reaches $0; and refundable tax credits, that will bring the value you owe below $0 which essentially becomes a tax refund. There are many tax credits out there, but one of the most significant ones is the Earned Income Tax Credit (EITC), which depending on your specific situation can get you a refundable tax credit between $500 and $7,000.
What are deductions?
Deductions are an amount of money taken out from your tax liability. This means it reduces your amount of taxable income to reduce the amount you ultimately owe. There is a standard deduction which is the standard amount taken off based on your marital/filing status. If you file as single then your deduction in 2019 was $12,200, if married filing jointly it is $24,400 ($12,200 if married filing separately), if head of household it is $18,350, and if you are a qualifying widow it is $24,400.
There are a number of other deductions that you can receive from doing more complicated things like itemizing, but most of these have become obsolete in recent years because the standard deduction is almost always greater than the deduction you would receive by taking one of these other routes.
But…What does it all mean for us students?
Again, almost everyone who works has to pay taxes, and even if you do not have to right now, you likely will have to within a few years. It’s important to ensure you maintain adequate withholdings at the start of your new job, that you are aware of what credits you are eligible for, and that you file for the correct deduction.
Adulting 101 Class: Investing
Did you know that by investing only $5 a day starting in high school, you could have over one million dollars earned by retirement? Investing is placing money into an account or purchase in such a way that it can grow over time. You could invest into something simple like a savings account or something more complicated like real estate.
However, there are alternative ways to invest that are actually not as extreme as a large-scale purchase like a home and these can grow every year. A key concept to grasp when talking about investing is that there are two types of interest.
What is Interest?
Interest is the growth your investment will see over a certain period of time, usually represented by a percent (%) value. For example, a savings account is a common investment strategy.
You place money into a savings account that grows at a rate somewhere around 1% or less per year (most savings accounts today are actually less than 1% growth). So, if you put $1,000 into a savings account at a 1% growth rate per year, next year your account will have grown to $1,010 if you do not touch it.
This is where the type of interest becomes critical. Simple Interest means that you gain interest on your initial investment. In other words, if your bank account is based on simple interest (using our same example), it will grow by $10 every year if you do not touch the money in the account.
Compound Interest means that you gain interest on both the initial investment and the growth! This is the interest that you want. Using our same example, if your bank uses compound interest, you will still get the same $10 on year one. But the following year, you will get 1% growth on $1,010 instead of the original $1000, so in the second year you will actually earn $10.10 for a total of $1,010.10. You might say “Wow, I could save a WHOLE ten cents extra a year, what a difference?” (trust me it gets better), but we can explore how this exponentially grows with alternative financial investments that have higher rates, as well as exploring the fact that you can invest more than a simple $1,000 over the course of your life!
What are some alternative financial investment strategies?
You may have heard of a very common alternative strategy to grow your wealth – an IRA, or Individual Retirement Account. Retirement may seem like a long time away, but it is a very real part of your life you have to deal with so you want to be set up to have the finances to support yourself.
There are two types of IRAs, a Roth IRA (rIRA) or traditional IRA (tIRA).
- A Roth IRAs means that you pay taxes on your investment up front so that you do not have to pay taxes when you withdraw your money at retirement (age 59 and ½).
- A Traditional IRA means that you pay the taxes at the end when you withdraw the money. These are the most basic differences between the two and they both have their purposes, so if you want to learn more you should seek out financial advice on which is best for your personal circumstances!
Another alternative strategy, which can be more active and not based around retirement is the stock market. The stock market is essentially a place where you can buy shares, or part-ownership, in a publicly owned business.
For example, you could own a share in Apple or Tesla (wouldn’t it be cool to brag to your friends about that?). Today, a share in Apple is in the $300-400 range. So, let’s say for that same $1,000 you could own 3 shares in Apple ($333 each). As of July 17, 2019, or one year ago today, that share was worth $203.35. Assuming the stock has that same growth from today to one year from now, then on July 17, 2021 the stock will be worth $462.65. Meaning your $1000 investment has now grown to be worth $1,387.95 in just one year (YOU ROCK!).
You’ve Got This.
This is a lot of information to absorb about financial adulting—how to manage and budget money, file taxes, build credit, and invest—but you’ve got this! These resources will remain here for you, and you can ask us any additional questions on our discussion thread. This will help us shape more courses on adulting to help you ace the next chapter in your life. If you have any other urgent adulting needs, shoot us an email at [email protected] and we’ll be sure to write an adulting guide to help.