Building your financial foundation is exactly like building a skyscraper.
First, you must pour a solid foundation and reinforce that foundation prior to building several stories above it. You must start from the ground up, building each floor strong and stable as you go. There is no other way around it, and no way to skip floors during the building process.
If your foundation is weak, your building will only go so high before it can no longer be supported.
If your foundation is completely unsound, the first strong wind will cause the building to collapse and you’ll need to start over.
It is the same with finances. Start with a solid foundation and your financial skyscraper can go as high as you can build it. Start weak, and your financial skyscraper will be limited. Start unsound, and the first major hiccup will threaten to collapse it.
In fact, laying the foundation of our financial lives is so important that it is our focus in this new series. While our hope is that you can begin building a strong foundation early in life, we realize that many of you have passed the high school and post-high school years, and are well on your way into full adulthood.
Don’t worry if you’re a little older, as there are still things you can do to solidify your foundation for the future, even if you’ve already poured some footings and have some weaknesses. If you’re in that situation, the key will be to shore up the weaknesses and build the right way from there.
With building a solid foundation in mind, we’ll walk you through 7 tips that you can use at each stage of your young adulthood to build a strong financial foundation, along with some tips for parents hoping to instill strong financial sense in their children.
In this article we’ll be focusing on the high school years, when most young people are just breaking ground on their financial lives. If this is you, you’re in luck. You can start completely fresh the right way and hopefully avoid financial pitfalls in the years to come.
So without further ado, here are our 7 tips to build your financial foundation the right way while in high school.
1. Get a Job, Even if It’s Part-time
At this stage of your life, most people are completely reliant on their parents or guardians and family for money. You may have an allowance or do chores in exchange for money, but almost everything you own has been bought for you. While it’s normal and necessary to rely on your parents for financial support, once you hit high school it may be a good idea to get your first job.
We recommend this for a number of reasons. One, you can begin to gain valuable skills for adulthood, such as learning new skills, collaborating with co-workers, meeting expectations and deadlines, and keeping a schedule. Getting a part-time or summer job will also help you to begin gaining independence through learning self-management and time management.
You must be able to get yourself up and ready, make it to work on time, and complete your required tasks efficiently and completely without having your parents or guardians directing every step of the way.
Getting a job will also allow you to begin earning your own money, which you can use to begin building a strong financial foundation. This will likely be the first time you are in complete control of your money, and it’s important to learn how to handle that responsibility.
This is your money, and no one will have control over it but you. Read on for the things you should do with that money to build a strong financial foundation.
2. Open a Checking/Savings Account
You may already have a checking or savings account that your parents started for you, but if you have a joint account with your parent/guardian you might want to consider opening your own accounts as well.
If you don’t have an account, it will be important to establish one in order to begin building a relationship with a bank or credit union. Building a relationship with a lender will be important when looking at opening credit cards or taking out loans, especially if you’re just beginning your financial life and have little credit history. Furthermore, opening a checking/savings account will give you a safe place to store your money.
A word of caution: make sure you fully understand the rules of a checking/savings account before opening one.
A lot of checking accounts require a minimum balance to avoid a fee, and many do not accrue interest (meaning you don’t earn money on the money in the account). It is often the same with savings accounts, as you typically need to carry a minimum balance to avoid paying fees.
Another benefit to opening a checking account is that you will receive a debit card tied to the account for spending. A debit card is similar to a credit card except your spending will not be tied to credit but money you have in the account.
Using a debit card will begin teaching you how to spend responsibly within your means, as you will need to make sure you have the funds in your account before making purchases to avoid overdraft fees.
A debit card is a nice baby step into the world of earning and burning with plastic, and can help you establish good financial sense before you get a credit card.
3. Start Building Savings
Once you have some money coming in and have established checking/savings accounts, we recommend you focus on building up some savings.
You can store money in either a checking or savings account, but we recommend having both and putting money in savings every month that you do not touch unless in an emergency.
There are several reasons for doing this. First, your debit card will be tied to your checking account but not your savings, so anything you put in savings will stay there unless you transfer it to checking or withdraw directly from it. Because it is in a separate account, you are less likely to touch it.
Furthermore, the extra step required to transfer money from savings to checking provides an extra barrier that will help you to keep your spending confined to what’s in your checking account. In other words, you are less likely to be tempted to spend because there is less money in your checking account and it requires more effort to transfer money.
Having separate checking and savings accounts will help you to spend within your means by confining that spending to what’s in your checking account, and you will be able to build a small savings at the same time.
The vast majority of Americans do not have an adequate amount of savings, or any savings at all, so you’ll be way ahead of the game!
Putting a little away every month into a savings account that you don’t touch is an extremely important and strong pillar in your financial foundation that you can begin building right away. It is very important to have something in reserve at all times in case of an emergency. This is the beginning of building sound financial habits that will benefit you throughout your life.
4. Make a Budget
While you should at least loosely budget your money throughout your life, budgeting and sticking to that budget is especially important when you don’t have a ton of money coming in and little savings.
Many people are overwhelmed by the idea of building a budget, but it’s actually really simple, especially when you’re just starting out and don’t have a ton of expenses.
The two main parts of a budget are expenses and income, while the two types of expenses are fixed and variable expenses.
Fixed expenses are those that you must pay every month and do not really change (rent, phone, insurance, utilities, etc.). On the other hand, variable expenses change and can be changed based on your choices (eating out, entertainment, clothing, etc.).
Luckily, most high school students don’t have a lot of fixed expenses, but it is still a good idea to track and manage the expenses you do have. Even without many fixed expenses, a budget will help you track variable expenses, as well as develop a savings plan for things you want to accomplish (car, trip, college, etc.).
Even at this early stage in your money life, building a budget will help you know where your money is going as well as help you to make money goals and work toward them.
5. Make Some Long-term Goals
Once you have some income, have opened checking/savings accounts, begun to save, and built a basic budget it’s time to set some goals.
What do you want in the near and far future? Do you want to attend college? Buy a car? Own a home?
Whatever your goals are, having a money plan for achieving them will help you reach them faster by reducing the chance of financial hardships causing delays or leaving you treading water in a sea of debt.
For example, say one of your big goals is to go to college. You know it will cost a lot, so saving as much as you can in high school will help lessen the financial burden of college, which will leave you in a better position once you are finished with school.
In this case, building a financial foundation in high school will allow you to reduce your student loans, which will allow you to pay them off faster after school. This in turn will allow you to begin moving toward other goals more quickly.
Or say you want to buy a car. You could have a small down payment and take out a larger loan (with interest), or if you’ve been saving you could make a larger down payment and have a much smaller loan (with less interest). Even better, you may be able to buy the car for cash!
Whatever you want to accomplish in life, there’s a good chance money will play a key role. That is why it is important to begin setting some long-term goals early on, then focus your finances around those goals. The more planning and less delay on the financial side, the faster and more you’ll be able to accomplish.
6. Begin To Build Credit
At the same time you begin making goals and thinking about how you will need to structure your finances to reach them, you should also begin looking to start building credit.
Every individual has a credit score that follows them throughout life, and is the measuring stick lenders and other institutions use to assess your financial responsibility. Your credit score is one of the most important financial tools you have, and can save you thousands over your lifespan.
With a good credit score you will have access to the best plans, rates, and loan terms. A bad credit score will close a lot of doors and cost you a lot of money.
HAVING GOOD CREDIT IS VERY IMPORTANT.
A huge part of building a good credit score is showing you can handle credit responsibly. You’ll need to start small, and as you build credit you’ll find that more credit options will be available to you.
There are a few ways you can begin to build credit in high school. First, you can become an authorized user on your parents credit card account. An authorized user is someone who can utilize credit to buy things, but who does not have primary responsibility for paying the balance.
As long as your parents are responsible and make their payments on time (and you don’t rack up debt on the card), becoming an authorized user may be a good way to start building credit.
Another way to build credit is to take out a small loan, such as if you’re buying a car. You will likely need your parent to co-sign on the loan with you (meaning if you can’t pay then they will be responsible) because you don’t have enough credit yourself to qualify. However, if you can get a small loan and make your payment on time you will be taking a big step in the right direction in building a history of responsibility with credit.
Yet another way you can begin to build credit in your high school years is by paying bills on time. Again, you may not have a lot of fixed expenses, but if you do have subscriptions or utility bills this is an excellent way to build credit. You may even ask your parents if you can take over one of their bills.
However you choose to start building your credit history, make sure you pay all your bills on time to show you can handle credit responsibly.
7. Build Good Financial Habits
This the biggest factor in building and maintaining a solid financial foundation throughout your life, and is an ongoing process.
You must become fiscally responsible through good financial habits.
Habits form when we learn to do things a certain way. The more we do it that way, the more worn that path becomes and the harder it will be to walk another one. Financial habits are no different, so we want to make sure we make the right paths well-trodden and leave the wrong paths to become overgrown.
Good financial habits are critical to your overall financial success. It doesn’t matter how much money you make, if your financial habits are bad you will always struggle with money.
There are many things that go into having good financial habits, but these 3 main ideas will start you down the right path.
- Do not buy something unless you can pay for it, either outright or in the near future
- Pay off one debt before accruing more
- Stop worrying about social status
This last one is especially hard in high school, but it’s key to a solid financial foundation.
Social status gets people into financial trouble all the time, as the need to look good to others overrides the need to spend within your means. This is a critical mistake, and one we’re hoping we can help you avoid early on. Trust us, the people in high school won’t matter a few years from now, but your financial choices will stay with you for the rest of your life.
Which is more important in the long run?
Moral of the Story
Teenagers are often accused of thinking they know everything, but money is the one area where YOU MUST listen to those who have been there before.
Few other things will follow you throughout your lifespan and have as big an impact on your trajectory as finances, which is why it’s so critical to build a solid financial foundation.
Begin building your foundation by getting a job, opening up a checking/savings account, building savings, making a budget, setting some long-term goals, gearing your finances toward achieving those goals, and building good money habits.
We promise high school will end, but money goes on until the day you depart this earth.
Make sure you invest your time and effort into what truly matters to you and avoid the mistakes of those who came before you.