Money, Money, Money - Does it make the world go around?
I'll never forget applying to the bank for a very small loan to help me buy some materials I needed for my side business as a Nail Technician. I had everything ready to go and was sure they would give me exactly what I asked for. When the bank manager rang me to say my application had been rejected as I had no "credit rating" I couldn't believe it! What did she mean no credit rating? I got paid into my bank account every month and I still had a few bob at the end of every month so I was never in the red. I was so disgusted I bawled crying in the car for about half an hour! How could I not have a good credit rating?!
The problem wasn't that I didn't have a good credit rating....it was that I had no credit rating at all! I thought I was doing great since I had made it all the way through university and had never had a loan for college, a summer holiday or my car (and I didn't sponge off my parents, I worked every weekend and holiday to pay my way!). The problem is having no credit rating is just as bad as having a bad credit rating since the bank has nothing to judge you on. How do they know you can and will pay back your loan each month? They don't.
I was advised to apply for a student credit card with a very small limit and start buying my weekly grocery shopping on it and pay it off each month in full. That way the bank can see that I am able to clear my debt and pay off the money that I owed before I was charged a high rate of interest on it.
Now don't get me wrong, I am not advising you to go out and apply for credit cards and go on a shopping spree just so you can have a credit score. The money you spend on a credit card is not your money and you have to pay it back to the bank within one month or you will be paying back way more than you have spent in the long run. Interest rates on credit cards are always really high!
Credit cards should only be used for absolute emergencies and large purchases like expensive flights that you can pay back next month or split over two or three months. You have to remember that it is not your own money and you definitely do have to pay it back, asap!
This was my first wake up call in my 20's about how not being on top of your finance as an adult can really scupper your plans for the future.
Below are my tips and tricks for what you need to do in your twenties in order to set yourself up for financial freedom (or at the very least - less financial stress):
1. Take a look at your personal finance - Ignorance is bliss until you go to pay for your new pair of stilettos and your card is rejected for insufficient funds. How embarrassing! It's time to get on top of things and know what your bank balance is and what funds are due out on what dates. Not only is it important to know how much money you have in a specific account, it is also important to check every second day that there has been no fraudulent activity on your account.
Banking online could not be simpler. However, these days the fraudsters are getting more and more savvy and they will find every way possible to get your money if you're not on top of it. Don't leave your pin number or account numbers lying around. With so much of our lives now public through social media it has never been easier to have your identity stolen and with that your bank accounts emptied.
2. Educate yourself about finance - What is a credit rating/score? How do I get one? What is APR? How do the banks make their money? What happens if I can't pay back my loan? These are all valid questions that you probably don't know the answers to unless you've looked into it and decided to educate yourself on finance and how it works. I hadn't a clue what they meant in my early 20's but I soon realised that if I don't learn now I run the risk of being worse off in a few years. Everyone thinks that they will just "be rich" when they "grow up".
Unfortunately, that's not the case for the majority of us and one of the main reasons is because we didn't plan for it early enough and we spend the rest of our lives caught in the money trap of paying back loans, bills, emergency expenses and have no real savings by the time we want to retire. There is tons of information online about everything you need to know about finance in your 20's. Take an hour or two and sit down and read it. Make notes. Read some more. Take notes. Then take action.
3. Start a savings account right now - Some financial guru's will say you should have at least three different savings accounts. One for emergencies only, one for your retirement that you never, ever touch, and one for the big dream, a.k.a the house, the wedding, the car, the holidays etc. I personally think that one savings account in your earlier twenties is enough for now and you can start another one in your mid to late twenties when you have a better grasp on your cash flow. The most important thing is that you're saving. Even if its only €20 a month, it's better than nothing.
When I opened my first proper savings account (not a kiddies stamp saving account that I had as a child) I set up a Standing Order (SO) of just €20 a month to go into it. It sounds like nothing but within 3 months I had changed jobs and was able to just click a button and change it to €50 a month. It came out on the first day of every month and I didn't even notice it being gone. After all it wasn't gone as in "spent" - it was saved so I could spend it in the future. By the end of the first year I had over €600 saved that I would never have had otherwise. The following year I upped the amount of the SO every few months and soon there was €250 going into my savings every month. I wasn't earning way more, I was just cutting back on some unnecessary spending. All of a sudden I was saving €3000 instead of €600 a year and it felt great! My point is start now. Big, small, anything at all. Just start saving right now. You can thank me later!
4. Budget - Noooooooo! Who likes budgeting? Not me! It's really not as bad as it sounds. Setting a budget doesn't mean no fun, it means that you won't be forced to eat beans on toast for the week before payday because you've spent all your money on a pair of Jimmy Choo's. Did you want them? Yes! Can you afford them? No! Sometimes we have to face facts and wait til next month for things that we really want right now. By planning a simple budget you can know exactly how much you have coming in this month, how much needs to go on bills, food, car or other expenses, how much you are going to put into your savings (DO IT!!) and how much you have left over to spend on nice things like nights out, getting your hair done, gifts etc.
Not all months are going to be the same. Sometimes your have family birthdays or anniversaries that you have to buy gifts for. You might have planned a holiday in three months time. Will you have enough spending money that month or should you put some aside this month so you can enjoy yourself more then? It doesn't take hours. Just jot down a few points in a notepad or make a list on your phone and suddenly you are in more control and less stressed about how you're going to pay for something.
5. Emergency fund - This does not mean the calling up the Bank of Mom and Dad. Unfortunately you're in your 20's now, and with that comes financial responsibility. The Bank of Mom and Dad is not limitless and let's face it, they have probably paid for your every expense for the past 20 years, it's time to pull up your big girl pants and start paying for yourself. Your parents will always be there for you but your emergencies are not always their emergencies so why should they be forking out for you when you are earning yourself?
Having an emergency fund isn't really an option it's a necessity. You only really realise that when you're car breaks down and you need to fork out €350 to get it fixed. If it's at the end of the month do yo have €350 lying around spare? Of course not! You need to attack your emergency funds. But remember, emergency funds are for emergencies. They are not for buying one more round of shots on a Saturday night when you've spent your last €20. If you are using a current account as your emergency fund account you do not need to bring that bank account card with you. Leave it locked in a safe place at home and only take it out for emergencies.
6. Build your credit history - You might not have ever thought of buying a house never mind applying for a mortgage but without a credit history you can kiss that idea goodbye before you have even started. While you might not be planning on buying a house until your late 20's or 30's, you need to put int he ground work as early as possible. If the bank can see that you have been paying back your loans every month for more than three years they will be happy to lend you money. They need to see that you are willing and able to pay money back, even if its only tiny amounts. Of course there are loads of other criteria too but if you can't show that you are able to manage your personal funds, loans, credit cards and have savings for a few years then you haven't a hope of being offered a mortgage by any reputable bank.
In short, start saving now. Start paying back now. You can thank me later!