So you just turned 18. Now what? As an 18 year old, you are now officially an adult by law. You can rent a car, open a new bank account, invest, and so much more. You will also need to memorize your social security number as you will need it for almost every financial-related application.
Unfortunately high school curriculums don’t prepare students on the topics of personal finance and paying taxes. My aim with this post is to help introduce young adults to the world of personal finance. Here are some of the best financial steps to take when you turn 18.
1. Open your First Checking and Savings Account
There is a possibility that your parents opened an account for you when you were younger. You don’t have to stick with that bank and you should shop around for a bank that meets your needs. Now that you are 18, you are free to pull money from your checking account or open a new account. There are many factors in choosing the right bank, including fees, accessibility, convenience, products, account features, App UI (User Interface), and interest rates.
Your checking account and savings accounts do not need to be from the same bank but it can be convenient. In a checking account, you should look for accounts with no minimum balance requirements and no recurring fees. Checking accounts with higher interest, fees, and minimum balance requirements typically require you to have a job and credit history.
As for your savings, the best savings accounts come from online banks as they typically offer the highest rates with no fees. I particularly enjoy saving my money through Yotta Savings, a lottery-based online savings account. For every $25 you save, you earn a lottery ticket and a chance to win up to $10 million in a weekly drawing. If you are interested, enter code HYDERFT when signing up to earn 200 free lottery tickets. Other popular high yield online savings accounts include Ally Bank, Citi Bank, Discover, and Capital One 360.
2. Build Up Your Credit
Your credit score measures your credit worthiness, or ability to borrow money. You can’t get a loan, mortgage, expensive car, or a good credit card without having a good credit score and a stable job. As an 18 year old, there is a good chance you have little work experience, if any. So how do you apply for a credit card without credit history or job history? The answer is pre-paid credit cards. When I was 16, I started out with a Bank of America pre-paid card. At 16, I was not legally allowed to have a regular credit card and it would have been tough to get a good credit card at 18 without credit history. A pre-paid card allowed me to build credit at an earlier age. I put $300 of my own money in this pre-paid card, which means I had a limit of $300 to borrow from myself. Do your research as these cards have different balance limits, withdrawal limits, fees, benefits, and features.
Chime is one of the best financial services companies for young individuals looking to get started. They offer checking and savings accounts with a Chime Credit Builder Credit Card. While I have personally never used Chime, their Credit Builder Card has no fees, no minimums, and no credit checks to apply. There are VERY FEW pre-paid cards available with no fees or limitations, making Chime an attractive option. An alternative to pre-paid credit cards are store credit cards. Many stores like Macy’s, Kohls, Gap, and Best Buy offer credit cards with low barriers of entry.
Credit Karma is a free app that allows you to view detailed information on your credit history. If you don’t know, a credit score above 670 is considered good and above 740 is very good. Anything above 800 is considered excellent. I have personally always hovered around the 800 mark. If you make any late credit card, loan, or mortgage payments, your score goes down and stays on your record for 7 years, limiting your ability to get loans or credit cards in the future. It could mean the difference between getting a credit card with a limit of $500 versus $15,000, or a high interest $150,000 mortgage versus a low interest $300,000 mortgage. Your credit history also affects your insurance rates, which means you could save on car insurance, health insurance, and home insurance if you have a great credit score. The higher your credit score, the more you can borrow at lower rates. Whats more, your credit history can affect your ability to get a job. Some companies look at your credit history when you apply for work. If you have a low credit score, companies may assume you would be a high risk or irresponsible employee.
Other factors that affect your credit score include:
- Number of bank accounts you have open (More = Higher Score)
- Age of Credit History (More years = Higher Score)
- Credit card utilization versus your credit limit. (Less than 6% = higher score)
- Payment History (100% On Time = Higher Score)
- Hard Inquiries, or number of times you applied for a loan or credit card. (More Injuries = Lower Score)
If you cancel your only credit card that you had for 10 years, your credit score goes down because it goes against your “Age of Credit History”. The 10 years you had that card goes away from your report. Similarly if you open new second credit card, it will bring your “Age of Credit History” down from 10 years to 5 years. For that reason, I keep my old unused no point, no reward credit cards in a safe. Keeping my old credit cards also helps keep my credit utilization less than 6%.
Measuring your credit score can be confusing as there are 4 different terms used when talking credit scores, including TransUnion, Experian, Equifax, and FICO. These are credit bureau’s that all measure your credit score in their own similar way, which means your score will be very similar across these credit bureau’s. If your FICO score is your highest score, then it may help to find a lender that primarily checks your FICO score. Experian, TransUnion, and Equifax offer more details on your credit history. Because of this, you will find that many apps and banks will show you your FICO score for free, but will charge to see your full credit report. With the Credit Karma App, you can see your TransUnion and Equifax credit scores and history for free.
3. Invest in an IRA
An IRA is an Individual Retirement Account. This is a type of brokerage account tailored to retirement. For the majority of American’s, $1 million is no longer enough to retire. Depending on your income, the cost of living in your area, work benefits, and other factors, it may take your entire lifetime to reach $1 million in retirement. With rising costs and inflation, it is never too late to save for retirement.
As far as IRA’s go, there is the Traditional IRA, the Roth IRA, and the SEP IRA. It is perfectly okay to have all three, or multiple of the same IRA’s, but that does not change your contribution limits of $6000 per year for the Traditional and Roth IRA’s. For example, you can contribute $1000 to one Roth IRA, $2000 to another Roth IRA, and $3000 to a Traditional IRA to reach the $6000 limit. The money you contribute to a Traditional IRA is tax deductible come tax time, but you will need to pay taxes when you withdraw the money in retirement. Tax Deductible means that the IRS, a government agency, will tax you on your Total Income minus the amount of money you contributed to your tax deductible accounts, like a Traditional IRA. For every year you contribute to your Traditional IRA, you save money on taxes. The money you contribute to a Roth IRA is not tax deductible, but your money grows tax free and is tax free when you withdraw in retirement. A Roth IRA is like the opposite of a Traditional IRA when it comes to taxes. A Roth IRA is better if you assume that income taxes will be higher in the future. A Traditional IRA is better if you assume income taxes will be lower in the future. It is impossible to know for sure so having both accounts help reduce the risk. If you are self-employed, a SEP IRA is the way to go. To learn about the specifics of these retirement accounts, read my blog post here. In my opinion, a Roth IRA account with a robo-advisor brokerage like Betterment or Wealthfront is the best way to get started if you have no experience in investing. All you need to do is set a recurring deposit and let them automatically invest for you. This is a low risk option. If you join Betterment here or if you join Wealthfront here, you will get your first $5000 managed free for a year. Both Betterment and Wealthfront offer checking accounts and regular brokerage accounts that are geared towards saving money.
If you want to manually experiment in long-term investing with your IRA or a regular brokerage account, M1 Finance is a great place to get started. M1 Finance is a robo-advisor that gives you the flexibility to customize your investments or automate them. Join M1 Finance here to get $50 when you deposit $100 within 30 days.
You can also open a regular brokerage investing account, but I don’t recommend it unless you have the knowledge of investing in the stock market and the ability to take financial risks. Here are some of the popular options available. You can use M1 Finance for both IRA and regular investing accounts. If you have CashApp, the Venmo and PayPal competitor, you can invest in some of the most popular stocks. Join CashApp here and get $5 when you send or receive money. If you are comfortable with investing and want way more stock and ETF investing options, join Robinhood or Webull and get free stock(s) when you join and deposit $100. Acorns is a popular brokerage with the young crowd since it automatically rounds up your expenses to the nearest dollar and invests the difference, however they have high fees compared to the competition.
4. Download a Personal Finance App
The apps I am talking about are free net worth, budget, and credit score tracking apps like Intuit Mint and NerdWallet. If you connect your banking and brokerage accounts to these apps, you can see all of your accounts in one place. You can set and track budgets, track your credit score, and monitor your expenses all from your fingertips. Interestingly, Betterment and Wealthfront also allow you to connect your external accounts so you can see everything through one app.
- Click here to read my review on Betterment
- Click here to read my review on Wealthfront
- Click here to read my review on M1 Finance
- Click here to read my review on Acorns and other Micro-investing apps
- Click here to read my review on NerdWallet
5. Determine your Budget and Financial Goals
With a new checking and saving account, a pre-paid credit card, a brokerage account, and an app for tracking everything, you should set strict targets for yourself. If you are planning on going to college, saving can be very difficult. Read my post on 16 ways to avoid student loan debt here. Based on your earnings, create a budget and stick to it. Your monthly rent or mortgage payment should never be more than 25% of your monthly pay. Your utilities and subscriptions should never be more than 10% of your monthly pay. You should try to limit eating out to save money and shop around for the best insurance plans, phone plans, internet plans, and more. Make sure you set aside money for emergency savings with the goal of reaching 6 months of expenses in your savings account. If possible, max out your $6000 annual limit IRA and use your pre-paid card on every purchase (and pay it back in full immediately) to increase your credit score and build up your borrowing power. After a year of doing this, you should be able to qualify for better credit cards and lower interest rate loans.
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