Financial Milestones: Financial Things to Do When You Turn 18 | INVESTEDMOM
Turning 18 is one of the first significant milestones in a young adult's life, representing the transition between adolescence and adulthood for many. This time can be psychologically substantial for many young adults just beginning to gain a sense of financial literacy.
Preparing from a young age will help adults avoid financial mistakes and have better access to financial goals, such as building a good credit score, proper money management, and achieving overall financial freedom.
In this article, we will discuss eight things young adults should do as they turn 18 to ensure they have the best financial understanding and are more prepared for their future.
Open Financial Accounts
The first thing young adults should do as they become adults is open an independent bank account. If you are a joint account owner of a savings account with your parents, now would be a great time to transfer the account to only you and start investing your money!
After you open a checking account, you will receive a debit card that physically represents the money in your account. You can use this card to make purchases at stores and, in most cases, online. To check the balance of your bank account, insert your debit card into your bank's ATM, consult a bank teller, or use your bank's mobile app if available.
Financial accounts are great because they help reduce the amount of money you have to handle, which is easy to lose and often harbors bacteria. Another benefit to these accounts is that you can link them to bills, like your credit card payment or student loan payment, to help automate these transactions.
Choosing a Suitable Bank
Choosing a bank account is easier than you think. Compare what accounts your local banks and credit unions have to offer. For example, one bank might offer savings accounts with higher interest rates. This compound interest can help you accumulate wealth and gradually put more money into your savings account. You can set up a bank account in less than thirty minutes and reap many benefits.
There are other things to consider when opening a bank account beyond the benefits. One important thing to consider as you choose your bank account is fees. If you can, avoid unnecessary fees. Another aspect to consider when choosing your bank is whether a larger branch with ATMs in other areas would benefit you or if you can stick to a more local option.
Budget Setting
Setting goals, tracking expenses, and saving money will help young people achieve their desired lifestyle. Many financial advisors recommend the 50/30/20 rule when it comes to budget setting.
A 50/30/20 rule refers to putting 50% of your money towards needs like groceries, housing, gas, and car payments, 30% of your income towards wants like a gym membership or going out with friends, and 20% of your money towards savings to later invest with or use as an emergency fund. To succeed, you must know how much money you make compared to your monthly expenses.
Allocate Income and Expenses
By recognizing all sources of income compared to your expenses, you will better understand your financial picture and ensure your costs do not exceed your monthly earnings.
Depending on your financial goals, you might allocate more money to one department than another. The areas you decide to spend money on depend on whether you are paying off debt or trying to save money for things like retirement or education.
Monitor Spending Habits
Tracking how you spend your money can help you understand where your cash mostly goes. You can recognize discrepancies between your budget and financial situation by monitoring your habits. You can use tracking to make the needed adjustments to keep moving towards your financial goals.
As a young adult on your own for the first time, spending your money on the latest trends and fads can be tempting. Avoid buying things you might not need, so you can better reach your savings goals. Financial tips like these can help you save a little money here and there, which can add up to a lot by the end of the year.
Learn About Taxes
As minors become legal adults, understanding taxes is important.
Types of Taxes
Adult children will face numerous types of taxes entering the financial world. The first type of tax we will dive deeper into is income tax, which depends on your job earnings. The state you work in imposes these taxes and uses them to fund national programs.
Another type of tax everyone will have to deal with as they make purchases is consumer excise taxes or sales taxes. A sales tax is a small percentage added to your transaction's total. Local governments determine the tax and apply it to all final retail consumptions.
Next is property taxes, or taxes someone must pay on property they own. If you own a family home, you must pay a property tax determined by the local government.
The final tax type is payroll taxes. You will pay payroll taxes to ensure your Social Security, Medicare, and unemployment insurance.
Tax Obligations
Adults must carry out numerous tax obligations to manage their tax liability. Filing your taxes during tax season, generally between January and April, is crucial. You can use tax preparation software or a certified public accountant (CPA) to access the easiest and highest returns annually. Filing your taxes relates to those income taxes we mentioned earlier based on the amount of money you earn each year. Staying on top of your finances during tax season is a big deal, as failure to meet tax deadlines can result in penalties and issues with the IRS.
Accurate records of your tax history can help support your tax filings each year. These records can include pay stubs, bank statements, receipts, deductions, and other relevant information. Managing such information responsibility can help you avoid making mistakes when filing throughout your life.
Establish Credit History
As you become an adult, it is vital to establish a credit history of your own. When you turn 18, request a free credit report to ensure everything is fine with your Social Security Number. Opening a few credit cards as early as possible will help you start building credit, which will be valuable as you purchase your first car. When young adults have better credit scores, they will be offered car loans with lower interest rates than someone with a lack of credit history.
Tips for Establishing Good Credit
You should use 30% or less of your total credit balance to keep your credit score in good shape. Having a low utilization rate will show lenders that you only borrow a little money and will likely have it paid back more promptly.
As you use credit cards, it is essential to purchase responsibly. Young adults should use credit cards for needs like groceries and gas instead of wants. Try to have your credit card balance paid off every month, or otherwise, never miss a credit card payment minimum.
By choosing a credit card packed with rewards, you will feel more inclined to use it in the areas it will benefit you. Having a choice of cards with various rewards will help you achieve a better credit score quicker than you would with one credit card.
Regularly checking your credit score using tools like Experian and CreditKarma will allow you to stay aware of your credit situation. Before opening a new credit card, check your credit report to see if your score is in the best shape for approval odds.
Goal-setting
Creating goals will help young adults prioritize their spending based on the money they make, bills they have, consumer debt, and saving plans. Goals will help you form better financial decisions for your most successful future.
Young adults should form both long and short-term goals. Long-term goals require more time to achieve, from years to decades. Meanwhile, you can complete short-term plans efficiently, usually within a year or less.
Examples of Financial Goals
Individuals commonly make short-term goals without even realizing them. One of these goals can include paying off your credit card debt. Paying this debt off can help increase your credit limit, as well as your credit score. An emergency fund is another goal that can be completed in the short term. In life, unexpected situations are to be expected. These situations can be costly, and having a backup emergency fund can help cover these expenses. Saving for an auto loan or vacation are a few more examples of short-term financial goals.
Working towards long-term goals is the key to success. Some long-term goals can include saving for your own home, building your retirement savings, or saving to manage your own business.
Protect Your Identity
Minors are a prime target for identity thieves. As you reach adulthood, you must do everything in your power to protect your identity in the digital age. When a thief has access to information like your credit cards, social security number, and savings accounts, they can make fraudulent purchases and put your future at risk. Identity theft cases can make obtaining a credit card, applying for a loan, or landing your dream job more difficult.
Tips to Help Protect Your Identity
There are many ways you can proactively protect your identity from theft. One way is by using strong and unique passwords with a mix of capital letters, lower-case letters, and special characters. Avoiding common passwords or passwords that contain guessable information will make it more difficult for hackers to get into your accounts and steal valuable data.
It is crucial to safeguard your social society number. Knowing who can access this number and why will ensure this sensitive information stays in the right hands. Another way to protect your identity is by simply watching your mailbox. Over 1/3 of Americans have experienced mail theft, which is one of the easiest ways to steal someone's identity. If you often receive sensitive information through the mail, a paper shredder can help dispose of the material safely.
Learn Early about Retirement
Many adults do not begin thinking about opening an individual retirement account until later on in their life. The reality is the earlier you start planning, the better off you will be in the long run. Reviewing and adjusting your retirement savings strategies can help you achieve the most comfortable years. By knowing your options for retirement accounts, you can choose an arrangement that will most benefit you.
401(k) Plans
A 401(k) plan is a defined-contribution savings plan implemented by an individual's employer. Employees can choose to have a portion of their wages set aside into an individual tax-advantaged account to help fund their retirement years. The limits of these contributions depend on your salary, local government regulations and the particular plan type.
IRAs
Individual retirement accounts, or IRAs, are retirement accounts anyone can open on their own to save for their later years in a tax-advantaged manner. You can make contributions pre-tax and grow them until you withdraw. A Roth IRA allows investors to set aside after-tax contributions, capping at a certain yearly amount.
Explore Investment Options
When you turn 18, you can start investing! Making investments is a great way to make your dollars work for you. When investing becomes an early habit, you can better meet your goals later.
Stocks
You buy a share or partial company ownership when you purchase a stock. Stocks are subject to fluctuations in the market, making them a riskier option for investment. Stock units are described as 'shares' and usually outperform other investment options when speaking long-term.
Bonds
A bond represents a loan to a business or corporation that always includes an end date by which the loan expires. These are fixed instruments with fixed rates of interest. If a borrower does not pay a bond back, they risk default.
Mutual Funds
Mutual funds are shares of money pooled together by like-minded investors looking to invest in various securities. The annual fees and commissions associated with mutual funds can affect an investor's overall return.
Conclusion: Your Financial Journey Begins Today
Turning 18 comes with many responsibilities, including those financial. By making informed financial decisions and following these tips early, you will be more prepared to transition into adulthood.
My new course at Invested Mom offers valuable insight for young readers to become more financially aware. Work with me to gain the necessary resources for your financial success as a young adult.
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!