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The Financial Literacy Payoff Has Finally Arrived

Financial Literacy Payoff

For more than two decades the nation’s largest payment networks, top banks, numerous financial firms, trade associations and tons of non-profit consumer advocacy/education have all been preaching the same sermons to teach and develop responsible money management skills.

The hard work spearheaded by Visa with “Practical Money Skills for Life” in the mid-90s has paid off in spades as young people today, regardless if college educated or not, rate their financial skills as good or excellent. However, they are always open to more education.

Majoring in Money

A new study found college graduates are the most confident, with 71% rating their money management skills as good or excellent, while 59% of college students rate themselves the same way. Forty-two percent of those who did not complete college rate their skills as good or excellent.

Ninety-one percent of college graduates, 84% of non-completers, and 72% of college students pay their bills on time, and more than half of each group say they track their spending and never spend more than they have. Sixty-two percent of college graduates, and half of college students and non-completers are saving money every month. Forty-one percent of college graduates say they have an emergency fund, compared to 22% of college students and 31% of non-completers.

The Sallie Mae and Ipsos “Majoring in Money 2019” report also found when it comes to paying for purchases, debit cards are nearly universal, and are the most frequently used payment method. While 81% of young adults still carry cash, 89% of college graduates and 91% of non-completers and 85% of college students use debit cards. Eighty-eight percent of college graduates, 86% of students and 78% of non-completers use mobile payments, most often citing PayPal and Venmo.

This national study by Sallie Mae and Ipsos examines how college students and other young adults manage their finances.

Young adults aren’t shying away from credit cards, and the majority have obtained one to establish credit. Eighty-three percent of graduates, 61% of non-completers, and 57% of college students have at least one credit card. Sixty percent of college students, and 64% of college graduates report paying credit card bills in full each month, compared to 32% of non-completers. Virtually all young adults—97%— make at least the minimum payment each month.

The rules for good and bad financial management have not changed.

Here are 7 things you should DO:

1. Create a Budget

A budget is a spending plan, based on income, lifestyle and goals. Young adults should begin by tallying all set monthly expenses – including housing, utilities, student loans, car payments and any credit card debt – and variable expenses, such as groceries, gas and clothing. The total will help set a target for monthly income and savings.

2. Use Credit Cards Wisely

Younger millennials have fewer credit cards, and use them less than any other generation. In fact, just 67% of young millennials use credit cards at all. However, most adults need one credit card for personal business and to help build a credit history. Grads who have any credit card debt should aim to pay it off before student loan payments begin.

3. Take Charge of Student Loans

Most student loans have a six-month grace period after graduation before regular payments begin. Graduates can check into loan repayment options, such as profession-based programs. Teachers or public servants may qualify for loan forgiveness. Some people qualify for income-based repayment plans. Those who suspect they might have trouble making payments should ask their lender about alternative arrangements.

4. Pay On Time

On-time payments are the single most important way build and protect a credit rating. They account for more than one-third of a person’s credit score.

5. Build an Emergency Fund

Deposit graduation money in a savings account dedicated to an emergency fund. Then, contribute 10% – or as much as possible – to the account from each paycheck. Build this fund to cover six to nine months of basic living expenses, although most new grads will find that even a few hundred dollars saved will go a long way toward covering an unexpected job loss, sudden car repair or a rental deposit.

6. Save for Retirement

Everyone should enroll in an employer’s retirement plan or open an individual retirement account (IRA). Saving $100 per month, growing at an annual rate of 6.5 percent, would amount to more than $320,000 over 45 years. Anytime income increases, raise the savings amount.

7. Get Health Coverage

The Affordable Care Act remains in place, which means that health insurance policies are available to policyholders’ adult children until they turn 26. This provision can make it more affordable for young adults who do not have insurance offered through their employers to maintain health insurance. In addition, current law imposes a fine – paid when filing annual tax returns – for anyone who does not have health insurance.

Here are 7 things you should NOT DO:

1. Not having a Budget

Supporting yourself can be expensive, and you can quickly find yourself struggling financially if you don’t take time to create a budget and live within your means. Calculate the amount of money you’re taking home after taxes, then figure out how much money you can afford to spend each month while contributing to your savings. Be sure to factor in recurring expenses such as student loans, monthly rent, utilities, groceries, transportation expenses and car loans.

2. Racking up Debt

Understand the responsibilities and benefits of credit. Shop around for a card that best suits your needs, and spend only what you can afford to pay back. Credit is a great tool, but only if you use it responsibly and live within your means.

3. Not thinking about Retirement

It may seem odd since you’re just beginning your career, but now is the best time to start planning for your retirement. Contribute to retirement accounts like a Roth IRA or your employer’s 401(k), especially if there is a company match. Invest enough to qualify for your company’s full match – it’s free money that adds up to a significant chunk of change over the years. Automatic retirement contributions quickly become part of your financial lifestyle without having to think about it.

4. Thinking you’re Invincible

Hardships can happen in a split second. Start an emergency fund and do your best to set aside the equivalent of three to six months worth of living expenses. Start saving immediately, no matter how small the amount. Make saving a part of your lifestyle with automatic payroll deductions or automatic transfers from checking to savings. Put your tax refund toward saving instead of an impulse buy.

5. Putting off Paying Bills

Each missed payment can hurt your credit history for up to seven years and can affect your ability to get loans, the interest rates you pay and your ability to get a job or rent an apartment. Consider setting up automatic payments for regular expenses like student loans, car payments and phone bills. Regardless of whether you take advantage of automatic monthly payments, arranging to receive notifications about upcoming bills can be helpful. You can also contact creditors and lenders to request a different monthly due date from the one provided by default (e.g., switching from the 1st of the month to the 15th).

6. Ignoring Free Help from your Bank

Many banks offer personalized financial checkups to help you identify and meet your financial goals. You can also take advantage of their free digital banking tools that let you check balances, pay bills, deposit checks, monitor transaction history and track your budget.

7. Getting Sucked into Bad Loans

Non-banks lenders, especially “payday lenders,” are more than willing to advance funds on your next paycheck, but the short-term relief might turn out to be a long-term disaster, with effective interest rates of 300% or more. Car loans twice the national average interest rate with a six or seven year term will always keep you upside down.

Sources: CardTrak; American Bankers Association; Sallie Mae; Visa; Freedom Financial Network