The three main tools available for looking after your money, controlling your cash-flow and getting more money when you need it are banks, credit and loans.
If you haven’t already got one, having a bank account is a great way of getting used to counting, saving, checking and controlling your money. It also keeps your money safe. As you get older you will need an account to pay in your wages and pay out expenses like rent and bills.
Legally you can:
- Open a bank account with a parent's signature at any age
- Open a savings account with a parent's permission at age 7
- Open a current account and get a debit card at age 16.
Current accounts make it easy for you to put money into the bank for safe-keeping and then take it out whenever you want. Things to look for when opening a current account include:
- Charges or fees
- Cashpoint services: locations, charges etc.
- Convenience: when can you access the bank – Saturday openings? Internet and telephone banking?
Beware of banks that try to lure you into opening accounts with offers of free gifts and cash. Stick to the criteria above to determine where you'll get the best long-term service at the best price.
What about an overdraft?
Overdrafts are a form of borrowing from your bank or building society, where you are charged when you spend more than you have in your bank account. They can be agreed in advance, or can be unplanned. Either way, they are a very expensive way to borrow money. Read about overdrafts, and how to avoid using them.
Savings accounts may be harder to get money out of or have restrictions on how much you can pay into them. They are designed to keep extra money safe, for when you will need it in the future. Many people set up regular payments into their savings to build up money over time.
Credit and debt
At age 18 you are entitled to get a bank loan, an overdraft and credit cards. Now is a good time to start getting smart about credit. Learning to use it responsibly is a critical skill.
How interest works
‘Credit’ is the term used when you agree to pay for something in the future rather than straight away. The most common types of credit are bank loans and credit cards. In return for offering you credit, the lender charges interest.
Interest is a percentage of the total loan and the amount varies depending on how much you borrow, as well as other factors.
Beware of high interest rates!
Some lenders only publicise their monthly interest rates. Something like "rates of 1.5% per month" may not sound like much but this is equivalent to 19.6% APR (Annual Percentage Rate). Here is an example of how interest works:
- You get a credit card with an 18% APR and £1000 credit limit and spend up to your limit
- If you pay the minimum payment of £20 each month It takes 8 years and 5 months to pay off the balance of £1000.
- You pay an additional £1087 in interest! In other words, for every £1 you put on the credit card you have to pay £2.08 back.
Use credit cards well
Credit cards should only be available to people who can pay back the amount they spend on credit. Usually you will need to be aged over 18 and in regular employment. to have a credit card. Whatever you borrow you must pay back. Use credit cards carefully:
- Pick a card with a good introductory APR and a good ongoing rate
- Avoid cards with additional fees
- Avoid cash advances – they are expensive
- Only spend as much as you can pay off each month
- If you can’t pay all of the money each month then pay as much as you can.
- Never miss a payment - you will get a fine.
The money you earn as a young person, whether it comes from pocket money, odd jobs or regular earning, often needs to be spent on food, travel costs or materials you need for school.
Any money left over can and should be saved. Even small amounts build up over time and can be used for larger purchases such as holidays, a car or even a deposit for a house.
Experts advise saving at least 10% of any money you receive and more, if you can manage it. Always include money for your savings in your budget and set yourself saving targets.
Choosing a savings account
You can open a savings account in the same bank as your current account, or in another bank or building society. The simplest type of account allows you to save as much or as little as you like and instantly access your money. You can often start with as little as £1.
For a better return look for accounts with higher interest rates. These often involve saving a fixed amount regularly or not accessing your savings for a fixed amount of time. Limited access to your account can be useful if you’re easily tempted into spending your savings.
How to spend less
Growing up and becoming independent can be hard on your finances. Don’t worry. There are things you can do to reduce the amount of money you spend.
Consumption is the urge to buy things. Most people suffer from it from time to time. Young people are particularly at risk, for reasons including peer pressure and vulnerability to advertising.
Pressures like this are very hard to resist. But some people are choosing to consume less, whether it's for political or environmental reasons or just because it is simple, sociable and fun.
However much money you have, you always wish you had more. Here are some ways to make your money go further:
- Apply for a student or youth discount card. There may be a one off payment, but you could save loads in the long run
- Hire DVDs from the library
- Make phone calls whenever it’s cheapest on your mobile (varies with package)
- Get a free/cheap haircut by being a model for a trainee stylist
- If you smoke, stop. Smoking is bad for your health and your bank balance.
- Look out for free gigs and entertainment at local venues
- If you drink, set limits on how much and how frequently you drink, or cut it out altogether.
- Refill water bottles instead of buying a new one every day. It’s good for the environment too!
- Cut out junk and snack foods. They may seem cheap but aren’t nutritious or filling, so you end up craving more.
- If you buy lunch every day, start making sandwiches. You will save money and probably calories too!
- Get free condoms from a Sexual Health Services clinic, school nurse or through the Safety Card.
- Visit charity shops regularly so you can grab the best bargains and hidden gems
- Get a student railcard and bus pass
- Only use cashpoints once a week and avoid the ones that charge you
- Make a budget and stick to it.
Reuse, recycle, and repair
Use an old one - See if you can get what you need for cheap or free from a family member or friend. You save something useful from going into landfill, too!
Don't buy again when you can repair - all sorts of things can all be successfully repaired with a little know-how. Look up the instructions and fix it.
Reuse items where possible - think you need something? Do you already have something that could do the job?
Managing money isn't automatic. It's a skill you need to learn. The basics are simple, and mastering them will benefit you enormously. Taking the time to set good money habits now means you will save more and get fewer nasty surprises. You'll also gain your financial freedom faster.
Checking your cash flow
Many people have no idea where their money goes. One day they have £20 and the next they are skint. Ask them what they spent it on and they haven’t a clue. To avoid falling into this trap you need to keep an eye on your cash flow.
- Make a list of money coming in each week: wages after tax, pocket money, gift money, benefits and any other income and write down the total.
- Make a note of everything you spend for a week. Yes, we mean everything!
- Subtract expenses from income
Instant Expert: Here’s a handy printable Expenses Log to get you started