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.
Take Action: This free course from the Open University, Managing Money for Young Adults, is aimed at 16-18 year olds but will be useful for anyone getting started with managing money.
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, phone app and telephone banking?
Some banks try to attract young people with offers of free gifts and cash. But 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. Agreed overdrafts are cheaper than unplanned overdrafts, where fees can add up very quickly. Overdrafts can be a very expensive way to borrow money.
Instant Expert: The Money Advice Service explains everything about overdrafts, and how to avoid using them.
Savings accounts 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, and save up money for a large purchase, like a car or a deposit on a house.
Crucial: Savings accounts may be harder to get money out of or have restrictions on how much you can pay into them. But getting into the savings habit pays off in the long term!
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:
- Live in a shared house - or with your parents!
- Apply for student or youth discount cards - but check you're getting a good deal!
- Some workplaces also have discount schemes, check for these
- Get DVDs, music, books and magazines from the library
- Get the cheapest deal possible on your mobile and avoid any extra costs
- Get a free/cheap haircut by being a model for a trainee stylist
- Stop or cut down smoking.
- Look out for free/cheap gigs and entertainment at local venues
- Stop or cut down drinking alcohol.
- If you buy water or hot drinks, get a reusable bottle or a keep cup - get discounts, and help the environment!
- Cut out snacks and eat cheaper food - you can save a lot by filling up on cheap vegetables.
- Don't buy lunch every day - make sandwiches, or take in last night's leftovers, and cut food waste 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, bike or bus pass - calculate the cheapest way to travel
- Only use cashpoints once a week, and avoid the ones that charge you
- Add up how much you're spending when using contactless payment
- Make a budget and stick to it
- Shop around for the cheapest offers and discounts for things like cinemas and days out
- See if you can get it cheaper online
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.
Reuse, recycle, and repair
Whenever you buy something from a charity shop, you are helping reduce waste and preserve the environment. Reusing, recycling and repairing items helps you cut waster and save money. You can find reusable items people no longer need at your local tip, in free exchange spaces at community centres or left on pavements at the weekend in some areas; there are also online services like Nextdoor, Freegle and Freecycle where people list free items. You can also:
- 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?
You can also buy many items cheaply from local bulletin boards and online reselling sites.
Crucial: If you are meeting up with someone to get a free item from them, or to buy something, think safety. Beware of deals that seem to good to be true, be aware that people sometimes try to sell stolen or counterfeit goods and be cautious. Always makes sure someone knows where you are going and if you are younger, take an adult with you. Your safety matters more than getting a good deal!
Checking your cash flow
Many people have no idea where their money goes. One day they have £30 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. This exercise can help you understand your own spending habits:
- 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
- See where you can make savings
Instant Expert: Here’s a handy printable Expenses Log to get you started