Everyone needs to learn to look after their money.
Money is kept safe in a bank account. You need an account to pay in your wages and pay out expenses like food, housing and bills.
You can open a bank account at any age but younger children need parental permission.
Current accounts are the everyday account you use for shopping and other necessities.
What about an overdraft?
Overdrafts are when you spend more than you have in your bank account. They can be agreed in advance, or unplanned. Agreed overdrafts are cost less than unplanned overdrafts. Fees add up very quickly. Overdrafts are an 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
As you get older you can use bank loans and credit cards. 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.
Experts advise saving at least 10% of any money you receive. Most people save more.
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. You don't need to have lots of money to start saving.
How to spend less
Growing up and becoming independent can be hard on your finances but you can spend less.
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 influence of social media and advertising.
Pressures like this can be hard to resist. But many people chose to consume less, for political or environmental reasons.
Here are some ways young people have shared to make your money go further:
- Live in a shared house - or with your parents!
- Get DVDs, music, books and magazines from the library
- Get the cheapest deal possible on your mobile and avoid any extra spending
- Stop or cut down smoking
- Stop or cut down drinking alcohol
- 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
- Make a budget and stick to it
- Shop around for the cheapest offers and discounts for things like cinemas and days out
Managing money isn't automatic. It's a skill you need to learn. 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 second hand you help reduce waste and save the environment. There are lots of ways to get things cheap or free. 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?
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
Everyone needs to keep an eye on their 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: There are lots of apps to help you track spending as well.