Any finance tips and tricks for those who are financially illiterate?
So I'm 20, in the US (California to be exact), and I'm planning to (secretly) move out of my parents' house sooner or later. I have a plan and all that, but I'm a bit anxious since I know nothing about finance. I was never taught about it at school beyond some surface-level vocabulary words (no personal finance. Only like how econ is related to governments and all) and I grew up with a dad who thought he was being selfless by making sure I never had to think about money ever. Mix that in with some good ol' learning problems and I'm clueless about money
Here are some things I learned to give an example of what I mean when I imply I'm absolutely clueless:
- Apparently taxes will sometimes differ from each store I buy from. I have not learned how or why each store has a different percentage (I thought it was by state), just that it sometimes does
- Also, groceries don't have taxes, but they tend to cost more than the pre-packaged stuff
- Speaking of taxes, apparently if you make enough for them you can completely ruin your parents' taxes if you forget to communicate with them. Luckily, I didn't have to learn this the hard way, but I suddenly realized why people who were keeping their jobs a secret from their parents were concerned about making too much
- Credit cards are like a loan that you are forced to pay monthly. I legitimately thought the money was directly transferred from your bank account to the card, but no, it's from this storage in the bank that they have where they take your and everyone else's money and lend it to others
- This was also why I was so confused as to why the banks collapsed right before the Great Depression
- A lot of things only take credit cards. For example, paying a house via cash is literally impossible, which is why you need to rely on a bank (to my disappointment). In fact, living bankless will only cause more problems than it does save money
- I figured out what a lease was. No one taught me that and I never sought to learn it until I was asking for apartment rooms
I'm lucky in that I'm not paying any sort of bills or insurance, and that I'm still reliant on my parents for that. However, I really want to get away from them, even though I would be tied to my parents' insurance plans and all. (I don't think they will ever kick me out of them, no matter what I do.) I don't want to be thrust into something that's difficult to reverse, so for those of you who are older and know what you're doing, is there any finance advice you recommend? What should I expect money-wise when I move out? What has been a regretful decision you've made and what has worked for you?
Resources are also nice, though I'm wary of books that are only found online and thus, I need to pay to see what's inside.
This personal finance flowchart has to be one of the best things to come out of /r/personalfinance possibly ever. This one is a bit complex once you get down to it but ultimately this is a really amazing set of ground rules to follow for financial success.
What it all really boils down to though is:
0. Budget! Review your ins and outs so that you understand what you have to pay out and when, and how much money you should have on hand at those times.
These are really the key pillars and the other items following after are really more about investing in your future. Balancing numbers 1-3 are a challenge sometimes, because let's face it; it's a luxury nowadays to have enough left over each month to achieve all of these. But start reasonably and small if you need to. Maybe your emergency fund grows by $100 a month or a paycheck at first. Maybe you only can afford 1% of the employer match. Maybe you can really only tackle one debt at a time.
Everyone has their own financial path to walk and there's no shame in where you are or what stage of life you are in. Know the basics, follow them as best you can, and take advantage of opportunities as they arrive to get a little further ahead.
I think the PF flowchart is great, but one thing that it misses is fun. People see this kind of advice and think that they are being told not to enjoy themselves at all until retirement.
NPR's Planet Money podcast had an interesting episode where an economist reviews popular personal finance advice, and one of the items was that it actually makes sense from a value perspective to spend a larger percentage of your income while you're young, because your income is likely to increase over time, and you're probably not going to music festivals when you're 60.
I think it's important to have a budget where you have an emergency fund and start saving for retirement, but to also make sure that you're including fun money in it. So, In addition to emergency fund, general expenses, and retirement savings, I have a discretionary account and a vacation account in which I automatically deposit a fixed amount each month. The discretionary is basically an allowance that I'm supposed to spend, not save, and the vacation budget allows me to go on trips without feeling guilty about the expense. You can still have a ton of fun while being realistic about what you can afford.
Hey there, yes it's clear that your financial education isn't the best. As @glory mentioned, you got a few things wrong.
As far as California goes, groceries are tax-free. But, that's not everything at the grocery store. If you buy pre-made items, like many snacks, cookies, etc, you will be paying a sales tax. I tend to shop at Trader Joes. It's cheaper than the Safeway in my town. Most states have sales tax on everything, some states of no sales tax at all, and some have sales tax on selective things (like Cali). It's a HUGE benefit of living in California...unfortunately far too many people choose to buy fast food and end up paying ~7.5% tax...plus the food is incredibly expensive compared to the store.
Credit Cards are not forced upon you. You do not have to use them. Debit cards are what you are talking about. Debit cards take money directly out of your bank account (usually tied to a checking account). Credit cards take money out of a credit card provider's bank. You then have to pay the credit card company back within a month or else you are charged interest. Usually 15-30%! If you are financially illiterate, do NOT use credit cards. You will lose money.
To explain the movement of money (liquidity) in the banking system could take several long, boring years. What you need to know is that since the Great Depression, the government created the FDIC which insures your money in the bank up to $250,000 per person per bank. Even if the bank were to collapse, you would still have access to those funds. One of the factors causing the great depression, and many bank failures, was when many people were trying to make their cash liquid (taken from the bank, and into their pockets) when then bank didn't have the cash liquid themselves. At your stage in life, do not worry about losing your money in the bank...unless you are sitting on several hundred thousands of dollars in one bank.
Not true. Any place that accepts credit cards, accepts debit cards.
You can pay cash for a house without a bank, sure. But it would be very unwise to be carrying hundreds of thousands, if not millions of dollars in physical cash. Banks allow you to store your physical cash in a safe location, and move it between other banks and investments. As I said earlier, it's coming across that you are irrationally afraid of the banking system. Your money is far safer in a bank than under a mattress or in a vault in your home.
Additionally, so many services around the globe require banks. Have a job? They'll send you a check to cash at a bank, or deposit the check for you in your bank (this is called direct deposit).
Want to go on vacation? Your hotel will require you to use a debit or credit card to cover any incidentals.
Most medical insurance allows you to have your children on your policy until they turn 26 years old. Legally, they would have to "kick you off" the plan once you turn 26.
My advice to you is to live with your parents until you are financially literate and stable; unless you are in an unsafe environment.
Could you answer a few questions?
I wont have access to a computer any time soon, so I'm afraid I wont be able to answer you in detail, but I'd thought I'd let you know that a lot of your information is incorrect. For example, a credit card is not a loan you are forced to pay every month. It is indeed a credit they lend you, but it is absolutely not something they force you to pay. On the contrary, credit card companies would love it if you dont pay your balance (the amount of credit you used) in full since it would mean that they get to charge you interest and make money. Since you don't want to pay interest, it would be in your best interest (see what I did there? ;)) to pay off the balance in full. Never use your credit card if you can't afford to pay off the balance in full every month. Also, don't be afraid to use your credit card to start building up credit. The USA has a system that monitors your credit usage to assess how reliable of a person you are. Having a good credit will help you down the road with getting good loans for cars and good rates for a mortgage. Just be responsible early on and remember to not spend more than you can afford.
Anyhow, I ended up writing a lot but I'd just google every bullet point you wrote and see that the info you have is not exactly correct. For example, you do pay taxes for your groceries in the form of a sales tax which in the USA is tacked on later (silly I know).
As a final aside, I highly recommend living with your parents a little longer until you get more comfortable with your finances. I understanding wanting the need for independence and wanting to live away from your parents, but free rent is no joke; It really helps a lot with your savings lol.
Specifically responding to the bit about groceries being taxed in the USA - that is true in some states. Most U.S. states waive sales tax on groceries while some others lower the tax. The Tax Foundation compiled the list of states and how they tax groceries.
Yo that's crazy. I used to live in Michigan and I never noticed that groceries were exempt from sales tax! TIL
Actually, American Express requires you to pay the full balance each month. But technically they are a “charge card”.
Honestly it’s been such a long time since I dealt with them that this might not even be the case anymore; I think they started offering some more standard credit products quite a while ago.
Yeah, I believe the gold and plat are charge cards while the rest of their products are traditional credit cards. Tbh tho their charge cards basically function as a credit card so i don't know why they even bother with the different terminology lol. Back when I had the gold, I thought I would have 'unlimited' credit as that's how they advertised their charge cards. Imagine my surprise when I found out that their charge cards also come with credit limits except they call them something else lol.
The credit card industry is kind of insane.
The thing you might not be aware of is that there is no single credit card network; it's actually several different networks that are often sold to merchants in bundled services by resellers. Credit card fees - which are usually invisible to consumers, can actually fluctuate wildly based on a number of variables, but resellers usually charge a single regular fee instead to simplify them to merchants. The reason why you see those stickers of credit card companies near POS machines is because there's technically a chance they don't accept the kind of card you're using.
This kind of thing is why it seems to take a long time for payment methods to improve at times - see the very slow rollout of EMV (chip) transactions in the US for example. When you want to innovate you have an uphill battle trying to get an entire cartel of corporations to agree on things.
AmEx's charge cards are different from credit cards because they were a relatively early mover, IIRC.
Yes, I came here to recommend YNAB. We’ve used it for a long time - I definitely subscribe to the “every dollar should have a job/label” thing when it comes to personal finance.
My advice would be to stay curious and be scared of things you don't know. What you shouldn't do is see a seemingly complex process, and simply decide that it's too hard to learn. If you don't know a system, whether benign or malicious, you will end up worse for wear. Quite literally everything you could need to know is on the internet.
Nothing in personal finance is intended to be intentionally obtuse, it's just how natural systems progress - there's lots of patchwork. When you don't understand how or why something works, get googling, and don't stop until you know how it works.
Maybe slightly controversial, but if you don't have someone to ask, consider asking broad questions to chatGPT. Of course, take everything it returns with a pinch of salt, and look up everything afterwards, but it can solve the issue of not knowing what to google.
For that matter, many of the things you put in the post are, well, wrong. I would examine how you learned those, and to adjust so that it's less likely to happen in the future.
ChatGPT still has hallucinations, so so would absolutely not recommend someone learn something that can potentially wreck their live with from it.
I agree with the advice of asking broad questions and looking everything up afterwards. It really can help to push through some of the "unknown unknowns". Plus, there's plenty of bad advice everywhere, whether it comes from a human on a message board, an AI, or your uncle. All of it should be considered and filtered through a calm brain and lots of corroboration.
There's a fundamental reason why I don't recommend asking ChatGPT over a human; when it hallucinates, it tells you an extremely convincing lie.
Ann Reardon posted a recent video on AI on her YouTube channel How To Cook That where she asks ChatGPT if food coloring has ever killed people, and it responded with a specific chemical, giving an entire paragraph about the health effects of that chemical and how it was handled legally. She then asked it if that chemical was a food coloring, and it replied no - which, this time, was the correct answer. She's a food scientist so she already knew that, but for average people, there would be absolutely no way to tell if that information was trustworthy or not. ChatGPT does not have any tells when it's hallucinating - it doesn't know that the things it's saying are beyond it's experience - and so it's nearly impossible to tell when those happen to you if you don't already know better.
Besides that, if you ask people in a public forum about something and get the wrong answer, people will jump out of the woodwork to correct them.
You've brought up a bunch of different topics and so this discussion is kind of chaotic. Just to organize things, it might be better to figure out what you want to ask and put each question in one comment, so replies are separate?
Many California cities have local sales taxes, so stores might charge different amounts based on which city you're in. (Sometimes sales taxes are hard to determine in advance and sometimes people don't bother, but when you don't have a lot of money then it might be important.) Also, sometimes there are other extra fees that aren't taxes. It's something to be wary of.
There are cheap groceries that cost less. It depends what you're buying and where you buy it. There are strategies for living cheaply and they often involve cooking for yourself. (That could be a discussion in itself.)
There are many ways to pay for things. Yeah, going without a bank account isn't good. There are a lot of choices for bank accounts, though. There could be another discussion about ways to pay for things, and one about choosing a bank or credit union.
Finding an apartment and signing a lease is a whole discussion in itself. There are local laws.
A question I have, but I don't know if you want to discuss it:
Lots of other good advice here, but a lot of it requires learning and understanding (which, I should stress, is absolutely important). If you don't have the bandwidth for that right now, one of the easiest best things you can do for future you is contribute 5-10% of your pay to a retirement account, assuming you have an employer that offers one. If you don't, make setting up those contributions a priority if/when you do have an employer that offers one. Then, forget about it. If you can do this early, you:
The only additional caveat to this is to invest it in a low-fee, broad market fund. Those terms sound "financy" but really what they mean is invest in the whole stock market, and don't pay a bunch of money for the privilege. Something like an S&P500 fund, or a Total Market Fund, but your options will be dictated by your employer's plan.
As you continue to learn about finances, you can adjust some of this accordingly, but this won't do you wrong as long as you forget about it. Don't panic sell if the market tanks. Keep contributing. Think of it as a small non-negotiable payment to future you.
I highly recommend the book The Millionaire Next Door for basic financial information and starting good habits around money. Best of luck.