As the school year gets underway, it’s a time when many young adults headed to college or into the trades begin thinking about managing their own money for the first time. For those who don’t know where to begin, a Richland-based credit union has some advice. 

Beginning to budget

James Rothwell, vice president of strategic initiatives and administration with Gesa Credit Union, said the key to getting started is understanding your finances and how money flows through your life. That includes understanding what money is coming in and where it’s going on a monthly basis. 

“That first step is the most important one, and it’s the one that almost everybody who gets into trouble skips before they get serious about this,” he said.

When it comes to budgeting for that flow of money, Rothwell advises a 50/30/20 breakdown. That means 50% of the money you take home should go toward needs, which include food and shelter plus electricity and your cellphone bill. 

Then, 30% can be spent on wants, from eating out to an unlimited phone plan, Rothwell said. The final 20% should go to savings, both saving for the future and saving for an emergency or a special trip you’re planning. 

That breakdown is one he recommends to everyone from college students to professionals. 

Although it can be hard to build up initially, Rothwell advises having emergency savings as a buffer in case the unexpected happens. 

“We recommend three to six months of savings in reserve for those needs,” he said. “So you know that your mortgage can get paid, you know that your rent can get paid, you know that you can put food on the table, for a period of three to six months out of savings.”

It’s a security measure that few people have anymore, Rothwell said. 

A Bankrate report on emergency savings found that only 46% of Americans have enough emergency savings to cover three months of expenses, while 19% could cover three to five months of expenses and 27% have enough to cover six months.

Building credit

As students launch into the world, the most obvious way to build credit is with a credit card. Rothwell recommends going to a local credit union or bank you trust for a low-rate credit card. 

“That’s going to be the cleanest way to enter the credit world and start being able to build up some good credit habits,” he said. 

Credit cards can be useful in providing a measure of security when making online payments and can be a buffer for short-term spending, like when you’re traveling, Rothwell said.  

There are a few restrictions that come along with that route. Rothwell said you have to have income to qualify, and then there will be credit limits that take into consideration a student’s ability to repay based on their income. 

It’s important for students to make sure they include credit card payments as a part of their budget and ensure that there’s generally enough cash to pay off the credit card. 

“It’s a great way to make sure that that credit card is still working for you and that you’re not just chasing a payment on there forever,” Rothwell said. 

That can be the biggest pitfall people fall into: going after something shiny without considering what they want their money to be doing. Credit doesn’t have to be scary, he said, but it should be working for you.  

Other credit considerations

For students who are getting a scholarship or help from a family to pay for college and might not be employed, one option to build credit is becoming an authorized user on a parent’s credit card. 

Rothwell said that can be just as effective at getting started with a credit score and history. Later on, when looking for loan approval, banks or credit unions might be looking for a little more than that, but it’s a good way to start. 

Student loans will work to build credit as well. 

Each method of building credit works a little differently, but what matters the most is having a variety of credit types over the span of your life, from credit cards to home and auto loans. 

Credit scores also often look at payment history and whether they are made on time, and the percentage of utilization of a credit card. The rule of thumb for that is not to go above 25% of your credit limit unless it’s an emergency, Rothwell said. 

“That way, you know that you’re getting the most possible benefit on the credit on a monthly basis,” he said. 

Person-to-person

While general tips can help get a student started, and online resources are great to learn more, there’s great value in talking with someone who works with finances for a living, Rothwell said. 

It’s never early to start talking with a financial advisor.  

They can help with setting up a savings account or choosing a first credit card. He suggested going to a trusted financial institution locally, or if a student has moved out of town for school, it’s worth checking out the institutions in that area. 

“It’s worth the time. It’s worth treating your finances like an important part of that college journey,” Rothwell said.