Finance 101

Money is something everyone is super focused on but we don’t learn enough about. Managing your money properly is a huge part of setting yourself up for a future where you are happy. It doesn’t have to be as complicated as we have always been told.

Vocabulary

This is just a section to introduce you to some finance terms in simple language. Feel free to skip this section unless you need to reference it for understanding the rest of the post. This is a great place to start to know more than 90% of high schoolers about money.

What is Interest?

Interest is what is owed when money is loaned out in addition to repaying the original amount. For example, if I loaned you $100 for a year at 50% interest (just for ease of math purposes, please do not ever do anything with 50% interest) at the end of that year you would owe me the original $100 plus 50% or $50.

The tricky thing about interest is that someone can be paying it to you, or you may owe it to somebody else. If you are making payments, the interest is something you owe. If you have your money in savings account the interest is being paid to you.

What is Debt?

Debt is money owed to another party. This is usually due to spending beyond what we can afford, but sometimes we have to take out loans for items like cars or houses. Debt can be owed to the government, businesses, or individual people.

What is a Savings Account?

A savings account is an account at a bank that earns a small amount of interest on the money left there. These accounts do not have a debit card or checks.

What is a Checking Account?

A checking account is an account at a bank that is meant to be your main money account. This account lets you move your move however you want, providing you with a debit card and checks. Most of these accounts do not earn interest.

What is a High Yield Savings Account?

High Yield Savings Accounts are special categories of savings accounts that pay more interest than the standard national interest rate. This can be up to 20x more. Most of these accounts are found at online banks as they attempt to compete with older brick-and-mortar banks.

What is a Debit Card?

A debit card is a plastic card with a magnetic strip that is linked to your checking account. It will withdraw money directly from that account to pay for purchases and so you will be unable to spend more than you have in your account.

What is a Credit Card?

A credit card is a plastic card with a magnetic strip that is linked to an account you have with a credit card company. They agree to lend you a set amount of money and then that money is tied to your card. If you spend it you will have to pay it back plus whatever interest rate you have agreed to.

The good news is you can make purchases you otherwise couldn’t afford, the bad news is you can easily get in a deep hole.

What is a Credit Union?

A credit union is similar to a bank but it is not-for-profit. This means that the fees they charge you will be invested back into the things they offer to customers like better software or a more up-to-date website while banks give these fees to shareholders.

This also means that they are generally more invested in their community, more focused on customer service, and more likely to be able to work with you. They are a great option if you don’t need the convenience of a large bank.

What is APR?

APR is the annual percentage rate. This is usually shown as a percentage and references the interest rate for the year. This is often shown on credit card applications.

What is a Credit Score?

A credit score is a number associated with a person based on their financial history that is meant to be a measure of how likely they are to repay their debts. It can range from terrible at 300 to perfect at 850.

What is a Stock?

A stock is a method of investing in a company. When you buy a stock you are buying a tiny piece of that company. Stocks are bought and sold on exchanges like the New York Stock Exchange.

If the value of the company goes up, the value of your stock will rise. However it can also go the other direction. If the company value drops, the value of your stock drops as well.

What is a Mutual Fund?

Mutual Funds are when a broker buys a bunch of stocks and other assets and then lets other people invest in pieces of that group. He takes a whole bunch of stock market stuff he thinks will do well and mashes them all together then other folks buy a tiny piece of the mash-up.

We do this because sometimes picking stocks is hard and we want to have a little bit of lots of different things. The easiest way to do that is with mutual funds.

What is Crypto?

Cryptocurrency is a new type of asset recently. There is a lot I still don’t understand about it. It is a method of storing value in bits and bytes across multiple computers from every person that uses it. It is meant to be a way of starting to make money safer, and cut out middle-men like banks. There are tons of types of crypto. Bitcoin is the most famous. But you should do your own research.

Open a High Yield Savings Account

Savings accounts are earning almost no interest these days. Interest when we are talking about saving, for us everyday people, is when you get a percentage of the money you put into the account added back in by the bank kinda like a perk of leaving it there and not using it. Don’t get excited. We are talking about rates in the 0.001% area right now.

There are some banks, usually online ones, that have High Yield Savings Accounts. These special accounts offer interest rates that are higher than the standard ones you find at your local brick-and-mortar banks. Be careful though, they may have special regulations like only being able to make 6 withdrawals a month. My suggestion for this is Discover. I use them for my HY Savings and am getting a 0.5% interest rate.

Understand debt

Debt is weird. You almost can’t get through life without it. Unless you happen to be the son of Bill Gates and can pay cash for a house, you need to get used to the idea of owing someone or something money. But that doesn’t mean that all debt is good or that it should be considered normal. People go into debt for everything these days. Engagement rings, Christmas presents, laptops, cars, furniture, and even groceries. Debt means you are borrowing money to pay for something because you don’t have the money to pay for it all right now.

That is all fine except our friend interest comes back to visit, this time in a not-fun way. Now that interest is going to be a percentage of the amount you borrowed added to what you owe. Meaning the longer you don’t pay it back the bigger the amount gets. Bad juju. So for our everyday purposes debt = bad. Unless you are buying a house or considering college, do not go into debt. No, a car is not a good excuse at your age. Sorry, not sorry.

Understand Student Loans

We just talked about debt. I can hear you asking, “If we just talked about this, why are we doing it again?”. Because student loans are a special kind of debt. You need to understand this kind of debt before you sign up for thousands of dollars in something you don’t have a clue about.

First off, student loan debt does not go away. Like ever. The only way to make student loan debt disappear is to pay it off or get it forgiven. That is it. Bankruptcy doesn’t work and dying doesn’t work. Pleasant right?
You may have noticed that the President has sort of gone all Indian Giver on his promise to forgive student loans. That leaves most of us without any method of getting our loans forgiven. There are programs available for public servants like police and teachers and some nurses, but the requirements are strict.
90% of student loan debt is deferred. This means that no matter if you get the loans from the federal government or a private lender, the loan payments aren’t due for a few years. This is intended so you don’t have to make payments while you are in college and only applies if you are a full-time student. Be warned though that even if you stay in school for 5,6, or even 7 years that does not mean your loans will stay in deferment that long.
Scholarships do not have to be paid back. This is free money. The application process is hard and tedious. But if it takes you 3 hours to complete each application and you only get each 3rd application and that awards you only $3,000 then your pay per hour of work is still $333. That is the best hourly rate you will ever get. Make use of it. Apply for local and super-specific scholarships. You have a better chance of winning these. You will have to keep up your grades while in college to keep having access to these funds.
Grants do not have to be paid back. This is free money most often from the federal government based on your family income.

Minimize subscriptions

Everything is becoming a subscription. It is how businesses sneak little pieces of your paycheck from different places on a regular basis so you don’t realize you are losing it. You don’t need a coffee subscription. Are 3 different streaming services really necessary? A doordash monthly bill? $7 for Netflix may not sound like much but times it by 12 and add $12 for Hulu multiplied by 12. Do the same with HBO and Disney and suddenly you are looking at $550 a year just for streaming services. Not so cheap is it? If you can buy something where you pay once instead of a subscription service always opt for the single purchase.

Get a credit card

Yes. Get a credit card. This is me going against the almighty Dave Ramsey. A credit card is going to help you build up your credit score and teach you how to be responsible for your financial decisions.

What is a credit score?

A credit score is a number associated with a person based on their financial history that is meant to be a measure of how likely they are to repay their debts. There is a lot wrong with the credit score system. But what matters is that your credit score is going to greatly affect you later in life. It will come up when you rent an apartment when you buy a car or a house when you try and get a loan or any large purchase that requires you to finance.

The lower your credit score the bigger risk you are considered and that means that you are going to get a higher interest rate. Remember interest, from the debt section? This can cost you thousands of dollars extra in debt. So now that I’ve given you the long version, short version. Keep this number high by paying your debts on time to keep your interest rates low.

Why do I need a credit card?

Right now you aren’t going to have a credit score. Why? You have never had any debt so how can the system have any idea what you might do with it. You need to build up your credit history and your credit score. The only way to do this is by using debt. “Didn’t you just tell us that debt is something we don’t want?”. Yes, I did and I stand by that. So here’s what we are going to do. Keep reading.

Which credit card should I get?

I recommend the Discover It card. They have a specific one for college students if you want. I pick them because they have a great High Yield Savings account so you can keep all your money in one place. They also have all United States-based customer service which is a huge help when things get confusing. One final perk is they have no yearly fee and their rewards play nice with Amazon. You can sign up for a card here. (This is my link. I will get credit for referring you and you will get $100 if approved)

What do I do once I get my credit card?

Now that you have your credit card the key is how to use it smartly. Remember we don’t like debt but we need to use it. How do we do that? You want to pick one thing that you buy semiregularly. If you are a college student, use your textbooks. When you buy them put the purchase on your credit card. Make sure the card is set to autopay from your bank account in full every month. Then it will be paid off at the end of the month without you worrying about it.

Do not buy anything else with the card. As you learn to have more self-control and increase your income you can start using the card for more things.

Fund an emergency account

There are always going to be emergencies that pop up. A cavity that needs filling, a blown tire, a sick pet, or you know a pandemic that shuts the world down. When that happens you want to be able to handle it without panicking and without going into debt. Remember debt is bad juju. You want to start funding an HY Savings Account specifically meant only to be used for emergencies. Your first benchmark for this account is $1000. This should cover a good chunk of emergencies. Once your income increases your emergency fund should too.

Invest

Money sitting in the bank in case of an emergency is great and needs to be part of your plan. But you never want all of your money sitting in the bank. Billions of dollars are being printed a year which makes every dollar you own worth less than it was just months earlier. If you want to stop the value of your money from going down, you need to invest your money so that it can grow instead of just sitting there.

Put your money in real estate, businesses, crypto, or the stock market. Just find somewhere for your money to earn more money. As a new investor, you want to stick to the stock market unless you have a background in something else that you understand better. Remember you aren’t looking for get-rich-quick schemes. You just want your money to grow and not shrink.