Getting your first job and all the trappings that come along with it -- credit cards, bank accounts, new digs -- creates a chance to get ahead or slip down a slippery slope of living beyond your means. Here are 10 tips from personal finance experts on how to avoid going into debt at each of these early life milestones:
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Milestone: First full-time job
1. Be realistic about the size of your paycheck. It's common to overextend yourself financially right after you get your first full-time job, says Kit Yarrow, a consumer psychologist and author of "GenBuy: How Tweens, Teens and Twenty-Somethings are Revolutionizing Retail." She says: "You tend to overestimate how far that big, juicy paycheck is going to go and your ability to pay off credit card bills." If you are overspending, Catey Hill, author of "Shoo, Jimmy Choo! The Modern Girl's Guide to Spending Less and Saving More" recommends keeping a money diary -- not just to see what you spend, but also to glean insights about your habits. "Maybe you're an impulse spender, or you spend to reward yourself," Hill says. "You'll see trends emerge."
2. Do spend on your career and business relationships. Don't let the desire to save prevent you from eating lunch out with colleagues a few times a week, shelling out for career coaching or joining a professional association, says Kimberly Palmer, author of "Generation Earn: the Young Professional's Guide to Earning, Investing and Giving Back." She says: "You don't want to be too frugal about investing in your career and your future. It's all about building your earning power."
Milestone: First credit card
3. Get a good low-interest credit card -- then tuck it away for emergencies. Use cash or debit cards for recurring expenses and little luxuries, such as lattes, dinners out with friends or that new handbag you can't live without. Experts say that even small balances carried over each month can add up to money trouble over time. "The magic of compounding interest goes the other way in a most dramatic fashion," Yarrow says. "The way most people get in trouble with credit cards is not that they buy so much. It's what happens when the interest starts compounding."
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4. Resist the lure of store credit cards. When the sales clerk smiles and asks if you'd like to open a store credit card -- just say no, experts recommend. "You end up with 14 credit cards in your wallet and you saved maybe $5 here and $7 there, but it hurts your credit score -- and what's worse, you think you're rich," says Ken Kamen, president of Mercadien Asset Management and author of "Reclaim Your Nest Egg: Take Control of Your Financial Future." Kamen says: "All these stores aren't giving you 20% off and losing money on it. These stores are counting on you not paying off your balance, getting hit with 18% interest and paying for that sweater you bought three times over."
5. Set up alerts to track your spending and balance. Through your credit card company, or using online tools such as those offered by Mint.com, set up alerts to let you know when your credit card spending hits a certain amount, Palmer says. "Say you want to spend no more than $500 per month on your credit card," Palmer says. "Plan in advance and know what you want your limit to be. No one wants to be shocked at the end of the month." Stopping when you hit your limit, Palmer says, helps ensure you'll pay your bill in full.
Milestone: First-time bill paying
6. Commit to making on-time payments. "The credit environment is incredibly tight right now, and about 30% of your credit score is based on a history of on-time payment of bills. A lot of people in their 20s do not realize how important that is," says Manisha Thakor, founder of the Women's Financial Literacy Initiative. "Be late on your bills, and you can make a mess of your score -- and pay higher interest when you go to buy a car or a home."
7. Use one online bill pay service to stay organized. Using the online bill pay offered by your bank or credit union -- rather than each individual company's website -- is the easiest way to make sure bills get paid on time, according to Thakor. "Just put it on auto pay -- and set it to send you [e-mail or text] alerts," Thakor says. "You can pay all your bills that way, and you only have to remember one login and password." Greg Meyer, community relations manager for the San Jose, Calif.-based Meriwest Credit Union, agrees: "You can pay your bills in five minutes -- and even pay them on your smartphone."
Milestone: First-time saving
8. Become a power saver. "Money you save early on is the most valuable in that it has the most time to compound and grow -- if you start saving in your 20s and 30s, it's like turbocharged saving," Thakor says. For that reason, Palmer recommends starting small, but quickly working up to saving 25% of your income, including retirement savings. "Start with 2%, then raise it to 5%, then 10%, then 25," Palmer says. "It sounds shockingly high, but it's actually a really good average to shoot for to build financial security."
Milestone: First big purchase
9. Watch out for too-good-to-be-true financing deals. Zero-interest deals can be tempting when you need to furnish your living space with a new couch, bed or TV. Make sure you read the contract carefully, though, and ask questions about what happens if a payment is late, Meyer says. "Generally, they will jack up the interest to about 24% and backdate it to day one," Meyer says. The Credit CARD Act of 2009 forced changes on deferred interest plans that make them more transparent and a bit less dangerous, but still, make sure you keep your payments up to date. Meyer recommends using online banking to set up automatic payments to go out at least a week before they're due. "You have to be very disciplined," he says. And make absolutely sure any balance is paid in full before the no-interest promotion period expires or you'll end up getting socked with back interest charges.
10. Buy a reliable car -- but not a fancy one. "If you buy, say, a Lexus, as your first car -- you've got a $450 or $500 payment each month -- and you've bought a higher end car, so you've also got to buy higher-end insurance," Meyer says. He recommends calculating a monthly payment you can afford -- but not letting a car salesperson sell to you by talking only in terms of the monthly payment, rather than total cost. "If you want a high-end stereo in the car, maybe it's only $25 more per payment -- which sounds like a great deal until you multiply it by 48 or 60 payments. You'll probably pay a lot more than it's worth." Research car buying advice thoroughly, and don't finance a car for more than four or five years as the odds of owing more than the car is worth increases dramatically the longer you finance it.
Follow these tips, and you can turn all of your money milestones into opportunities to avoid debt -- and get ahead in life.
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