For Young Adults:What to Know Before Declaring Your Financial Independence

Twenty-somethings may not realize it, but every time they enter a new phase of their life as young adults — perhaps starting college, a career or a family — they're also venturing into a new world of money management. Here are ways to be prepared. Save money that could make your future dreams a reality. It's important to put money aside for purchases you expect to make in the next few months or years. But even at this stage of your adult life, it's smart to save for long-term goals, perhaps buying a home, owning a business or saving for retirement (even though that may be 40 or 50 years away). To help you stay focused on saving money and controlling your spending, think about creating a formal or informal budget. "The important thing is to understand how much you earn each month, how much you pay for essentials like rent or transportation, and how much is left over for everything else," said Janet Kincaid, Chief of the FDIC's Consumer Response Center. It's how you spend what is in the "everything else" category that is critical to successful money management, Kincaid added. Also, to make saving easy and painless, consider arranging with your bank or employer to automatically transfer a certain amount each month to a savings or investment account. Build a good credit record. As you become responsible for paying your own debts — for credit card purchases, rent, car loans or student loans, and other obligations — you are building a credit record. Companies called credit bureaus are authorized by law to collect information on each person's history of paying debts, which is then used to prepare "credit reports" and summary "credit scores." In general, the better your credit history and credit score, the better your chances are of getting a loan, including a credit card, with an attractive interest rate. Credit reports and scores also can be considered when you apply for a job, an insurance policy or an apartment. One of the best ways to build and maintain a good credit record is to pay your credit card bill and other debts on time — to show you are a reliable money manager. What else can you do to improve your credit score? "Try to charge on your credit card only what you can afford to pay off immediately or within a reasonable time frame," said Robert Mooney, FDIC Deputy Director for Consumer Protection and Community Affairs. "Whenever possible, pay your credit card bill in full each month, but if you can't do that, pay as much as you can over the minimum amount due." If you need to get a car, consider the best way to pay for it. For many young adults, their first big purchase and ongoing expense is their vehicle. Often, the first question is whether to buy (which may involve taking out a loan) or lease (which is similar to renting a car but for a few years). "There are different pros and cons to buying or leasing," said Kincaid. "For example, monthly lease payments are usually lower than monthly loan payments, but at the end of the lease you don't own the car you've been paying for and you may owe a sizeable sum of money. If you buy, you do have a vehicle you can sell or trade in." The Federal Reserve Board has published a guide to the differences between buying and leasing a car. "Keys to Vehicle Leasing" is online at www.federalreserve.gov/pubs/leasing. If you're thinking about buying a car and borrowing money to pay for it, see the Summer 2007 FDIC Consumer News (www.fdic.gov/consumers/consumer/news/cnsum07/auto.html) for tips that can help you save time and money, perhaps hundreds of dollars. If you're renting a house or apartment, consider if it's time to buy. Once you start earning a good, steady income, you'll most likely face the decision about when is the right time to own your first home. Real estate can be an excellent investment. But home ownership is a big financial commitment, and home values sometimes can go down. "There's a lot to consider before making that big leap into home ownership, and what works for one person isn't always the best fit for someone else," said Lee Bowman, FDIC National Coordinator for Community Affairs. First look at the costs of renting versus paying a mortgage. "When buying a home, the most important thing to look at is what you can reasonably afford," added Kincaid. "Remember you'll be paying real estate taxes and insurance, mortgage interest payments, and the costs of maintenance and improvements. But also remember the upsides of buying a home, such as tax benefits, the potential for your home to appreciate in value, and the satisfaction of having a place to call your own." Other factors to consider include how long you plan to stay in the house, how much money you have for the down payment, and how good your credit record is. "If your credit record is less than stellar, you may only be offered a mortgage at a high interest rate," Kincaid said. To learn more about renting vs. buying a home and paying a mortgage, go to www.mymoney.gov/homeownership.shtml, a federal Web site for information from a variety of sources, and www.hud.gov, the U.S. Department of Housing and Urban Development. Article from the FDIC Website

Saving Tips

Savings can help you achieve any financial goal. Whether it’s a comfortable retirement, a down payment for a house, or a new car or stereo, you can get there by setting money aside. And best of all, you can have what you want without getting bogged down in debt. Yet if you’re like most people, you don’t save as much as you’d like to. Or you don’t save at all. Americans spend more than we earn. Consider that the national personal savings rate has dipped to the lowest point since the Great Depression. Today’s high energy, home and food prices may make saving seem less possible than ever. But the time is now. And with a little forethought and effort, saving money is not only possible, it’s easy. Make Saving a Priority You’ll be more likely to save money if you make it a priority. Sit down and figure out what you’d like to save money for – retirement, a house, car, college, dream vacation –and how much it will cost. Then make your plan: Set a timeline for when you’d like to reach your goal. Set a schedule by dividing the total goal amount by the number of weeks, months or pay periods between now and your goal date. Be vigilant by treating your savings contribution just like any other must-pay expense, such as rent or groceries. Find Money to Save While it may seem difficult sometimes just to make ends meet, chances are you have extra money you didn’t even know about. Here are some ways to find it: Keep track of everything you spend for a week. You might be surprised what you’re buying, and what you can do without. Make purchases with cash. This can help you stick to a budget and avoid impulse purchases. Simply decide ahead of time how much you want to spend and then set aside that amount in cash before you go shopping. Lower your bills. Many creditors will give borrowers a lower interest rate if they’re asked. Also, conserving electricity and gas can make a big difference. Rank your nonessential expenses. Keep the ones you like the best and cut the items on the bottom of the list. Pack a lunch. Or cook more dinners at home. Eating out at restaurants can eat up a lot of money that could be saved. Pay Yourself First You're probably inclined to pay everyone else first – whether it’s your landlord or your grocer or the electric company. But it’s vital to start paying yourself first by saving money. Once you’ve made a contribution to your financial longevity and well-being, then you can divide up your money to cover everything else. Don’t worry. You'll more than likely have plenty left over to cover everything you need. In fact, most banks make this easier. You can have them automatically transfer funds from your checking account to your savings account, money market, mutual fund and other accounts. You might also check with your employer. Companies will often deduct savings from paychecks if asked. Article from "Practicalmoneyskills.com"

Improving your credit score

Many people suffered blows to their credit scores during the unstable economy of the last few years, whether because they missed payments, exceeded credit limits or, more seriously, experienced a home foreclosure or even bankruptcy. Is this a big deal? Absolutely. If your credit score drops significantly, you'll likely be charged higher loan and credit card interest rates and offered lower credit limits – or perhaps be disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or get a cell phone. Fortunately, taking these few steps will begin improving your credit score almost immediately: First, review your credit reports from the three major credit bureaus (Equifax, Experian and Transunion) to see which negative actions your creditors have reported and look for errors or fraudulent activity. You can order one free report per year from each at www.annualreport.com. You can also order a FICO credit score (the score most commonly used by lenders) for $19.95 from www.myfico.com to know exactly where you stand. "It definitely pays to have a good FICO Score," says Greg Pelling, vice president of Scoring and Analytics at FICO. "Based on today's rates, you could save $30,000 in interest on a $100,000 home loan over 30 years, if your score is above 740 rather than below 620. Lenders base their decision on many factors but your FICO score plays a major role." Never exceed individual credit limits. In fact, the lower your credit utilization ratio (the percentage of available credit you're using), the better. Try to keep your overall utilization ratio – and ratios on individual cards and lines of credit – below 30 percent. Even if you pay off your balance each month, showing a high utilization ratio at any time during the month could conceivably hurt your score. A few suggestions: Spread purchases among multiple cards to keep individual balances lower. Make extra payments midway through billing cycles so your outstanding balances appear lower. Ask lenders to reinstate higher limits if your payment history has been solid. Transferring balances to a new credit card to get a lower rate dings your credit score by a few points – although it won't take long to recover. But, say you move a $2,000 balance from a card with a $10,000 limit to one with a $4,000 limit; you've immediately gone from a 20 percent utilization ratio to 50 percent on the new card. A few other credit score-improvement tips: Make sure that credit card limits reported to credit bureaus are accurate. Don't automatically close older, unused accounts; 15 percent of your score is based on credit history. In fact, occasionally make small charges on existing accounts to make sure lenders don't close them out. Each time you open a new account there's a slight impact on your score, so avoid doing so in the months before a major purchase like a home or car. Pay off medical bills and parking, traffic or library fines. Once old, unpaid bills go into collection, they can damage your credit. There are many good resources for learning what you can do to repair and protect your credit scores, including the Credit Education Center at www.myfico.com/CreditEducation, the Credits and Loans page at www.ftc.gov/bcp/menus/consumer/credit.shtm, and What's My Score (www.whatsmyscore.org), a financial literacy program run by Visa Inc. By Jason Alderman --------------------------------------------------------------------------------