You’re getting ready to move out of the dorm. You’ve given notice at Mom’s crib. Maybe you’re leaving a relationship you were in since you were very young. Whether you’re 22 or 60, the experience of living completely on your own for the first time is exciting, daunting, and filled with potential financial pitfalls.
Do You Know Your Local Cost of Living?
For many of us, living on our own for the first time means we might be doing so in a city or town we’ve never lived in before. Do you know what it costs there to rent an apartment, operate a car, or buy a bagel? (In the nation’s largest cities, new workers might pay more than 30-50 percent of their gross earnings on rent alone.) Do you know what it will cost you to buy a house or condo later on? Before you fire up the U-Haul, do a little research.
A lot of this you can do anecdotally, and it makes sense to do it well in advance. If you’re moving to a new city to work for a company, ask your future boss about what it costs to live there, or make full use of your future employer’s human resource department to see what they know and to make sure that there’s no money-saving option unturned. After bugging them, go to some official resources:
Call the Chamber of Commerce. Yes, it immediately conjures up images of cigar-smoking guys who are darn glad to meet you, but most chambers are one-stop shops for key living and business information on a community. Give them a call and press them to answer your questions. Take notes. They’ll probably also send you a packet with maps and other useful stuff that will come in handy later.
Bookmark the local newspaper’s website. Unless you’re in a fairly small town, many newspapers now feature property transfers (that’s the public record of what homes sell for) online. They might also do apartment listings online. Get a feel for neighborhoods and prices. Also, get to know the local news and business section-that’s where you’ll find out about employment, jobs, crime, real estate, state and local tax issues, and other important pocketbook information.
Check the local public transportation system’s Web site. See what public transportation options you’ll have if you don’t have a car or if your car fails. You might want to build your neighborhood search around public transportation. Also bookmark the city’s transportation department site to see if you’re going to need to buy expensive city stickers and other licenses that will make it more costly to drive a car. Generally, larger cities tend to be more expensive to drive in, so it’s important to check fees for parking, licensing, and public transit alternatives.
Check local entertainment Web sites. Find places where you can have fun on a budget. Buy a good, old-fashioned budget travel guide to the city. There’s no better way to get to know individual neighborhoods while finding out cheap alternatives for entertainment, culture and food. Tourists do it, why shouldn’t you?
Get a subscription to that city’s local magazine or newspaper. If you have more than a few months to think about where you’re going, see if your chosen city has a monthly magazine. Particularly in larger cities, local city magazines give you an in-depth impression of what it’s really like to live there. If you get the newspaper, check which day the food section runs. That’s when you’ll get an idea of grocery, drug, and retail store prices in your chosen city.
Go to the local city library’s Web site. So many municipal libraries in cities large and small are now online. Even if it’s a little tough to find resources in the card catalog, you can usually e-mail a librarian, and with a kind note, you’ll probably find all sorts of unexpected resources for newcomers. Also, it’s a good way to save money by borrowing CDs, DVDs, new best-sellers, and other resources that take cash out of your pocket.
Building That First Budget
Living alone for the first time, when it comes to money, is full of experimentation, trial and error. You’ll find that your wallet is empty more times than you’d like. That’s why it’s so important to track what you’re spending and then develop a spending structure with limits and allowances for the long term. That’s what a budget is.
You can definitely tell yourself on the first day you move in how much you’re going to spend for lunch, furniture, gas, movies, and other things you will spend money on. Its good to get in the habit of doing that right at the start. But the second important part of budgeting involves tracking not only to find out where your wallet is leaking, but also to prepare for future spending and savings you might accomplish with a few tweaks.
Managing College Debt
The average undergraduate student borrower graduates with nearly $19,000 of college debt, at least 50 percent more than a decade ago. lf you attend graduate school, that level of debt can easily triple or quadruple.
There’s an easy reason for this. The American Association of Colleges and Universities notes that over the last ten years, the average tuition at four-year public colleges has risen 51 percent, at private four-year schools 36 percent, and 26 percent at two-year schools. Wherever you went to school, you’re probably facing some form of debt, either in student loans or credit cards. That’s why one of the kindest things you can do for yourself after graduation (heck, maybe ask your parents to give this to you as a graduation present!) is a first-time visit to a financial planner and tax adviser. This way, you’ll be forced to lay all your money issues on the table at once. You’ll also get another set of eyeballs on future expenses so you can budget properly.
Questions you might want to ask a financial expert:
a. Which debt should I tackle first based on my future income?
b. Student debt has certain tax advantages, so this actually may not be the first line of attack. Most advisers will tell you to wrestle down credit card debt first.
c. How should I save for a car? The first question is, do I really need a car? Wheels are great, but unless you can pay cash for a reliable used vehicle (something of an oxymoron in itself), you’re just piling on more debt and expense.
d. How much can I spend on an apartment? Living alone may not be an option. Part of the reason so many young people return home to Live is that they can keep their living expenses at a cut-rate level. If this is a good option for you and your parents are agreeable, consider it for a fixed period of time and put every dime you save in the bank.
e. What’s the best way to sock away an emergency fund? If you give up three lattes a week, that’s $7 bucks. Even if you have a change jar on your bureau that you empty and take to the bank each month for deposit, that’s better than doing nothing. Tell yourself that every penny saved -thanks to compounding-will be much more significant later. And don’t listen to anyone who tells you socking away small amounts is silly.
f. How do I save for retirement and pay off my debt? You might as well learn this balancing act now because you’ll be living it all your life. The point is that you have to start doing both from the start, even if it means putting the absolute minimum away for retirement in an IRA or 401(k). Again, even a pittance saved in retirement at 22 has the chance of growing exponentially for 40 years without any attention to it at all. Again, this is why it’s wise to get help with thi,s process, because you might find sources of money to save and pay off debt that you never knew you had.
Cleaning Up Your Credit
If you were careless with credit cards, car loans, or any other debt in your life up until now, you are going to feel the burden of late payments or overly high balances the moment you strike out on your own. Credit scores and credit reports are pored over by employers, landlords, car dealerships, banks, and even adoption agencies. Since you’ve dedicated yourself to saving and investing, you’re going to have to dedicate yourself to cleaning up your credit as well.
Here are some steps:
a. Take responsibility and fix it yourself with the right advice. So called credit-repair scams and companies are everywhere. Even consumer credit counseling can occasionally pay your bills late, and you don’t want that. You see them advertised on late-night TV all the time-they pay for those commercials with the money they’re making off of you. There is nothing more paralyzing than looking at a single huge debt figure with no idea of what to tackle first. Set a plan, and then write the checks yourself. Don’t let anyone do it for you. This, actually, is a critical part of your recovery.
b. Do an annual credit check. We’ve mentioned this earlier, but you have the right to get each of your credit reports (Trans Union, Experian, and Equifax) for free once a year. Get in the habit of scheduling receipt of those reports at staggered times (example: TransUnion in January, Experian in May, Equifax in June) so you can see whether all your credit information is correct and it hasn’t picked up any inaccuracies during the year. Make this a lifetime habit, even when your credit rating is recovered.
c. Go debit and save one real, lower-limit credit card for emergencies. Emergencies, as a refresher, are sudden car breakdowns in strange towns and last-minute plane tickets so you can visit a sick relative. They are not concert tickets, dinners out, or double-shot lattes. To enforce the reality that you are spending real money whenever you open your wallet, ask your bank for a debit card with a Visa or MasterCard link and tell the bank to limit the funds available on that card only to what you have in your checking account. Otherwise, those branded debit cards will act like regular, high-interest credit cards and you’ll be back in trouble again. Why a branded card? Some retailers won’t accept your plain-vanilla ATM card for purchases.
d. Set up an electronic payment link for your credit cards-and pay it every week. If you’re constantly chipping away at a credit card balance instead of doing it only once a month, you’re lowering the amount of the balance the credit card company uses to compute the interest they’re charging you. Good for you, bad for them, which is fine. If you send them a payment every week electronically, you’re saving interest too.
e. If you need to renegotiate payment schedules, do it yourself. And by all means, take notes. Most creditors aren’t super friendly when they hear you want to stretch out or lower your debt payments, but it’s a lot cheaper for them to work with you than to have to chase after you later. Suck up whatever fear you have about doing this. Negotiate in a friendly and firm way, and don’t hesitate to call a financial adviser before you do this. Be sure to ask them to put any new payment terms in writing and mail them to you on their stationery just in case someone messes up and doesn’t record your new terms properly.
Don’t Ignore Your First Employer’s Retirement Options
We’ve already talked about the importance of starting saving early, even if it’s only a few bucks a week. But your retirement options are maximized by finding an employer willing to match your retirement savings. Obviously, go where your dream job is, but don’t forget to check whether your future employer provides a good range of retirement choices in their 40l(k) plans and matching and if they have any other savings or stock options that you can take advantage of. Jobs are not just about doing what you want to do-the best employers provide the best for their employees.
One more thing-you may be tempted to drain your retirement savings to purchase a house at some point, but remember, you’re going to have to pay it back, and you’ll lose the tax-free appreciation of those dollars while you’re doing so. If you can, find another way to take care of that down payment.
Longer-range Planning For Singles
Yes, even with all your new money pressures, you still have to plan for the unexpected financial considerations if you get sick or die. Depressing, yes, but necessary. Ask yourself the question-do you really want to saddle your relatives with excess medical debt or care giving if something happens to you? It’s a tough reality to accept when you’re 22, but it happens. Some ideas:
Write a will, living will, and health directive. Even if it’s done on a reputable software program, you need a simple will that tells people where you want your money and stuff to go. Put it in a safe place and make sure one trusted individual knows where it is.
What’s a living will and how does it differ from a health directive? A living will is a document that says you want certain things to happen if you are incapacitated by an irreversible health condition. You might back it up with a videotape of yourself reading it, which makes it tough to dispute in a court of law. Do you want to be kept on life support if doctors decide you’re never really going to get better? This is the stuff you need to decide and write down, no matter how old you are. A health directive is a supplement to a living will that gives detailed instructions for a family member you’ve given health-care power of attorney to carry out specific medical instructions if you’re incapacitated but not in an irreversible condition.
Insurance choices. If you don’t have dependents, you probably don’t need life insurance. If you want to leave assets to someone, focus on retirement savings instead, and make sure you have beneficiaries listed correctly on every investment you have. If you’re worried about family members paying for your burial, put money in a cash account your executor can get to easily. If you are planning to become a parent later, go for term insurance which buys more than a whole or variable life policy and you can lock in your rates for decades if you’re under 40.
If you do become a single parent. Set up appropriate financial vehicles-such as particular trusts-to direct and safeguard your assets if you die before your kids reach adulthood. If you have a lot of assets, it makes sense to talk to a CFP practitioner and a tax adviser to make sure the solution you choose works smoothly and doesn’t eat up your estate in excess taxes and penalties. You will also need to designate a legal guardian for your children if you die suddenly.
Don’t forget your pets. If you adore your dog, cat, or ferret, you need to think about them if you die or become incapacitated. You need to make legal arrangements for them too-some people make provisions for their financial and living support in their living trust.
Business power of attorney. If you’re a business owner, you may want to set out steps for the continued operation of the business if you arc incapacitated or die. The person you designate business power of attorney will have the legal authority only over your business and its operation, not your personal assets or other financial issues outside the business.
Critical illness insurance. Sometimes, people choose this insurance over a traditional life policy, but definitely get some advice here. Critical illness insurance pays a lump sum in cash if the holder survives more than 30 days after the diagnosis of specific illnesses, and the amount is paid to you or your trustee in tax-free cash that can be spent for any purpose. It’s no substitute for health insurance and it is more expensive than traditional life policies. Most individuals will change jobs and employers a number of times before they retire.