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“I am nervous [about managing my finances]. I am not prepared,” says Miranda, a sophomore, from Indianapolis, Indiana.

Iman, a senior from Brooklyn, New York, agrees. “I don’t feel prepared at all.”

Miranda and Iman aren’t alone. In a recent Student Health 101 survey, one in four students said they felt unprepared to manage their finances after graduation. Financial education company EverFi found this same statistic when they surveyed students nationally in 2013.

So what happens when students don’t know how to handle money?

“In 45 years of university teaching, I have run across many students who were not able to manage their own finances once they left home. Most of them ran up too much debt on their credit cards and had to drop out of school to take a full-time job to repay their debts,” says Dr. Lewis Mandell, professor emeritus and former business dean at the University at Buffalo, The State University of New York.

But high school is the perfect time to “learn how to manage money and even make mistakes,” says Kimberly Palmer, author of The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your Life. Practicing your money management skills and learning from any mistakes as a teenager will help you be on top of the money game when you’re an adult.

According to Dr. Mandell, students who begin adulthood without unnecessary debt have the following advantages:

  • Fewer financial worries and burdens.
  • You’ll be better prepared to save for retirement. Why? Money you put away for retirement at age 21 is worth twice as much as money you’ll put away 10 years later. (This is because most retirement accounts earn interest, and the longer your money is earning interest, the more the money in the account will grow.)
  • You can get better-quality loans for a car, a house, or a business.
  • You can start a family (if you so choose) earlier and more securely than those who have lots of debt.

Important questions to ask yourself when choosing a bank

Think about what features you plan to use when choosing a bank, advises Dr. Lewis Mandell, professor emeritus from the School of Management at the University at Buffalo, The State University of New York. “For example, do you plan to write checks? If not, choose an account without this feature. Do you just want an ATM card to take out cash or do you want a debit card that can also be used at the point of sale (stores)?” he says. Also ask yourself these questions:

Where is the bank located?
  • How far is the bank from your house? You might want to pick something nearby, especially if you’ll be making lots of deposits and withdrawals.
  • Is the bank local, regional, or national? Some banks might only be in your hometown while other chains can be found nationally. Local banks, such as credit unions, might have lower fees and better options for young people. However, national banks will give you easier access when you travel.
What are the fees?
  • Does the bank charge you to withdraw money from the ATM of another bank? The average ATM fee in 2014 was $4.35. Whoa.
    +  Read this article to find out how to reduce the likelihood of paying an ATM fee.
  • Does the bank charge fees for the account you want?
  • How much is the minimum balance (the money you need to keep in your account to avoid being charged a fee)? “Some banks offer a free account to young people, but most will give you a free account only if you keep a certain minimum balance (often $500 or more). Since few young people can maintain large balances, search for the lowest fees without a large minimum balance. Often, credit unions are more friendly to young people who are just getting started,” says Dr. Mandell.
Do the accounts earn any interest?
  • What are the interest rates on savings accounts? Online-only savings accounts tend to have slightly higher interest rates. The downsides to online-only accounts are that you can only do your transactions online or over the phone, and sometimes it can take longer to access your money.
    + This link can help you find the best savings account rates.

Remember that some debt, such as student loans, may be unavoidable. But credit card debt and debt from late payments on bills can be avoided. Learning how to balance your budget and pay bills on time will help you stay out of unnecessary debt.

Get a grasp on money-handling basics so that you can make the most of your money.
Here are five easy steps:

Step 1:

Create a budget

Budgeting is simple. It’s about figuring out how much money you have coming in (called income) vs. how much money you spend (called expenses). Income can come from a job, your allowance, family, that penny you found on the sidewalk, or any other source that pads your wallet.

To figure out your expenses, you need to ask yourself, what do I spend my money on? Expenses can be tricky to keep track of since it’s difficult to remember all the little things you buy. That pack of gum and bottle of Gatorade might seem small, but trust us, they add up. Here are the different types of expenses to consider:

  • Fixed expenses. These stay the same each month. They include things like car insurance, rent, tuition, or a car payment. You might not have to pay any of these now, but you most likely will once you start living on your own.
  • Variable expenses. These could change month to month, depending on how much you spend. Examples include: gas for your car, clothing, books for school, movie tickets, and your mid-morning snack ritual.
  • Periodic expenses. These might only come up once or twice a year and could include things like your upcoming spring break trips, shopping for a school dance, or birthday presents.
How to create a budget

Start by choosing a time period, such as a month. Add up your income for that month, add up your expenses for the month, and then subtract your total expenses from your total income. After you’ve subtracted your expenses from your income, you can put any money left over (if there is any) into savings or spend how you’d like. Tip: Saving now will make a big difference in your future. If you have extra, try saving most of it.

It’s helpful to have a spreadsheet or visual representation of your budget. Try using:

Here’s an example of what your budget might look like:

Job $340/month
Allowance $50/month
Total $390
Car insurance $100/month
Food $80/month
Entertainment $60/month
Gas for car $75/month
Total $315/month

Extra $75 (for college savings/emergencies/spring break, etc.)

+ Need more help? Use this budget worksheet from the Federal Trade Commission

Step 2:

Open a checking and a savings account

Want to set yourself up for a successful financial future? Then smash that piggy bank, grab those crumpled-up dollar bills, and head to a real bank. “Opening a bank account is a great way for a high school student to learn how to stick to a budget, save money, and navigate online banking platforms,” says Brianna McGurran, staff writer at NerdWallet. There are two types of accounts that are most helpful for high school students: a checking account and a savings account.

Checking accounts are bank accounts that allow you to store, deposit, and access your money easily. You can withdraw (take out) money from the account by writing checks, going to an ATM, or using a debit card.

With checking accounts, you can usually:

  • Use ATMs (Automated Teller Machines) to withdraw cash. But be careful—if you use an ATM that doesn’t belong to your bank, you are likely to be charged a small fee (approx. $2.00–$5.00) per transaction.
  • Make multiple deposits or withdrawals in a day.
  • Write checks to pay for things.
  • Link the account to a savings account to transfer funds and avoid overdraft fees.
  • Pay bills automatically online (e.g., your car insurance or cell phone bill).

Savings accounts are bank accounts that allow you to store money and earn a (tiny) amount of interest. Earning interest means that the bank will pay you a percentage of the money you have in your account (in the case of savings accounts usually around .1%–1%).

For example, if you have $1,000 in a savings account (lucky you), and your account earns you 1% interest per year, then at the end of the year, you’ll have $1,010. It might not be much, but it’s free money, so take advantage. Other types of accounts earn higher interest, but it’s a good idea to start with the basics.

Savings accounts:

  • Earn a small amount of interest
  • Are intended for saving and storing money (as the name implies)
  • Are not always accessible by ATM
  • Sometimes require you to have a minimum balance (a certain amount of money in the account at all times) to avoid fees
  • Are not usually linked to a debit card or checkbook (but sometimes they can be; it depends on your bank)

Step 3:

Get a debit or credit card

Nearly half of students say they have access to a credit or debit card, according to a recent Student Health 101 survey. But most of the time, they’re using cards linked to a family member’s account. “I share a card with my parents, but I’m interested in getting my own credit card,” says Michelle, a senior from Columbus, Ohio. Whether you’re using your own card or a family member’s, it’s important to understand the difference between the two, and to know what happens if you miss a payment or spend too much.

Credit cards

A credit card is like getting a loan. When you charge something to your credit card, you are borrowing money from the bank or credit card company until you pay it back. It is not free money. You are expected to pay the credit card payment either every month or over a period of time. If you don’t pay the balance of the card when it’s due, you’ll be charged a fee (usually a percentage of what you owe) until you pay off the balance.

Key points to know about credit cards:

  • They help you build credit (which will help you get loans for houses, cars, and other big purchases when you’re older)
  • You can earn points or cash-back rewards
  • They usually have protections against identity theft
  • They can lead to overspending if you’re not careful
  • You can be charged penalty fees for not paying off your balance on time

Debit cards

When you open a checking account, it usually comes with a debit card. You can use the debit card to withdraw money from your account or to buy things. The money on the debit card comes directly out of your checking account, which means it can run out. Beware of overspending—you can be charged overdraft fees for spending more money than you have in your account.

Key points to know about debit cards:

  • Money comes right out of the checking account, which may mean smarter spending. But it could also mean withdrawing too much (which can lead to fees)
  • They require you to know how much money you have in your account at all times (which is a good thing!)
  • There’s no interest to pay off
  • A debit card might not have as much consumer protection as a credit card if it gets stolen—check with your bank to be sure

Step 4:

Learn how credit works

Let’s say that you borrowed money from your parents, but you never paid them back. Would they let you borrow money from them again? Doubtful. Credit is sort of like trust—if you borrow money from the bank but don’t pay it back, you have lost the bank’s trust. In other words, your credit has been damaged and they might not let you borrow money again in the future. “Credit is a way to show how financially responsible you are to banks you might want to get a loan from,” says Brianna McGurran, staff writer at NerdWallet.

You can build your credit by borrowing money (e.g., through a loan or by using a credit card) and paying it back on time. You can also build credit by paying your bills (e.g., your cell phone bill) on time. McGurran recommends asking your parent to add you to their credit card, if possible. “This is a low-risk way to start building your credit early,” she says. Just make sure you have their permission to use it and don’t spend more than they allow.

Credit scores

As you borrow money and establish your credit, you’ll get a credit score. A high credit score shows that you are trustworthy—that you pay your bills and make your payments on time. In the future, this can help you get better credit cards, car loans, and apartments down the road. While that might seem far off, it’s not. Building your credit now can help you a lot in the future.

How payments work

If you decide to get a credit card or share one with a family member, it’s important to make payments on time. Paying late or not at all can hurt your credit and put you in debt, which will make it harder to open a credit card or get a loan in the future. This could affect things like buying a car or a house. It could also mean paying more for student loans in college.

Step 5:

Avoid these financial pitfalls

Unfortunately, there are a lot of traps out there that prey on people who don’t understand finances very well. Falling for one of these can mean a minor setback, such as losing a little bit of money, or a major downfall, such as ruining your credit history and not being able to buy a house or car later on.

Try to avoid these common mistakes:

  • Payday lenders. If you’ve ever stayed home sick from school, you’ve probably seen commercials for payday loan companies. Payday loans, also called cash advances or check loans, are short-term loans with very high fees or interest rates (usually around 15 percent). The loan companies expect to be paid back when you get your next paycheck (hence the name payday lenders). If the loans aren’t paid off on time, the fees can add up quickly. Some people end up paying more in fees than the money they are loaned in the first place.
  • Not paying on time. Making late payments on bills (like credit card or cell phone payments) could lead to added fees and hurt your credit score. Paying everything on time can help save you money in the long run. If you’re able, set up automatic bill payments so you don’t forget to pay the bill when it’s due.
  • Living beyond your means. Alas, this is a pretty common scenario. You may want the flashy car, but if you can’t realistically afford it, it’ll get you into trouble. “This can lead to debt,” says Kimberly Palmer, author of The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your Life. Setting a budget can help prevent this.
  • Not saving money. Ever heard of the rainy day fund? That’s the money you save for when things don’t go as planned. Start one. Things like car repairs and medical bills can be major expenses that seem to come out of nowhere. Make sure you have some money set aside to cover the unexpected.
  • Not planning ahead. If you know you have a big purchase coming up, put funds aside each month so that you won’t be surprised (and broke) when it’s time to lay down the money. For example, if you want to buy tickets to the big game or go on a spring break trip, now is the time to start saving.

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Article sources

Lewis Mandell, PhD, professor emeritus, School of Management, University at Buffalo, The State University of New York and author of 20 finance books, including Financial Literacy: Improving Education.

Brianna McGurran, staff writer, NerdWallet.com.

Kimberly Palmer, author of The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your Life, and senior money editor at US News & World Report.

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Federal Deposit Insurance Corporation. (2012, March 1). A quick guide for consumers on credit, debit, and prepaid cards. Retrieved from https://www.fdic.gov/consumers/consumer/information/ncpw/cardchart.html

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Hyman, L. (2013, April 2). Survey reveals that US high school students lack adequate financial knowledge. Retrieved from https://www.everfi.com/about/news/press-releases/april-2-2013-survey-reveals-that-us-high-school-students-lack-adequate-financial-knowledge

Popken, B. (2014, October 1). 4 ways to never pay ATM fees ever again. Today Money. Retrieved from https://www.today.com/money/4-ways-never-pay-atm-fees-ever-again-2D80186758

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