5 Financial Things to Do When You Turn 18

Turning 18 marks a significant milestone, ushering in new freedoms and responsibilities, many involving financial management. Establishing a solid financial foundation now can positively influence your future opportunities and long-term security, setting you on a path toward achieving your aspirations.

Setting Up Your Financial Infrastructure

Establishing a robust financial infrastructure begins with opening checking and savings accounts. A checking account provides easy access to funds for daily transactions via a debit card or electronic transfers. When selecting an account, look for low or no monthly fees, convenient online and mobile banking, and accessible ATMs. Many financial institutions offer accounts tailored for students or young adults that waive fees.

Pairing your checking account with a savings account is important for financial stability. Savings accounts hold money not needed for immediate expenses, often earning interest. Building an emergency fund, ideally covering three to six months of living expenses, is a component of savings. Even small, consistent contributions accumulate over time, providing a safety net for unexpected events like job loss or medical emergencies.

Creating a budget is the cornerstone of money management, allowing you to track your income and expenses. Begin by calculating your net income, the amount you take home after taxes and deductions. Categorize your expenses into fixed costs, like rent or subscriptions, and variable costs, such as groceries or entertainment. Regularly monitoring these helps identify areas where you can adjust spending to align with your financial goals and build your savings.

Building a Strong Financial Profile

Understanding and building a credit score is a financial step for young adults. This three-digit number, typically ranging from 300 to 850, predicts your likelihood of repaying borrowed money. Lenders, landlords, and some employers use this score to assess your financial reliability. Key factors include payment history, amounts owed, and credit history length.

Building credit responsibly at 18 offers advantages for future financial endeavors. One effective method is a secured credit card, requiring a cash deposit that often acts as your credit limit. This card allows purchases and builds payment history, with activity reported to major credit bureaus. Another option is becoming an authorized user on a parent’s credit card, allowing you to use the card and potentially benefit from the primary cardholder’s positive payment history.

While becoming an authorized user can help establish credit, the primary cardholder remains responsible for all debt incurred. Both the authorized user and the primary account holder’s credit scores can be affected by the account’s management. Paying bills on time and keeping credit utilization low, ideally below 30% of your available credit, are practices for cultivating a healthy credit score. Accumulating debt, particularly high-interest credit card debt, can quickly become burdensome, making it challenging to pay off balances and negatively impacting your financial future.

Planning for Future Financial Goals

Thinking about future financial goals, such as higher education, is an important part of your financial journey. For those considering college, completing the Free Application for Federal Student Aid (FAFSA) is a step to determine eligibility for various forms of financial assistance. The FAFSA is an information form used to calculate your financial need, not an application for a specific loan. Student loans represent borrowed money that must be repaid with interest and fees, typically after graduation or leaving school.

Beyond education, starting to save for retirement early, even with small amounts, offers benefits. A Roth Individual Retirement Account (IRA) is a retirement savings vehicle for young earners. Contributions to a Roth IRA are made with after-tax dollars, meaning that qualified withdrawals in retirement are tax-free. This can be beneficial if you anticipate being in a higher tax bracket later in your career.

The power of compounding is an advantage of starting retirement savings early. Compounding refers to earning returns not only on your initial investment but also on the accumulated interest or earnings from previous periods. This “interest on interest” effect allows your money to grow exponentially over time. For example, a small consistent investment made at 18 can grow significantly larger than a much larger investment started later in life, thanks to the extended period of compound growth.

Protecting Your Financial Well-being

Understanding basic tax obligations is an aspect of financial responsibility as you begin working. When starting a new job, you will complete a Form W-4, Employee’s Withholding Certificate. This form provides information to your employer, allowing them to accurately withhold the correct amount of federal income tax from your paychecks. The goal is to avoid under-withholding, which could lead to an unexpected tax bill, or over-withholding, which means you are giving the government an interest-free loan.

Exploring types of insurance is another protective measure for your financial well-being. Health insurance helps cover medical expenses, protecting you from potentially overwhelming costs associated with illness or injury. Auto insurance is a legal requirement for vehicle owners and drivers, providing financial protection in case of accidents. If you plan to rent an apartment, renter’s insurance can protect your personal belongings from theft, damage, or other covered perils, often at a modest annual cost.

Protecting your personal information and being aware of financial scams and identity theft risks are important in today’s digital landscape. Scammers often use tactics like phishing emails, imposter calls, or fake websites to trick individuals into revealing sensitive data. Regularly monitoring bank statements and credit reports for unauthorized activity, using strong, unique passwords, and being cautious about sharing personal details online can help safeguard your finances from potential fraud.