I am in my early twenties and starting to become financially independent. I feel pretty stupid, but I do not understand even the basics of personal finance. For example, I was just on the phone with a bank teller who was trying to explain that my credit card needs to be paid off before a certain date every month. I didn’t understand this before and my credit score isn’t good. I still don’t know what a credit score is, or even what credit is. I don’t know how to pay taxes without a parent’s help. I don’t know how to rent without a guarantor. I don’t know how interest works, at all. I don’t understand cash back, credit card points, what my pay stubs are for, what high risk or high yield savings accounts do and how to pick one, the list goes on.
Of course I google these things, I’ve lurked on this subreddit plenty, but how-tos and advice are generally geared towards people who at least know some basics. I get lost in information very easily and come out with more questions than answers, and often tears.
I want to understand these things, and not accidentally ruin my finances or rely on my parents for everything. I’m currently terrified I won’t be able to move out and rent a new place like I planned this year, because of my credit score. Does anyone know of a method for dummies, some place I can start that will teach me the basics and the necessities?
I am completely, utterly financially illiterate and everywhere I start is already too complicated. Where should I actually start?
byu/locklocklongago inpersonalfinance
Posted by locklocklongago
23 Comments
Click the pf wiki click prime directive
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Read “Simple Path to Wealth” by JL Collins.
I’d also listen to a Freakonomics podcast called “The worst thing you can do with your money (or something like that).
I’d also recommend a podcast called “Stacking Benjamins”. If you don’t like that one, there are a million other podcasts about making personal finance accessible.
If there’s something you don’t understand re: terminology, look it up.
But the most important thing is don’t get fooled into thinking you need things like investing to be super complex.
1. Automate withdraws into retirement accounts.
2. Automate automatic increases ever year.
3. Invest in a broad based index fund. Any SP500 fund, US total market fund, or Total global market (including US) fund. Or even easier is to pick a target date fund…but I’d say only do this if you’re working with vanguard and maybe fidelity. Many target date funds have lots and lots of fees.
4. Eventually read about a 3-fund portfolio and switch to that after you get to something close to $100k. Or don’t…the indices above are probably fine forever.
5. DO NOT MAKE STUPID EMOTIONAL DECISIONS AND SELL WHEN THE MARKET GOES DOWN.
Good luck!
Know your credit card balances and rates. If you want specifics about what is going on you’ll have to post specifics. Bottom line is they are likely high interest rates, which is what you are paying them to borrow the money. Paying it off ANTYTIME THERE IS A BALANCE will keep you from WASTING MONEY on credit card interest rates.
Credit is the ability to buy things now and pay later. If you use a credit card to buy something, the money isn’t really “spent” because it hasn’t left your bank account. But the transaction still happened (you still bought the thing and now own it). So then later you need to pay back the money you owe by taking money out of your bank account and using it to pay off your card. It’s the same as if a coworker lent you money for the bus and you promised to pay them back the next day. The only difference is, if you don’t pay off your credit card in time, then you get charged interest as a punishment for not paying. Which basically just means that now on top of the price of the item you bought, you have to pay extra money because you were late. Your credit card company sends you a monthly statement (either in the mail or electronically) which you then have to pay, and if you don’t pay it then you start to accumulate interest.
I’m kinda surprised your bank let you have a card without explaining this to you tbh. That’s really kind of their fault.
Okay so imagine you want to buy a $500 item and don’t have the $500 in your bank account. You can’t buy it then right? Well credit card companies decided they will lend you that $500 for free for one month. So you use your credit card to buy it, visa pays the $500 on your behalf. And now you owe Visa $500. You have until the end of your statement date to pay that $500 back to visa and only owe the $500. After your statement date, they start charging interest (a percentage of the balance) So now you’ll owe Visa $510 for that $500 purchase. And the amount you owe visa is going to increase every month you don’t pay them back. (They initially lend you the $500 for free because a lot of people end up paying interest. That’s how they make their money as a company)
Your credit score is a number that tells companies how good you are at paying back your debt. So if you continually charge things to a credit card and pay it back, that will increase your credit score. Companies will ask what your credit score is to decide if they want to lend you money (or rent a place). Imagine if someone rented an apartment and has a terrible credit score. That would indicate the likely hood that person will be able to pay rent every month is low.
Credit is when you borrow money. A credit card works like this. When you swipe/tap/insert your credit card number, the seller contacts the credit card company and asks if they will pay for your purchase on your behalf. If they say yes, the credit card company pays for your items and sends you a bill for it later. If you pay it back before a certain deadline, usually the same month, then that’s that. If you don’t pay it back in time, they charge you interest. That’s a percentage of what you owe. So if you spent $100 on something and you didn’t pay it off by the end of the month, and your annual interest rate is 24%, now you owe $102. The longer you don’t pay it all off, the more you owe.
In contrast, a debit card is tied to your bank account. You put money into an account when you get paid. When you swipe/tap/use your debit card number, the seller contacts the bank and asks if you have enough money to cover the purchase, and the bank takes the money out of your account and sends it to the seller.
You have a credit score that is based on a number of different things, like how much money you’ve borrowed, and how well you’ve paid your loans back. Every time you pay back money you owe on time, the people you owe money to report that, and eventually your score goes up. Every time you borrow money and you don’t pay it back, or don’t pay it back on time, your score goes down. It’s much easier to make your score go down than it is to go up. People with high scores are more likely to pay bills and pay them on time, so they tend to have an easier time borrowing money and getting low rates. People with low credit scores can have trouble getting loans, getting housing, getting good car insurance, some jobs even check them.
My best advice is to stop using a credit card. Stop borrowing money until you have a better understanding of what you are doing.
Step ONE: Track your spending. This allows you to find your money leaks, which are where you’re spending on things that don’t give value. Do this regularly. This will also show you what you spend on major categories, such as Housing, Transportation, Food, Entertainment, Insurance, etc. And finally, once you have done this for a few months, you have a good idea of what to set up as a budget in these areas. What all this does is allow you to understand your monthly cash flow. FYI, I follow up on my spending nearly every day, and check where I am against my spending plan. With online banking and banking apps, this doesn’t take much time.
Step TWO: Pay off credit cards, car loans, personal loans, and student loans. The interest on these loans really adds up fast, so the sooner you can wipe these out, the better for your pocketbook. You can use the [snowball method](https://www.ramseysolutions.com/debt/how-the-debt-snowball-method-works) or the [avalanche method](https://www.nerdwallet.com/article/finance/what-is-a-debt-avalanche).
Step THREE: Start saving regularly. First save for an Emergency Fund, which would be for a sudden car repair, or a sudden medical emergency for a pet, to name just two examples. Having this fund, even if it’s only $500 or so, will keep you from resorting to using credit cards to cover sudden shortfalls. Then save up for 3 to 6 months’ living expenses should you suddenly become unemployed. Finally, start long-term savings for retirement. The easiest way for me to save was to use automatic transfers from my checking account into various savings accounts. That way the money disappeared out of my checking account before I could spend it. If you have access to an employer-sponsored 401k, USE IT!
At this point, you have a handle on your monthly cash flow, have a budget (or a monthly spending plan), are making regular payments on your loans and are finally on track to pay them off, and have established emergency savings funds. Note that you can’t establish all these habits in a short period of time. They will take discipline and practice before they become second nature. It took me years to arrive at the best way to track my spending, pay off all my debts, and build up my savings to the point that there was enough to begin investing. Developing good personal finance management habits is the keystone to building personal wealth, IMO.
Now you can start thinking about where to direct your savings accounts.
Well, to start with some of the basic items you asked about:
“Credit” in this context is just how reliably we think you will pay back loans. If someone has a history of paying back loans and bills on time and as agreed, we say they have good credit. A credit score is a numerical approximation of this, mostly based on whether they’ve been paying back their loans and how long they’ve been doing so. Doing these things longer yields a higher credit score.
You can think of “interest” as a fee you pay for borrowing money, usually a percent of the money borrowed. If you borrow $1000 at 10% interest for a year, you’ll pay back $1100 ($1000 of money borrowed + $100 of interest) generally speaking. If pay it earlier, you owe less interest. You can figure out interest owed per month by dividing the interest rate by 12. In this case, for every month it’s not paid back, you’ll owe an extra $8.33.
Credit card cash back is some money you can back from your purchases stored with your account. Buying a $100 item with a 2% cash back credit card will add $2 to your rewards account. You can usually redeem this to lower the amount you owe on your credit card or just send the money to a bank account. Points are just another form of these rewards which can be redeemed in more ways.
Your paystub just breaks down how your employer determined the amount of money deposited into your bank account. You don’t have to do anything with it, it’s just for your information. Say you make $20/hr and worked 80 hours over the past 2 weeks. The paystub will show the calculation for your pay (20 * 80 = $1600), then detail all the adjustments, usually subtractions for the taxes you owe among other things. Then at the end, you might end up with like $1440 as a “net pay” amount if they subtracted 10% for taxes, which is what actually gets deposited into your account. Paystub will show how they got $1600 to start and how they ended up at $1440.
“High yield savings accounts” are just normal savings accounts with higher than typical interest rates. If you have money in a savings account, the bank pays you interest. So if you have $1000 in savings and the bank pays 5% interest, after a year assuming no other transactions, you’ll have about $1050 in this account. Banks typically pay this monthly though so each month you’ll just see about $4.17 deposited into your savings by the bank. I’d just pick an account that has a high rate (3-4% right now) and is convenient (has a good website design, mobile app, etc).
There are some good books to introduce you to it. I know… books. But there is a lot of complexity to doing it well. It’s unfortunate, honestly, because if it weren’t so complicated more people would be better shape financially.
mate, talk to ChatGPT and ask all your questions while telling it to explain it to you like you’re 12
This is a free textbook on Personal Finance, I’d help you a lot:
https://open.umn.edu/opentextbooks/textbooks/31
Rule #1: Spend less than you bring in …
Find a book written in the last 5 years that is something like “Personal finance for dummies” and read it cover to cover.
Then keep things simple! And really really really internalize what “interest” is. When you have money in a savings account, some one is paying YOU interest. When you borrow money, you are paying THEM interest. Never ever ever think of borrowing as “free money”
I’m really not trying to be mean here, but if you are so lost and overwhelmed…
1. They write finance books for kids. Look for those at your local library and where ever you like to get 2nd hand books. I expect these will be more ‘explain it like I’m five’, and have less expectation of base knowledge. There is nothing wrong with starting there if that works for you.
Note: It is completely normal when learning something new to come out having more questions than answers. It shows you absorbed at least some of the material and now are ready to dig a little deeper. That’s a good sign, not a bad one, no need for frustration or tears. Not everything can be learned in one simple lesson, nor can everything be written just for you so at the end you simply understand everything, no notes.
Just keep a notebook or something so you can capture the thoughts/questions. Leave a little space in between questions. When you get the answer, write that in after and put a check mark next to that question, so you know you are done with it. Then you will neither forget good questions, or the answers once you find them. Or rather, you can forget because you have them written down and don’t need to remember and keep it all in your head.
2. Pick one thing at a time until you get that. You are trying to drink from a fire hose, you need to dial it back, and keep this simple.
* Just focus on one concept at a time until you feel like you get it.
* Then move onto the next one.
It’ll help you not get muddled. Once you have gone through all the topics you listed… Hear me out here…. start again with the first topic. Study it again. You’ll get more the second time and pick up more tidbits I swear. Just keep doing this.
You seem very interested and driven to learn, so in time you’ll get there, but putting extra pressure of deadlines and terror on yourself is not helping you. Plans can change. Maybe you’ll move out in 1 year, maybe 2.
You have made mistakes, and you know what, you will again. Because you are human. It’s okay, just don’t give up and keep working on it at your pace and you’ll get there. Until then, I would work on making financial plans your self, and then running them past someone you trust like your parents, and then adjusting based on their advice, before you do things. Trying to do things yourself, but then running it past someone before you do it so you don’t make a big mistake is a good way to learn. There may also be free financial counselling in your area that you can visit and run things past others that may help as well.
Good luck internet stranger.
A lot of people on this Reddit and others are really into optimizing as much as they can. We really can’t help ourselves. We love learning about these things, and we’re excited to share what we’ve learned and debate about what the best approach is. Since you’re starting at the beginning, let’s keep it simple.
1. **Your credit score is a grade on how risky you are to lenders.** They look at the amount of debts you have, how much total you’ve borrowed, and whether you’ve paid back your debts on time. Your credit score goes up when you show that you’ve had loans and credit cards for a long period of time, and you always pay on-time. That’s the basic gist of it, no need to worry about the factors just yet.
2. **You don’t need to actually use the credit card to get a good credit score.** Having the card open and not missing payments is enough to build good credit. You need to use it once or twice a year just to keep it from being closed for inactivity. If you like, you can put one monthly bill on it, and then set it up to automatically pay your *statement balance* before the due date. The statement balance is how much you need to pay to avoid interest charges. Trying to maximize the amount of cashback you get or earn miles or points is more complicated than you need to be at the beginning of your journey.
3. **Interest charges are a fee you pay to borrow money.** Credit cards are a unique kind of debt that allow you to avoid paying interest as long as you pay the statement balance on time.
4. **You need an emergency fund.** You need to have cash or something you can easily turn into cash in case an emergency comes up. Otherwise, when an emergency happens (a hospital visit, flat tires, losing a job, etc.), you end up in debt trying to care of it. If you don’t have an emergency fund at all, start trying to save just $500 or $1000. Over time, you want to build your savings up to cover 3 months, 6 months, or 12 months of your living expenses.
5. **You need to save for your future.** Most of us plan to retire some day. If your job offers a retirement account like a 401k a 403b, you should use it. If your job offers to contribute to your account by *matching* the amount you contribute, you want to contribute enough to get every dollar they’re offering. If your job doesn’t have accounts like that, there are other ways you can invest for retirement, such as an IRA account. The reason to use these kinds of accounts is that you can invest the money so it grows over time, and you can save money on taxes.
A great “for dummies” place to start is with Ramit Sethi’s book [*I Will Teach You To Be Rich*](https://www.iwillteachyoutoberich.com/i-will-teach-you-to-be-rich-second-edition/)*.* This is how I first learned about personal finance. It’s a great starting point because he explains what you should be doing and what you shouldn’t be doing in a really approachable way. It’s done in a step-by-step way, so you can learn about this progressively instead of trying to do everything all at once. He has other books, a podcast, and a Netflix series as well, which are also worth checking out.
Start by asking ChatGPT this question and ask it for references.
Read the articles / books and ask it clarifying questions and for examples.
There are a lot of personal finance courses geared towards high school students that assume no prior knowledge, that might be a good place to start.
Honestly? Ask ChatGPT to teach you from the ground up. Folks here are smarter but it’s easier to iterate through questions and get more detail in a highly interactive environment. Like, start on a bank website and see all the stuff they offer, then ask GPT ‘how do credit cards work ‘ and then read the answer and ask questions about every detail. Then ask ‘how do bank accounts work’ and ‘how do loans work, ‘ ‘how do money market accounts work,’ ‘how do CDs work,’ etc. Then go to an investment site and look at all their offerings and do the same thing.
Look towards your local community college for adult education classes. It might cost a few hundred $ but it could be well worth your time and money. I have seen others have pointed you to some of the persistent information here, and I highly recommend you review that info. Keep the adult education in mind if you want to go further.
Hey, I am so glad you asked. I recommend the library for books for kids or teens on money.
The book that changed my life is How to Get What You Want with the Money You Already Have by Carole Keeffe. It’s great for someone new to money.
Since you feel overwhelmed, let’s back up and make your finances simpler for now.
It sounds like you have a job and income and bank, and I am going to assume that you either deposit your checks or have direct deposit so that your paycheck goes into your bank account. That is your income. That is money coming in.
Stop using the credit card. Send a payment and pay it off. I’m hoping that is possible to do quickly. Don’t use credit if you don’t understand it. That is why your credit score is low. You borrowed money by using your credit card and didn’t pay your payments on time. Credit is one of the biggest ways that people ruin their finances.
If you have extra money beyond your basic expenses (food, shelter, transportation), you can create an emergency fund. That is savings for an emergency. If some emergency happens this money is there to spend to fix it. Having an emergency fund builds a sense of security and helps you learn how to save money.
A high yield savings account (hysa) is a savings account where the bank pays you interest, extra money, based on how much you have in the account. High yield means that it’s a bigger percentage that gets added to your account. For example (a simple explanation), 3 percent annual interest means for every $100 in the account, you get $3 added to the account every year. $3 might not seem like much, but the more you save over time, the more gets added to your account. That snowballs over time so that it gets much bigger. (Imagine the day when your interest on savings is the same amount as what you earn in wages each year!).
I hope that this calms your mind and helps!
If you can afford it, pay off the credit card as early as possible. If you want to waste money, make small, late payments on big debts.
When you buy things using a credit card and fail to pay off the card every month, you are agreeing to pay extra for what you buy. This can make that coffee from the Micky D dollar menu cost $1.20 or even $2.00.
Those interest payments are the difference between retiring with a big pile of cash at 55 or working until you die.
perhaps there is a community college course you could take that would do all that. I would sure look into it. Nobody knows how to do things before they make their first mistake—2nd mistake –3rd mistake. google something like Basic Finance for Dummies……….whole bunch of Dummies books out there