It's All About the Money, Money, Money

Photo by 401k via Flickr

The best thing about my job is getting paid. I enjoy my work and I like my colleagues but at the end of the day I'm in it for the money, not the job satisfaction. Getting paid after years of pocket money and student loans is an amazing feeling- for the first time you are truly financially independent, your money is under your sole control.

The downside to all this is that you are financially independent and in sole control of your money. All those bits of paper you used to pass over to your dad? Your's now. All the cash sympathetic relatives would send your way? Gone now- people assume you have plenty of money.

So what to do with your money once you've got it? Obviously for many people a reasonable (or unreasonable depending on your job and point of view) chunk of it goes on rent, transport to and from work and basic necessities (by which I mean food- not beer or shoes!)

Whatever is left over is yours to do as what you want with- save it, spend it, roll around in it, just remember it's got to last you a month. This week we're looking at what to do with your cash and the pitfalls to avoid falling into. 

So, save or spend? Despite the carefree, reckless life young twenty-somethings are purported to lead, not all of us take an ostrich- like head in the sand approach to the future. However, interest rates are at an all time low which can make it difficult to know whether a savings account is worth having. Generally speaking you are always better off with the bulk of your money out of your current account and many banks provide e-savings accounts that allow you to instantly move money back to your current account so you can always access it if you need it.

The main alternative to using a savings account is to put your money into an ISA. This is a longer term option and better for larger sums as it meas you don't pay tax on it. However, your money is less accessible because you can only keep contributing to an ISA up to £5000 and if you withdraw money before you reach this limit, you cannot continue adding money beyond the value you had before withdrawal. This means that before you put money in an ISA you should consider the likelihood that you're going to want it back in the near future.

One option that I adopted is to run both: once I've 'banked' a certain amount in my e-savings, I transfer half to my ISA. That way I have money available but not sitting around unnecessarily accruing tax.

If you decide not to save, you need to make sure you are happy and secure in your current position. Savings are a buffer for when you are in-between jobs so you need to be sure that won't be a situation you find yourself in. When spending, also keep in mind that you need to budget for four weeks: I plan my shopping trips so that I indulge myself as soon as I get paid and then keep my money for socialising and necessities. Then at the end of the month I know I can safely spend whatever is left over without going overdrawn.

Off the back of this is the issue of credit cards: contrary to media scandal-mongering, they can actually be a good idea- within certain limits. For young earners, especially those living at home, a credit card is the easiest way to develop a good credit score- something that is essential further on in life for securing mortgages and loans. Making online purchases and booking flights on your credit card means that your goods and tickets are insured so that if your order doesn't arrive or your flight is cancelled you can get your money back. Credit cards can also be useful if you need to make a large purchase that you can't afford until next payday as you don't have to pay it off immediately. 

However, you DO need to be careful: if you don't pay it off on time your credit rating can go down just as easily as up and worst case scenario you could end up getting phone calls from the bailiffs (this happened to me once when my paypal was hacked and it was really scary). To avoid getting into too much trouble I advise you to set your own credit limit: the bank will offer you far more than you actually need, so choose a limit that will allow you to make the purchases you need but that your paycheck or savings could conceivably cover in a worst case scenario.

At the end of the day, enjoying your money while you're young is the most important thing but don't overdo it: its worth buying sensibly and planning in advance for big or extravagant purchases. You might like spending but you WON'T like debt.