So you just graduated. You’re stoically ignoring your student debt and looking forward to your first pay day. Great! Before you go on a big spend up please know that what you do with your money matters more now than at any other time in your life. There are a few things that it’s worth you knowing.
Have a plan!
Firstly, plan your budget from your first payday. Financial wellbeing starts with being able to manage within the means available to you. There are a number of free apps that will help you set out a budget and understand where you spend your money each month. It’s illuminating – “coffee… how much?!” Try ontrees or moneydashboard.
Plan to save
If you can possibly manage it, save a little – even a fiver a month can build up and make you feel more financially secure than having nothing. Saving is not something you do when you grow up, it’s something you need to do if you want to go on holiday, or put a deposit down for a flat, or buy a scooter or any other modest purchase that you can’t afford within your monthly pay. Your spending will naturally expand into the budget you give yourself. If you have no budget at all it’s scarily easy to perpetually live in your overdraft.
Be a savvy borrower
What if you can’t save and you have an unexpected cost? And let’s be honest there are a great many unexpected costs when you’re starting work. If you don’t have a financial buffer of some description you may have to borrow money. Here’s where you need to be really smart.
Unfortunately you belong to one of the most indebted generations to date. You also have readier access to instant borrowing than any generation before you, right there - in your hand – thanks to your mobile phone. There are a couple of other factors that you might not know about that make it even more important to have a plan and make good choices.
Firstly ever since you started using a bank, your data has been available by default to the credit bureaus and used by lenders to profile you and decide whether or not to lend you money and how much they will charge you for the pleasure. So what? Well that can be good information, or bad information about you, and can drive higher borrowing costs in the future for things like mortgages or car loans, and influence whether you are able to get a credit card or not.
Here’s something else that slightly lacks intuition – if there is no information about you in the credit bureaus, lenders will assume the worst. What’s the worst? That you might not pay their money back. Will they still lend to you? Possibly but they will add risk pricing which means they will charge you more for your borrowing than they would if they could see information showing you likely to clear your debt. That pricing is the interest rate you are offered for your money.
So actually getting a credit card or some other form of short term borrowing is good as long as you pay back pretty much every month. That’s good information on your file. Having a credit card and rolling a balance every month or only paying the minimum possible, that’s bad information – it shows you can’t manage your money.
Final point - don’t ever take a payday loan. Definitely don’t do it if you have other forms of borrowing available to you no matter how easy it is. Once you have taken a payday loan, that information will be on your credit file and many other lenders just won’t lend you money. Taking a payday loan is like putting a big sign on your file saying you can’t manage your money and you’re not a good risk. Other sources of money might take longer to arrange, but they won’t damage your credit file as much as taking a payday loan.
So what? Good information, bad information, no information – what’s the impact? Here’s some maths for you. Say you want to borrow £1,000 for a year. At 9.9% your money will cost you £52.08. At 29.9% it will cost you £148.97. The same loan at 69.9% will cost you £317.20! I’m not even going to do the maths for a payday lender at 1000% +, it just makes me feel ill. Let me remind you that saving £1,000 costs you nothing at all and might even earn you a small amount of interest.
This example is for a small amount of money over a short amount of time - as the amount you borrow goes up, and the time you borrow for extends, so the costs extrapolate. The difference between a low and a high interest rate can be the difference in being able to afford to do the fun things in life or not. It’s totally worth making good choices.
If your money management gets out of control, don’t panic and do ask for help. Ask for free help. There are a number of places out there who will charge you money to sort out your debt but please know that you don’t have to pay. StepChange will help you for free, as will Citizens Advice.
Stay in control
So keep an eye on things. Our sister company ClearScore provides a free app that allows you to see your credit score and provides you with advice and guidance on how to improve the information on your credit file. Sign up now, get your friends to do it.
Your employer may also have some financial wellbeing support as part of their benefits package to help you make your money go further, borrow affordably, or save through your salary.
It’s your money, and it really matters what you do with it.