Understanding Your Cash Flow Is Key: “It's really important to understand your cash flow, which is a very simple formula of how much money is coming in versus how much money is going out,” Erin explained. If the result is a negative number, Erin advised that you need to cut expenses, increase earnings, or both. If it’s a positive number, you have extra money to put towards a savings goal, paying off debt, or just some flexibility for everyday life. “My advice would be to play around with different budgeting styles and see what actually works for you.”
Start Building Your Credit Now: If you’re in college and want to start building your credit, Erin suggests making payments on your student loans (if you can afford to do so). Alternatively, you can also look into opening a credit card–if you have a good financial relationship with your parents, you can become an authorized user on their credit card. Or, you can get a secured card on your own. “A secured card is basically a credit card with training wheels,” Erin explained. You put down a refundable deposit when you get the card, and that amount of money acts as your line of credit. Erin recommends making one to two very small purchases each month on that card (pro tip–make it the payment method for your favorite streaming service), and make sure you pay it off on time and in full.
Pay Attention to the Most Important Factors When Building Your Credit: Two factors are really important when building your credit: on-time payment and credit utilization: on-time payment and credit utilization. “When it comes to a FICO score, those two things make up 65% of your total score out of five factors,” Erin said. “Those are the heavy hitters that you want to be paying attention to.”
On-time payment history is whether or not you paid your bills on time, but credit utilization is more nuanced. “Credit utilization is just a fancy way of saying how much of your available credit are you using,” Erin said. “If you have a $1,000 line of credit and you spend $300, you’re 30% utilized. It might sound strange, but they want to see that you’re not using all of your available credit. In fact, they want to see that you’re using 30% or less, and if you stay in the single digits all the better.”
When You’re Building Credit, Give Yourself Time: If you’re new to the world of credit, Erin explained you’ll see significant growth in your credit score in about six months. If you’re rebuilding your credit, it could take six months to a year. The ultimate goal is a credit score of 700 or above. “That unlocks a lot of options for you,” Erin said. “None of us want to borrow money, but if you do have to you want to have access to the best option, so I think of a credit score as an insurance policy on your financial life. If you have a strong healthy credit score, then you have access to the best deals (including the lowest interest rate for loans, so it will save you money in the long run if you do have to borrow.”
Create a Fun or Friend Fund: “Sometimes we get so fixated on doing the right thing financially that we fail to invest in other things like our friendships,” Erin said. “No matter how modest, set aside some money out of every paycheck into a fun fund or a friend fund or just to have moments of pleasure.” With that, Erin also advises to figure out budget-friendly and frugal plans so you can maintain friendships no matter your financial situation.
Find Ways to Increase Your Earning Power: Budgeting can feel limiting at times, but it's not just about cutting your spending. Erin recommended finding ways to earn more money to boost your budget as well. “Is there a way to monetize a skill or create a side hustle?" Erin asked. "Or instead of doing either of those things, you can negotiate to earn more money.” Once you’re thinking about how to maximize your earning potential, the options are limitless.
Learn more about Erin Lowry and the Broke Millennial book series here.
Illustration by Hannah Kellner