I want to keep this really simple. Currently there are a lot of people talking about personal finance and the fact that they need to know about 401ks and investing. Bottom line is that over 80% of students don’t have any money to invest, simply because they are not either earning enough, have enough disposable income, have a part time job or because college is so expensive. There simply isn’t any money to spare.
The earlier people start learning about money habits, the better they will be off in the future. That is what people are saying and it is both logical and a fact. We quite often hear people in the personal finance space saying that if you put X into your bank account, by year 20, you will have Y. In reality, and in my case, I couldn’t even consider saving or investing until I had finished University and found a full time job. Until then, I was living through the school term on the money that I had saved working various jobs during the holiday season. Luckily my parents subsidized my rent, but the rest was on me.
Going back to money skills. During my student life, I had learned to save during the holidays and budget during school time. With this in mind, my observations on current student life, I have listed what I believe are essential skills required for all students and adults moving forward.
- 1. You should always know how much money you have available to spend. i.e. what is in your checking account without going into debt. This way when you are about to spend money, you know roughly whether you can afford it or not. If you cannot afford it, you need to ask yourself; do you really need it or is it simply a want? Is there a cheaper alternative to what you are wanting to buy? If you don’t buy it today, will you be able to survive? Can you wait until your next pay day or when you next are able to afford it?
- 2. Rounding up – this is a simple calculation when you are in the store. If you round up your purchases to the nearest dollar, you will have a rough idea of how much the basket of goods will cost you. If you go into the store, knowing that you can only spend $20 and mentally roundup and add up all your choices as you are going, then there is little chance of overspending and keeping within your budget.
- 3. Calculating Sales tax is one of those unavoidable transactions that need to be made. I always work out the approximate sales tax as I am going along. If I see something in the store, for example a pair of board shorts that I like. I will always look at the price and then work out the sales tax on top. This will be the total amount that I would pay and therefore I decide if it is worth it to me. For example, If the board shorts are $29.99. Sales tax in California is 8%. I immediately round up to $30 and then work out that for every one dollar, it is going to cost me 8 cents extra in tax. With this in mind I then multiply 30 by 8 and I get 240. This 240 cents is $2.40. The total for my board shorts is going to cost me $32.40. For me, I now need to think if the shorts are worth $32.40. It is only $2.40 extra, but the price is over $30 which is my sweet spot for spending.
- 4. Estimating is a great way of keeping within your budget. When I do my weekly grocery shop, I roughly know how much things are, what I need and how much it is going to cost me. I do have the luxury of paying with cash and in the worst case scenario, I have a credit card that affords me the ability to pay the extra amount that I have not budgeted for. I did this once and now pay careful attention to what I am buying and the fixed amount that I have to spend. If you go to a restaurant, you should be doing a mental exercise in how much your meal is going to cost. If you have an appetizer a desert and a drink. What is it going to cost you? Do you have enough money? If you go to the mall or a game. How much is parking? How much is the ticket? How much is food. Do you have enough? By thinking about these costs as a rough estimate, you will be able to quickly add up what your potential spending will look like and act accordingly. This might mean that you may eat before you go to the game as you would have spent $10 to park your car, which you could have spent on food and drink. If you still spend on food and drink and pay for your parking, it means that you have spent an extra $10. You could have saved that $10 or put it towards something else.
- 5. Needs and Wants is a big one. Probably the biggest issue that anyone faces is when it comes to spending. When you are next in the shop and you see something you like. Ask yourself why are you buying it? Is this something I need to enhance my life. How much usage will I get out of it? If I don’t buy it, can I survive? You need water to survive, but a fruit juice tastes so much better. You want a fruit juice but in reality you only need water to survive.
- 6. Opportunity Cost is the cost of giving up one thing for the next best alternative. So if we look back at the needs and wants scenario. You are at a restaurant and you are thirsty and want a drink with your food. The fruit drink will quench your thirst and costs $3. Water is also available, it will quench your thirst and it is free. You have just quenched your thirst and saved $3. Opportunity cost can apply to nearly every situation in the market place.
- 7. The money you have available is not your budget. When you get any money, whether it be from your part time job, birthday money etc. Always try to put some of it away. Some people say 10%, others 20% – but start with whatever ever you feel comfortable with. I started to do this when I got a full time job. In the first month I did it, I felt the pinch as I realized that I had $100 less to spend. By the second month, I had gotten used to not seeing the extra $100 in my account (I had set up a standing order where $100 would be immediately taken from my checking account on payday and deposited in a savings account). The $100 saved each month would soon add up. This became my emergency fund for unseen bills such as the dentist etc. There was something comforting about knowing that you have a cushion in the case of an emergency. My savings balance grew each month, which gave me a feeling of satisfaction and a competitive goal of trying to save more. If you have this mindset, your discipline for spending and making the right financial decision will follow.
Once you get into the habit of saving, there are a number of options available to you in order to make your money work for you. By that I mean getting a return on the money that you have saved. This is when 401, IRA and other jargon mentioned will become relevant. Until then, concentrate on getting your mindset, discipline and financial decisions working for you. All the best.