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.
1.
