Updated: Apr 24, 2021
Are you wondering where to start your journey of better personal finances? Dive into these basics!
In school, you learn about a million different topics. Chemistry, Algebra, World History, and even Computer Science if you are interested. However, how often are we taught about the “real world” stuff like budgeting, saving, and other personal finance topics? Not often enough! We are not by any means stating other topics are not important, but we are advocating that real financial education be included!
Today we will look at some of these important financial topics to help you better prepare for your future.
"BUT MY PARENTS TAKE CARE OF EVERYTHING, SO WHY IS THIS IMPORTANT?"
Having your parents’ support is perhaps one of the best times of your life to learn about personal finance. You can learn about how to create a budget, how to save, how your credit score will impact your life while having the safety net of your parents providing for your necessities. You have the freedom of learning through trial and error while not having to worry about being out on the street if you make a mistake.
THE IMPORTANCE OF CREATING A BUDGET
Creating a budget will be a cornerstone of how handle your money going forward. Preparing a budget will highlight for you where your money is coming from and where it is (or should be going).
If you are earning money as a teen, great! Take time now to understand how much you are earning each month versus how much money you are bringing home. Your paycheck will likely be adjusted for taxes, so you will want to understand your income both before and after taxes.
If you have any other sources of income such as an allowance, include that as well.
What financial obligations do you have? Do you pay for your own cell phone bill? Clothes? Entertainment? Set up a category for each of these expenses as well as how much you anticipate spending on each item every month.
Think about saving portion of your income for future goals. Get in the habit of “paying yourself first”. Include your savings as one of your expenses each month. This helps you to create the habit of your savings as a financial obligation rather than “extra”. We will talk a little more about savings later.
The easiest budget to understand is a zero-based budget. This means that every dollar you earn is allocated to either expenses, savings, or debt. Every dollar is accounted for.
Try your new budget out. You are not expected to get it all right the first time. You will make adjustments as you go. Perhaps you start to earn more money, or your expenses turn out to be different from what you originally estimated. Creating a habit of tweaking your budget as you go will put you well ahead on the road of financial success.
THE IMPORTANCE OF SAVING
It is never too early to start saving. It is estimated that 41% of Americans would not be able to cover a $1,000 emergency. Having an emergency fund or other savings can help you to be prepared just in case disaster strikes.
The general rule of thumb is that you should have between 3-6 months of living expenses available if something were to happen (i.e., job loss, etc.). While this will not have as big an impact on your lifestyle if you are home with your parents, it is still not too early to create this awesome habit. Try to save 3-6 months of the expenses that you outlined in your budget as your “rainy day fund”. This money should be placed in a savings account where it is easily accessible, but hopefully never touched. Set it and forget it. As you grown older and your financial obligations change, you can add to your savings to take into account your new lifestyle.
Are there things that you are saving for or know you will have to pay for periodically? Consider setting up a sinking fund for each item. For example, if you are saving for a car, saving for college, and know you want to buy your family Christmas gifts each year, you could set up a separate “account” for each activity. As a part of your budget, you would allocate funds to each of your goals.
Rather than trying to come up with a large sum of money all at once, you will have paid yourself over time. This does a number of things.
One, it reduces the chance that you will go into debt for making large purchased (such as college or a car). This helps to avoid using credit as a means of purchasing things which will pay dividends as you get older.
Secondly, by using sinking funds, it will help you to determine what things are important to you from a financial perspective. You are less likely to spend frivolously if you know you may not meet your savings goals by grabbing a pizza for the third time this week rather than saving for your goal.
THE IMPORTANCE OF CREDIT
I am sure that you have seen a million commercials for the latest credit card, home loan, or other debt instruments. While you will not be able to utilize these until you are an adult, it is important to learn about them now.
Used wisely credit can be a great way to help you finance big purchases in your life such as a home. Getting a mortgage, however, will require having a solid credit score. That means using credit cards and other debt (including student loans responsibly).
Think of your credit report and credit score as a sort of report card that lets you know how you are doing financially when it comes to being a viable candidate for loans and other financing.
If you choose to get a credit card, only use the amount of credit that you can pay back each month. Getting into credit card debt is one of the leading factors in poor financial health and debt trouble for adults.
If you go to college, look carefully at your student loan obligations. These will eventually have to be repaid. Keep this in mind when you and your parents are considering college financing options.
THE IMPORTANCE OF INVESTING
Investing may not even be on your radar of ways to save your money but investing while you are young is the ideal time to start. Time is on your side.
Compound investing is the idea that you earn money on not only the amount you invest (the principal), but also on your accumulated earnings (whether that be dividends, capital gains, interest, etc.).
For example, if you started out with $1,000 and earned 10% a year, at the end of a year you would have $1,100. In the second year, not only are you earning 10% on the $1,000 you initially invested, but you also earn on the $100 of earnings from year one. At the end of the second year, you would have $1,210. The earlier you start, the bigger potential nest egg you can create.
Consider the example of someone who started investing at age 21. They invested $200 per month for nine years and then stopped making contributions. By the time they turned 67 (the typical retirement age), they had over $2.5 million, assuming an 11% rate of return per year.
Now consider if this same person waited until they were 30 to start investing. This person could save $200 a month until they reached the age of 67 and would still have less money ($1.48 million) than the person who had the earlier start, assuming the same 11% rate of return.
Compounding interest makes a huge difference!
Getting an early start in creating good financial habits now, can pay off for decades to come.
If you have any questions about getting a good financial start or you would like to learn more about our services, please feel free to contact us for more information.
"I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed." - Michael Jordan
Start making the better financial decisions today. Do not be afraid to fail. Failure is the ultimate teacher, and your ability to continue trying is the best indicator of your future success.
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