WHAT'S REALLY IMPORTANT
We live in a consumption-oriented society where billions of advertising dollars are spent every year to persuade you to spend more than you have and to purchase what you do not need. Celebrities are enlisted in marketing campaigns to promote the newest cosmetics, perfumes and designer clothes on the basis that you are not cool unless you also have or use these ridiculously expensive products. Even when you are still a student with no income, banks are pushing their credit cards at you in an attempt to make it easy for you to get in debt.
Here is the reality — keeping financially fit is next in importance to looking after your health. To maintain a sense of control over your life and minimize stress, you have to start managing your financial affairs in a prudent, heads-up manner as a student and when you receive your first paycheck. To do so, follow these principles:
- Prepare a monthly and annual budget showing your expected annual income from all sources and a list of your estimated expenses and spending on a line by line basis. Group these expenses into categories, such as home maintenance (or rent), utilities, phone/cable charges, transportation, recreation/entertainment, groceries, eating out, cosmetics/drugstore items and clothing. Some of your expenses will occur throughout the year and some will happen on an irregular basis, such as education fees, insurance and holidays. Calculate the total of your monthly expenses, including one-twelfth of the total of your irregular expenses. The purpose of doing this is to ensure that your total monthly expenses do not exceed your monthly income. Keep your budget simple and realistic. Do not forget to include interest charges and income taxes.
- At the end of each month, add up all your expenses and compare them to your budgeted expenses for the month. This requires keeping records and receipts for all your expenditures, including those where you paid cash. Keep these records and bills in separate envelopes for each category of expense. Tracking your actual spending against your monthly budgeted expenses will tell you where you need to make changes in order to live within your budget.
- Delay getting a credit card for as long as you can. Make sure that you can always pay off the full balance owing on your credit card at the end of each month in order to avoid paying an exorbitant amount of interest. The credit card companies charge interest of 18% or higher on any outstanding balances. This represents the most expensive kind of debt you can carry, so do not do it. Avoid getting a second credit card to enable you to spend more.
- While it may be necessary for you to go into debt to finance your post-secondary education, be resourceful in checking out the best possible bursaries and scholarships available from governments and your school or college to minimize the amount of student loans you require to complete your education. Prior to taking out any student loans, make sure you understand the total amount you are going to have to repay, how the interest charges are going to be added to your loans, and when you are going to have to start making monthly repayments. The sooner you begin saving for your education, the easier it will be for you to finance it. You may also have to delay moving away from home.
- Pay all bills on time and check your monthly credit card, bank, utility and phone statements when you receive them for any errors or wrong charges. Do not just assume they will be correct. Save the receipts for all credit card transactions and keep a record of all deposits and withdrawals from your bank account.
- Be a thrifty shopper. Look for special deals and discounts. Buy no-name brands of household and grocery items. Shop at wholesale clubs such as Costco, Sam’s Club and BJ’s. Use eBay to find big savings on expensive items. Wear vintage clothing.
- Avoid being foolish in spending your discretionary income. Do you really need a BMW or will a Ford work just as well for you? Is it truly necessary to purchase a designer purse or can you easily make do with a designer knock-off purse? You should not have to buy things to make yourself happy. Do not let your sense of self-worth and personal image become dependent on having expensive brand-name products, designer clothes and other big-ticket items. What you have, wear or drive is much less important than who you really are as a person.
- Look for easy ways to reduce your expenses. Have people over to your place in the evening as opposed to going to a club or bar. Avoid racking up large cellphone bills, especially through texting and Twitter. Sign up for the best possible plan for how you use your cellphone. Cut back on the number of times you purchase take-out food or go to Starbucks. Use the public transit system and take taxis as opposed to purchasing or leasing a vehicle unless your job requires you to do so. The total direct and indirect costs of having your own car are getting more and more expensive. Do something radical — quit smoking. You will be surprised at how fast a handful of small daily savings adds up to a large monthly amount.
- Be extremely careful about going into debt. Do not sign any type of borrowing contract or loan agreement without reading it carefully and asking questions about any of the terms and conditions that you do not fully understand. Make sure you stay current on paying the interest and meeting the repayment schedule. This will protect your credit rating so you will be eligible for lower interest rates on any future mortgages or car loans. Remember that you are making those interest payments with after-tax dollars unless you are an American paying interest on your mortgage.
- Commence your own savings program on your first day of employment. Put a set percentage of each paycheck, ideally 10% but a minimum of 5%, into a savings or mutual fund account. Let the compounding of interest and dividends work for you. This will require making sacrifices and trade-offs today to put you in a financial position to afford the big things you want to do in the future. The longer you procrastinate in doing so, the less money you will have at those critical times when you really need it — to put the down payment on a condo or house, to serve as a bridge when you want to change jobs or are fired, to start your own business, to pay for a serious illness, and ultimately to facilitate your retirement.
It is impossible to exaggerate the importance of preparing a monthly budget for the year, recording all of your weekly and monthly expenditures, and comparing your actual monthly expenditures against the budgeted monthly amounts right down to the nearest dollar. If you do not do this, you are flying financially blind and being irresponsible with your future financial well-being.
Discuss any big-ticket purchases beforehand with your spouse or partner. The same applies to taking on any debts. If both of you are earning an income, work out a fair sharing arrangement on rent, household expenses and any other monthly bills.
Educate yourself about the many options for investing your savings to achieve hopefully a higher return than what you will receive from a savings account. The best results from investing require patience, a long-term approach and a willingness to assume some risks. If your investments earn a 10% annual return, your money will double every 7.2 years. Find out if your employer offers some type of matching stock purchase plan.
To minimize the risks of anyone accessing your bank account or using your credit cards, practise prudent security measures when you go online. Be especially careful never to give out your birth date, Social Security number, passwords, PIN numbers or any bank account information online, regardless of how authentic the request appears to be. Legitimate financial institutions and payment services, such as PayPal, will never contact you online asking for this type of information.
For online payments, use two separate e-mails to send your credit card number and expiry date, splitting each of these in half in each message. Also, avoid conducting any financial transactions online when you are using a Wi-Fi network in any public place, including airports, coffee bars and hotels. Finally, ignore e-mails asking for your personal and financial information in connection with any offers of money, “Security Compromises” or threats of legal action.
For further information on keeping financially fit, I recommend the revised 2008 edition of Joe Dominguez and Vicki Robin’s book, Your Money or Your Life: 9 Steps to Transforming Your Relationship With Money and Achieving Financial Independence,
and Lesley Scorgie’s book, Rich by Thirty: A Young Adult’s Guide to Financial Success
. Also see Avoiding Identity Theft, Personal Fraud and Other Scams
on the Other Stuff To Know
section of our Web site at www.COTWguides.com.