Personal Finance 101

SAM SAWALE, WESTERN REGION VICE PRESIDENT

I'll be honest... money management is s a skill that took me a long time to acquire. I used to be the type of person that would get lunch money from my parents and spend it all on Gushers from the cafeteria. Creating a personal budget and understanding how to keep yourself in a good financial position is a critical skill that will only continue to become more and more useful as you go about your life.

1. Observe

The first step to creating a budget is to observe your spending habits. A good way to do this is to keep track of all the money you receive and spend throughout the week. Keep in mind that it is never too early to develop a budget. Regardless of whether the only income you have comes from quarters you find in the nooks of a sofa, or you have a part-time or full-time job, budgeting is necessary to maximize the efficiency and the safety of the way you spend your money. Every day for a week, keep track of how much money comes in and goes out of your “personal account” (this could be your bank account, money in your wallet or purse, etc.). You can keep track of this using a simple sheet of paper or an excel spreadsheet if you have access to a computer.

2. Analyze

After completing a week’s worth of observations, sit down and analyze your spending habits. Start asking questions like: “Where did I spend the most money this week?” and, “If I subtracted this from my total spending, how much money would I have leftover?” Notice if you end up saving any money at the end of the week. This could be useful for activities next week, or good to have in case of a future emergency.

3. Budget

Developing a budget is understanding your spending habits and then coming up with a comprehensive plan to distribute what you spend where. Budgeting looks different from person to person, so doing research online about how to breakdown your spending is useful. Typically, a good budget to follow is the 50/30/20 rule where you spend 50% of your total income in a set period on things that you need, i.e., housing, food, toiletries; 30% on things that you want i.e., going to the movies, going out to dinner with friends; and 20% is saved for future use.

Making the conscious decision to save money can be difficult, especially when there are so many distractions that get in the way (or in my case, the seemingly unlimited supply of Gushers from the school cafeteria). A good way to save steadily is to set a goal. This helps build saving skills in the long run.

Pick something relatively expensive that you can’t afford right now and set aside a little money each week. An example of this could be a new Xbox, camera, laptop, car, etc.

4. Use Credit

Another important step to being good at personal finance is understanding how to use credit and debit cards. With the increasing presence of digital technology within the financial world, these tools are an effective way to access your money in a safe and easy manner. The function of debit cards is pretty standard throughout. You put your money in a bank and then have access to it through your card. Credit cards, on the other hand, can be tricky to navigate. The basic idea of a credit card is that you spend money through a bank that provides you a credit limit. Every period, you will be required to pay the bank back what you used. Credit cards are effective because they allow you to have potential access to more capital, and often, different cards will have different benefits associated with it. If you pay back your incurred bill on time and in full (taking on no interest), your credit score will go up. A credit score is what allows banks to assess your health for potential loans and mortgages. The higher your credit score, the less money you will have to pay in interest later down the line.

Normally, people who want to start building credit start with a secured credit card. However, there are also potential ways to cosign with a parent/guardian card. Credit cards come with diverse different benefits and risks, so I suggest doing a lot of research and talking to a trusted adult for more information.

5. Invest

The final part of mastering personal finance is learning how to invest. The world of investing entails many different things, and it can be very simple to make a bad investment and lose a significant amount of money. Understanding how the stock market works is a solid benchmark for the foundations of investing. In simple terms, the stock market is trade. It can be between two people, two institutions, two governments or really any mixed-and-matched version. You can invest in multiple things at one time, and if someone, whether it be a bank or another trader, agrees with your trade, you can gain or lose money.

Additionally, you are able to trade financial derivatives, which are contracts based on an underlying stock. These are often good ways to make fast money but can be increasingly risky. As with any other aspect of personal finance, you should do research and consult with people that you trust.

I wish you all the best financial success and prosperity in the future… just be careful of Gushers!