It will seem like you are spending more and more on less and less, until you are broke because you spent everything on nothing.
TIM P., AGE 22
Admit it. Until now, money hasn’t been that much of a problem for you. Sure, there were times when you were running short. Maybe you couldn’t go to the movie with your friends or you had to skimp on prom night (but the candle and floral arrangement on the table at McDonald’s made it seem just like a fancy restaurant). Besides, if things got really tight, you could always play on your parents’ sympathy. Maybe the conversation went something like this:
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YOU: |
Mom, Dad, could I have a few bucks? Some friends and me want to go— |
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THEM: |
That’s “Some friends and I.” |
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YOU: |
Yeah, whatever. Some friends and I want to go out to eat after the game. |
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THEM: |
Why don’t you spend your own cash for that? We aren’t made of money, you know. It doesn’t grow on trees. If all of your friends jumped off a cliff, would you?… Oh, wait, we got mixed up; we’ll use that one for something else. |
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YOU: |
(Whining.) I never have enough money for anything. |
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THEM: |
(Sarcastically.) We feel sooo sorry for you. You are sooo underprivileged. |
When you’re on your own, the whole money thing changes. It gets worse. Money is harder to find and harder to keep. Everything costs more—because you’re paying for it. But don’t worry. With a little planning, diligence and self-deprivation on your part, and with a few practical and helpful tips on our part, you’ll be able to afford everything you need. And occasionally, just occasionally, you’ll even be able to afford a few nonessential luxuries (like getting your dinner supersized for an extra 39 cents).
It has been estimated that middle-income families spend between $150,000 and $200,000 to raise a child from birth to age 17.
When it comes to managing your money, all you need to know and remember are four simple directions: in, out, up, down. Here’s how those four simple directions relate to managing your finances when you are living on your own:
When your outgo exceeds your income, then your upkeep will be your downfall.
We can even make it simpler than that: Don’t spend more than you make.
If you spend more than you make, you’ll be getting deeper in debt each day. Suppose that each day you spend just $3.45 (the cost of a #3 combo meal without the supersize) more than you earn. That adds up to a little more than $100 a month. By the end of one year, you’ll be in the hole $1,259. Now, that’s a whopper of a debt for a hamburger.
Without a budget, you’ll have a difficult time determining whether the cost of your lifestyle is exceeding your income. Until now, you probably didn’t need a budget. Most of your expenses were subsidized under the parental provision plan. Once you are on your own, however, your parents pay for less and less. (Read that last sentence to mean: “Once you are on your own, however, you pay for more and more.”)
A budget is a simple way of figuring out what you can afford. It let’s you know how much of your revenue is committed to the essentials that you have to pay for, and anything left over can be allocated for other things at your discretion. Budgeting is a simple process that begins with listing your income and your expenses.
Column A: Your Income
Make a list of your monthly income. This may not take very long. If you have odd jobs that don’t pay regularly, then do your best to estimate the monthly average. Be realistic. Sure, Aunt Isabel used to send you $20 on your birthday every year, but do you really expect that to continue after high school? (And by the way, you must be really desperate if you are counting that $20, because it only counts for $1.66 of monthly income when spread out over the whole year.)
Column B: Your Expenses
We bet this list will be a lot longer. What do you have to pay for? Write the amount down for your monthly expenses. Some will always be the same (such as car payments), so that will be easy. Others vary each month, depending upon your mood, your appetite and your car’s mileage. So for expenses such as food, clothes and gasoline, you may want to talk to someone who has been independent for a while to help you make a reasonable estimate. You might have to adjust your estimates after a few months (after you have some real-life experience with the bills).
Don’t forget about expenses that don’t get paid every month (such as car insurance). For these bills, you might only make two payments a year. Break these expenses down on a monthly basis. Maybe you pay college tuition at the beginning of each semester, but what is that amount per month? And don’t just be thinking about you, you, you. What about planning for the charitable contributions that you will (or should) be making.
Be honest with yourself. If all of the employees at Starbucks know you as the “double, tall, vanilla latte with skim milk, heated to 175 degrees” customer, then estimate a lot more than just $15 a month for your food-and-snacks budget.
The Moment of Truth: Subtract the Total of Column B from the Total of Column A
If all goes well, the total on Column A will be more than the total on Column B. If it is, then congratulations.
1. You have extra spending money each month. Disburse the excess among the expense categories on Column B to give you a little extra “fudge” factor (figuratively or literally, depending upon your cravings). Or put a new entry on Column B for something like “Getting Wild and Crazy,” and then each month you can decide how to spend that extra $4.17. But before you actually spend any of that excess, read number 2.
2. You are the first person in history who is unintentionally living within your means. You must have made a mistake. Go back and check your figures. Did you include all of your expenses? (Your friends and family may not be too happy when they get no Christmas gifts from you. It will sound pretty lame for you to blame “budgetary design miscalculations.”)
It is more likely that your expenses (Column B) will exceed your income (Column A). Join the club. Now you’ve got to get financially creative in order to make the amounts equal each other. You have two choices:
1. Make more income. Wow, there is something you never thought of before. Don’t spend too much time here. If there were something you could easily do to make more money, you’d probably already be doing it.
2. Cut back on some of your expenses. This is painful, but it is probably the only option for you. Maybe the first thing to go will be the $90 monthly expense for the daily double, tall, vanilla latte with skim milk, heated to 175 degrees.
Using a Budget Is Different from Having a Budget
Lots of people have a budget. Few people use one. After you create your budget, then you have to live within its parameters. Sometimes that’s fun, and sometimes it’s not. If you have allocated $40 a month for clothes and you only spend $30 in October, then you’ve got $50 to spend in November. On the other hand, if you have budgeted only a measly $25 a month for car repairs, then a new radiator cap could throw your budget out of whack.
If you are over in one account, you’ll have to stay under in another. So don’t be so quick to spend that extra $10 of clothes money from October. You won’t look good wearing a radiator cap, but it will work better then stuffing a sweater vest in the radiator hole.
The supermarket isn’t the only place where the question “Paper or plastic?” applies. It is a key consideration once you are in charge of handling your own finances. Should you use paper (cash, checks or a debit card) or plastic (credit cards)? Each system has its own advantages and drawbacks, but we think a checking account is the best choice if you are using a budget (notice we said using a budget).
Cash
If you are spending cash, it is hard to keep track of where it goes. To stay on a budget, at the beginning of each month you could put the cash for each expense item into separate envelopes. For example, if you’re planning on spending $50 each month for gas, you put $50 in the envelope for gas and keep it in the glove compartment of your car. When you use up the money in the envelope, you stop buying gas for the month. (Just hope you aren’t on the interstate 200 miles from home when your gas tank and your gas envelope simultaneously go empty.)
Credit Cards
Credit cards have the convenience of giving you buying power without your having to carry a wad of cash in your pocket. They also have the advantage of giving you a written record (the receipt and your monthly statement) for where your money went. This makes budgeting much easier and more accurate.
The disadvantage of credit cards is their illusion that you have more money than your budget may allow. When store clerks accept your credit card, they will never ask, “Are you sure this expenditure is within the parameters of your budgetary constraints?” You’ve got to keep track of your expenditures during the month so that you won’t be surprised (and your budget won’t be obliterated) when the bill comes the next month.
Credit card companies love college students. Not “love” as in a “have affection for” kind of way, but “love” as in a “make a lot of money off of” kind of way. Most college students, not having read this book, don’t have the discipline to control their spending. The credit card companies can be pretty sure that college students will run their card balance to the credit limit and then get stuck paying double-digit interest (and late payment penalty fees) for years to come.
So be prepared for mass mailings of credit card offers. You’ll get them all: the general ones (Visa, MasterCard, Discover Card) and the specialty ones (gasoline companies, department stores, electronic retailers).
We suggest that you pick one with a low limit—for emergencies only—and pay it off each month without fail. Now here’s the really important part: Throw all of the other solicitations away. After you start your own company, then you can have two: one for personal use and another for business. But for now, one is enough.
Don’t borrow money from anyone who is anxious to loan it to you.
Checking Account
Once you are on your own, a checking account is a necessity. It is the safest way to hold your money (in the bank instead of your wallet), and it gives you an immediate record of what you spend your money on (assuming that you make a notation in the checkbook ledger every time you write a check). Of course, the total in your ledger won’t be reliable unless you follow a few rules:
• Write it down right away. Take the extra 17 seconds to write the check number, payee, description and amount in the ledger when you write the check. You won’t remember this information later in the evening after you eat dinner and fall asleep watching the syndicated rerun of Friends.
• Reconcile your checkbook ledger each month. This just means checking your ledger total against the total on your monthly bank statement or online report. DO NOT JUST CHANGE THE TOTAL IN YOUR CHECKBOOK LEDGER TO MATCH THE BANK’S RECORDS. You have to subtract from the bank statement or online total any outstanding checks—checks that haven’t gone through the bank yet.
• Watch those debit cards. These cards are like charge cards, except that when the card is swiped, the money is immediately swiped from your checking account. There is nothing wrong with using them, but you need to remember to write the amount of the charge in your checkbook ledger. These cards are a relatively painless way to spend money. That’s the problem with them.
Your biggest expense over the next few years is going to be college. As we discussed in chapter 2, there are a lot of reasons to go to college. But strictly from a financial standpoint, a college education is a wise investment because most college graduates make much more money during their working lives than those without college degrees.
Cost: Last but Not Least
When you are choosing which college or university to attend, the cost is not the least important factor, but it should be the last factor you consider. What we mean is that your decision should first be made without considering the cost. Decide which particular college or university is best for you based on the many nonfinancial factors mentioned in chapter 2. (Do you want a small college or a large university? Which school has the best program for the major you are interested in? Christian or secular? Private or public? Liberal arts or research and technology?)
After you have decided which kind of institution will best equip you for the kind of person you want to be and for the career you’re interested in, then look at the cost.
If your parents get a hold of this book, they’ll probably rip out this section. They’ll say that college expenses are a major part of the decision process. We agree, but we think there isn’t just one big decision. There are two separate decisions.
Which is the best college or institution for you (ignoring financial considerations)?
After you have the answer to Decision 1, then you move to the second stage:
How can you make the financial arrangements for the school you have selected?
Paying Less Than the Cost
Very few college students pay the full amount of what their college education costs. It is not uncommon for 80 to 90 percent of the student population to be on some form of assistance. Here are a few of the financial aid opportunities that may be available to you at the institution of your choice:
• Academic Scholarships. Many schools will provide a scholarship to be used toward tuition if your GPA and SAT or ACT scores are high enough. The brainiacs can get a full-ride scholarship, but even the less-than-genius types can receive a major discount—scholarships unrelated to financial need.
• Athletic Scholarships. Sports programs play a major role in college life. Each school’s reputation and publicity is tied into the success of its sports teams. If you are really good at running or jumping or throwing, the school may pay to get you on its team.
• Other Scholarships. If you’re in the middle of the pack academically and athletically, don’t despair. There are a lot of scholarships awarded for other criteria. Maybe your college has a scholarship for mediocre students with blond hair who major in kinesiology. You got the mediocre part covered, and a stop at the drugstore can take care of the blond hair, and you’re sure you’ll want to major in kinesiology (as soon as someone explains what it is).
• Grants. Federal and state grants (money that you don’t have to pay back) are available on the basis of financial need.
• Loans. Loans from the federal and state governments and from the school may be available. These loans have to be paid, but they are usually at low interest or no interest. The repayment schedule usually begins after graduation (which is an incentive for you to go to work after college).
• Work Study. Where do you think the college gets its cheap labor force? Someone has to spread the fertilizer on the grass and dish out the green beans in the dining commons (usually these are separate jobs).
Here’s the point of all of this: There are lots of ways to accomplish the financing of your college education. Contact the financial aid office, and investigate all of the options. It will be the best investment you ever make.
All the money in the world won’t do you much good if you are nailed shut in a pine box buried six feet under and pushing up daisies. You probably haven’t had to think about your health very often. Until this point in your life, you probably haven’t had to. Your mother took care of that (with the vitamin C at breakfast and broccoli at dinner). But once you are on your own, you are responsible for your own health. That could be a scary thought, so the next chapter will help you figure out how to stay alive (and we won’t mention broccoli once).