Chapter Two: Spending and Saving
Personal finance concepts become a lot easier when you realize it all boils down to two things: spending and saving. In other words, what do you do with money once you have it in your hands? Do you run out and buy whatever catches your eye, or do you make purchases you have planned for beforehand? Do you buy things you need, or do you buy things you want? Does any of your money go into a piggybank or savings account, or is it gone before you can even consider putting some of it away?
In other words, what do you do with the money you get?
Here is the great thing about your money: You’re in charge. You get to tell it what to do and where to go. Unless your parents put restrictions on how you use your money, it is your show — and you’re running it.
Needs versus Wants
“Need versus want” is a common phrase in personal finance. These three words sum up a simple concept many people have a hard time mastering, even long into adulthood. You are supposed to buy the things you need and wait to buy the things you want until you can afford to make the purchase. The line between needs and wants can be pretty blurry sometimes, so it is important to learn how to figure out which category a purchase you want to make falls into. Do you need it, or do you want it? You may be surprised to discover a lot of things you think you need are actually things you want, and you don’t actually need them after all.
Sometimes, we get so used to all the niceties that come along with living in a modern, prospering society that “wants” start to edge their way into the “needs” category within our minds. For example, you may think that you need a cell phone — after all, you have always had one, and everyone else around you has one— but when it comes right down to it, you may not actually need one. A cell phone is generally not a need; it’s a want. Does this mean you shouldn’t own a cell phone? No. It means the other things you actually need should come as a priority when you are making a budget and planning your spending. You will learn more about budgeting in Chapter 4.
What falls into the category of need? Think of the things you actually need to function within your life. Food is a need. Shelter is a need. Clothing is a need. Keep in mind, though, many of these needs may be met by your parents at this point in your life unless you are already out on your own. For this reason, you cannot make the claim that a designer-label shirt is a need when you already have a closet full of clothing. By the same token, you can’t put late night trips to Taco Bell into the needs category if your parents supply you with a fridge stocked with food at your house. You probably see where this is going already; the needs category is a basic (and somewhat stingy) category that is actually not all that long. As you begin to live life more independently, your needs list will grow quite a bit when you start paying for utilities, food, and shelter, but rest assured, even adults can have a hard time distinguishing between a need and a want.
Need versus wants questionnaire
The following questionnaire is an easy way to figure out if something is a need versus a want. This questionnaire assumes your parents provide you with food and housing, and your main concern is purchasing items for school. Remember: There is nothing wrong with buying something you don’t really need, as long as you have budgeted for it and can actually afford it. The point of this questionnaire is not to say you shouldn’t buy something; it is only to help you distinguish between a need and a want.
Ask yourself these questions:
1. Is this purchase something I really need to for school?
If the answer is:
Yes: Keep moving down the list to the next question.
No: Unless you really need this item for school or some other important reason, this purchase falls into the category of a want.
2. Can I buy a cheaper version of this item?
If the answer is:
Yes: Cheaper isn’t always better, but if you’re buying an expensive items just because it’s the version everyone else has, this purchase falls into the category of a want.
No: Keep moving down the list to the next question.
3. Can I wait to make this purchase?
If the answer is:
Yes: If you don’t need to make this purchase right now, but you still want to, this falls into the category of a want.
No: If you need this item right now, and the two other questions led you here, there is a good chance this purchase falls into the category of a need.
You can revise this questionnaire to work for just about any purchase as not all needs are related to school. After all, you need clothes to wear and food to eat, so use this questionnaire as a quick checklist to figure out if any purchase is a need or a want.
Case Study: Stretching Dollars
Stephanie — High School Student
For the majority of my middle and high school years, my family and I have been living on a single-person income. My father cannot work due to major health conditions that cause him a great deal of pain, and he was denied disability insurance. Even though I am physically and legally able to work, I cannot, as I have neither a license nor a car, and we live in the countryside far from potential job locations. The amount of money it would take for gas and the inconvenience it is to drive me all the way into town and back are not worth a part-time, minimum-wage job. Thus, we survive on a salary of approximately $23,000 per annum.
It is not easy. Even on a strict budget, debt lurks just within sight each month. The simple rule we have to follow that governs all expenses: Is it a want or a need?
Priority goes to utilities and other bills, and then the other necessary expenses, like food for ourselves and the animals.
Neither my mom nor I can afford health insurance, and my dad has it only through the VA for his service in the Army (which is fortunate, because he needs it the most). There is also no money in the budget for life insurance, and so clearly, there is no way I can get automobile insurance, so I cannot get my license, let alone a car.
It is difficult, especially when surrounded by those who don’t have to worry about money. They can splurge on a nice jacket or go out to eat at a fancy restaurant, and they don’t need to worry about college.
However, being on the verge of going out into the real world and facing the realities of college expenses and bills, I have come to realize I wouldn’t have had my adolescent years any other way.
Life has been rough, but having to live this way has taught me valuable lessons about life. It’s taught me how to differentiate between what is necessary and what is wanted. I know I’m going into the real world with at least some protection, as I will know how to budget and know how to survive on the bare minimum. Many of the aforementioned will doubtless run into trouble and find themselves in debt before long if they continue wasting money with such frivolity when it no longer is coming from their parents, as they never really learned how to save and manage.
But above all, living on such a tight budget has taught me the real value of a dollar and what it means to really work for it, for which I am most grateful.
Why does it matter?
Why should you bother taking such a close look at how you spend your money? The truth is, the way you spend your money has a lot to do with whether or not you can be successful with personal financial management. It may seem like there is a lot more to personal finance than just how you spend your money — and indeed there is a lot more to it — but the basic fundamental concept of not spending your money on things you don’t need is a vital concept to grasp. If you can master this concept, you will be sitting pretty with your money throughout your life.
Take a look at two different scenarios to see how even relatively small amounts of money can really add up over time.
Scenario 1: The spender
Josh gets an allowance of $30 per week. His parents cover all his necessary expenses, such as food, shelter, and clothing, so the allowance is his to use however he wants. When he gets his allowance on Friday, he immediately heads off to the mall and buys games for his computer or books he has wanted to read. Any money left over buys sodas and snacks. The only time he saves his allowance is when he wants to buy something that costs more than $30, but his typical weekly ritual is to spend all the money his parents gave him without saving any of the money at all. By Monday, he’s usually out of money and must wait until Friday before he can spend any more.
Josh continues to receive this allowance for three years before getting a part-time job. During this time, Josh does not save any money. An allowance of $30 per week may not seem like a lot of money, but within three years, he has received a total of $4,680. That’s enough money to buy a decent used car or go on a really great vacation — but Josh did not save any money at all.
What if Josh continues to waste $30 per week throughout his adult life? It isn’t a huge amount of money, but it can really add up. By the time he’s 65 years old, if he started at age 15, he will have wasted $78,000.
Scenario 2: The saver
Ethan gets the same $30 per week as an allowance from his parents. His parents also cover all of his necessary expenses. Unlike Josh, however, Ethan decides to only spend a portion of his allowance each week and to put the rest into a savings account at the bank. Although the amount of money he saves each week varies depending on what he needs to buy, he saves an average of $15 per week. Because he is so good about saving some money, when something comes along that he really wants to buy, he doesn’t have to wait for too long to make the purchase because the money is already in his savings account. Ethan does not make impulse buys very often, and his savings grow quickly.
This pattern continues for three years until he get a part-time job. Within that time span, he put approximately $2,340 into a savings account. Because Ethan decided to put his money into a savings account that earns interest (you will learn more about savings accounts and interest in Chapter 3), he earned even more money. In three years, with an interest rate of 3 percent, his savings account has a balance of $2,460.
Suppose Ethan continued the practice of putting $15 a week into his savings account throughout his adult life, starting at age 15 and continuing until age 65. It isn’t a lot of money, and most people won’t even notice having $15 less to spend each week. By the time he is ready to stop working and retire around age 65, though, this small weekly deposit will grow into $39,000. Assuming his savings earns interest at a rate of 3 percent, it has the potential to grow to approximately $90,000, in large part due to the interest the money earns when it sits in the bank.
Personal finance doesn’t always have to involve large amounts of money. As a teen, time is on your side. Even a small amount of money can equal big bucks down the road, especially when you consistently put money away and let it grow.
Case Study: Advice from a Financial Expert
Andrew Housser — Co-CEO of Bills.com
Get creative with saving!
Sell unneeded items on eBay, hold a yard sale, or put change into a jar every evening and save the proceeds when you cash it in. Even small amounts, when saved regularly, will accumulate surprisingly quickly.
Give up expensive coffee drinks. If you hit Starbucks twice a week, break the habit for eight weeks and save $64. To make the habit permanent, spend $10 on an insulated container and bring coffee made from home. Short-term savings: $50 if you spring for the container. Long-term savings if you bank the money saved and thank compound interest: $136,000 over 25-30 years.
Drive less. Walk, bike, or carpool. Drive your car about 25 miles less a week and you’ll have saved another $68,000 over 25-30 years (depending on type of car, mileage, and cost of fuel).
Eat out less. Make lunch or dinner at home instead of “grabbing a quick bite.” Saving $10, $20, or more each week by cutting out a restaurant meal or two adds up to hundreds in a few months.
Spend with cash. People who do not use debit cards or credit cards are less likely to throw that extra item into the shopping cart. You’ll be pleasantly surprised at the end of the month.
Redeem credit card rewards. If you’re an older teen or college student with a credit card, check your credit card statements to see how many rewards “points” you have. Then, visit the rewards Web site to find out if you can convert the rewards into cash or gift cards. Some credit cards even double the value of your rewards at specific retailers.
They All Want Your Money
$ave $mart Tip
Check out a savings calculator online that estimates compound interest to see how much you can save over a long period of time: www.math.com/students/calculators/source/compound.htm
How many times have you seen a magazine ad or a television commercial where the teens within the advertisement seemed really cheesy? You probably laughed at the marketer’s attempt at appealing to teenagers because it was so far off the mark. The teens in the ad were wearing clothes that no one really wears, dancing to music that no one really listens to. All in all, the ad was incredibly fake and made you wonder why marketers try so hard to get your attention.
As a teen, you are within a group that is highly valuable and intriguing to advertisers. You have what is referred to as disposable income, which means you have money you can spend without worrying you won’t be able to pay your mortgage payment or put food on the table. Advertisers want to figure out how to get you to spend, spend, spend, and they don’t want you to know they’re trying so hard.
If you are going to take control of your money and your spending, you need to know marketers are always throwing messages at you, even when you don’t realize it’s happening. What types of messages are they throwing at you? They want you to feel as though you need their product in order to be popular, or that their product will make your life better than it is now. They use many different types of advertising to influence you to buy certain clothes, listen to certain types of music, and eat certain types of food. While you can easily spot a bad attempt at getting you to buy something (think about the last cheesy advertisement you saw featuring teenagers or college students), it isn’t always easy to spot the better attempts. Not all advertising comes in the form of an ad on TV or in a magazine. Marketers are far sneakier than that. You are probably being assaulted with advertising no matter where you go, whether it’s in school, while riding in a car, or just walking down the street with your friends.
Pay attention the next time you go to see a movie in a theater. Right away, you will encounter advertisements for other movies, as well as advertisements for products. Signs and videos playing on screens overhead will try to urge you to buy one snack over another at the snack counter. The people who sell you popcorn may wear buttons advertising certain drinks. And the advertisement assault doesn’t end when the movie begins. If you make a conscious effort to catch all the advertisements snuck into the movie (also called product placement), you will realize marketers never really stop with their attempt to get teenagers to spend money. Companies pay big bucks to have their products featured in movies. They know a certain car driven by a celebrity during an action movie or a jacket worn by a leading lady in a romance may influence viewers to also buy these items. The scary thing is most people don’t even realize these thoughts are entering their minds; they know they want a certain product, but don’t really stop to think about where the desire first came from.
Find Out More!
Check out the PBS documentary The Merchants of Cool to learn more about how marketers try to understand and influence teen spending at www.pbs.org/wgbh/pages/frontline/shows/cool.
Why do you need to know this? You now know that one of the best way to take control of your money is to first control your spending. You should realize companies depend on your being unable to resist the urge to buy things you don’t need. Right now, there are many well-paid executives sitting in a fancy boardroom trying to figure out exactly how to get you and your money to part ways. They pay teenagers to tell them what is cool and what isn’t; they send professionals undercover to blend in with college students to find out the latest fads; and they use this research to develop marketing campaigns designed to get your attention. Wouldn’t you rather decide on your own what you want to buy, instead of having someone else tell you what you want? Once you are able to spot advertisements intended to make you spend money on things you don’t need, you will be more likely to spend money consciously, and it will become easier to resist their spell.
Impulse buying
How many times have you bought something on impulse? You know you’re making an impulse purchase when you buy something you had no intention of buying and you later realize it wasn’t even something you needed. Maybe you see a shirt in a store window and impulsively decide to buy it, but by the time you get the shirt home, you realize that you don’t even really like it and will probably never wear it, so the shirt just sits in your closet without ever being worn. Sometimes people buy things on impulse because they can’t find exactly what their looking for, they’re bored, their friends are making purchases, or they don’t want to leave the store without buying something.
Impulse buying can turn into a larger problem when it evolves into compulsive shopping. Compulsive shoppers buy items because they can’t resist the urge to shop. They also usually claim to feel a “rush” or a “high” from shopping, which is quickly replaced with feelings of guilt or depression. This is considered an addiction by some behavioral scientists, just like a drug addiction or a gambling addiction. Compulsive shoppers usually hide purchases from friends and family and commonly fall deeply into debt — with debt sometimes reaching hundreds of thousands of dollars — before they ever seek help. It’s not normal to get a huge rush out of making purchases at a store, and it isn’t normal to feel anxious when you are not shopping. If this sounds like something you have experienced, get some help. Talk to your parents, a guidance counselor at your school, or go online and look for local resources such as a Shopaholics Anonymous (www.shopaholicsanonymous.org) group — yes, they really do exist.
Chances are, however, you don’t fall into the category of a compulsive shopper, but instead, do have some experience with impulse buying. While it may be fun to buy something without having planned it out beforehand, too many instances of impulse buying will drain your wallet and may lead to more serious problems in the future.
Here are some tips to avoid impulse buying:
• Think through your purchases before you make them. You are going to run out of money quickly if you make purchases without first considering how the purchase will impact your finances. This doesn’t mean you have to mull over buying a cookie for 20 minutes, but it does mean that you shouldn’t make purchases you weren’t expecting to make that will have more of an impact on your wallet, such as a $29 shirt or DVDs that total $40.
• Leave your credit or debit card at home when you shop. You might prefer to use a debit card, but if you only take the exact amount of cash needed to make a purchase, it will be impossible to impulsively buy a bunch of other stuff you don’t need. That is, of course, unless you have friends with you who are willing to let you borrow money. Don’t let this happen. Impulse buying combined with being in debt to your friends equals trouble. You run the risk of not only falling deeply into debt, but also losing some friends when you don’t pay them back.
• Budget your spending. If you have a written budget — and stick to it —you will be much less likely to make impulse purchases. You will learn more about budgeting your money and tracking your spending in Chapter 4.
Everyone makes impulse purchases once in a while. If you slip up and buy something you were not planning on to buy, don’t beat yourself up over it. Accept it as a learning experience and move on.
Sure, you can spend
You don’t have to plop every cent you get into a savings account and never touch it. Money should be enjoyed, as long as that enjoyment is combined with some saving too. If you can find a balance between saving and spending, you will have an easier time with your finances than most other people do, while also having the ability to buy the things you want without draining your savings account. The trick is to figure out how to save money on all the things you want most. In the following sections, you will find strategies for saving money while you spend it.
Never pay full price
In order to make money, stores purchase merchandise at a low cost, then charge customers a much larger price for the same merchandise. Doing so allows the company to not only make back the money they spent to purchase the products, but to make additional money as well — this is referred to as making a profit. Take, for example, for a $25 backpack you purchase in August before heading back to school. You feel good about the purchase because even though you didn’t buy the cheapest backpack in the store, you didn’t buy the most expensive backpack, either.
After school has been in session for three or four weeks, you see the very same backpack you bought for $25 sitting on the clearance rack for $19. Not all of the backpacks have sold over the next few days, so soon you spy the same backpacks for $12. Then, the price drops to $8.50. One lone backpack won’t sell, so the retailer slashes the price down to $4.99 in an attempt to clear out the last of the school supplies and make room for Halloween merchandise. So, the backpack you bought for $25 is now available for less than five dollars, just because a few weeks have passed and the store wants to sell the merchandise.
$ave $mart Tip
Buy school supplies in mid to late September, after all the schools have started their sessions.
How can stores afford to slash prices like this? Stores — especially large retailers — have the buying power to buy items in bulk for reduced prices. There is no way the retailer spent $25 when it originally bought the backpack you purchased, or even close to $25. In fact, chances are the retailer spent a lot closer to the clearance price for the backpack instead of the full amount you paid.
This is how stores can afford to offer discounts and have sales. They would rather charge you less for an item than send it back to the supplier. This is also why it isn’t unreasonable to expect you should be able buy something for less than for the original price. You can expect just about everything will go on sale at some point, even if it is a hot new item that everyone wants. If you wait to buy something until it has been marked down substantially, you’re not only saving money, but you’re beating the store at its own game.
It isn’t always easy to wait for things to go on sale or wait to get your hands on a coupon so you can buy something at a reduced cost. It sure beats seeing something on a clearance rack priced at a fraction of what you paid for it, though. If you can figure out how to buy in the “off-season,” you can save yourself a bunch of money. Using the example of the backpack, the best (and cheapest) time to buy school supplies is after school starts because stores want to get rid of all the extra school supplies they have lining the shelves. If you can remember to buy what you need the year before, such as buying notebooks and pens this year when school supplies go on sale because you know you will also need them next year, you will save quite a bit of money. Otherwise, you can at least remember to load up on all the school supplies you will need for the remainder of the school year — and snatch up any extras you might like, such as art supplies — when all the school supplies go on clearance.
The same goes for clothes. The best time to buy summer clothes is at the end of the season, when stores are trying to make room for their autumn clothes. Retailers get anxious to clear the store of seasonal clothing when the season is nearing its end because they don’t want to take a financial loss on the clothes that haven’t been purchased by customers yet, so this is the time to buy new clothes. The good news for you is many retailers are restless with seasonal stock, so bathing suits might go on clearance racks in July, or you might be able to score a great winter coat on clearance while there is still snow on the ground. Retailers can be a little funny when it comes to this stuff, so pay attention to how your favorite stores rotate their stock. You will begin to notice a real trend that is actually easy to follow, and you will know when you should buy something or when should wait for them to wind up on sale. If you talk to an employee who works at your favorite store, you might be able to find out when things go on sale and the lowest cost you can expect to pay.
Shop around
Did you know: Different stores charge different amounts for the same products? You might pay $16 for a shirt in one store, but $12 for the same shirt at another store on the other side of town. The truth is, some stores charge more for a variety of reasons. These stores might offer excellent customer service, so they feel they can charge more for their items. They might also believe the area of town they are located in justifies higher prices, such as stores located in a wealthy part of town. Whatever the reasoning, you should be aware the price you find at one store is not necessarily the same price you will find everywhere else. The trick is to figure out which store offers the item you need to buy at the cheapest price. Keep in mind that just because a particular store advertises itself as having the lowest prices does not mean this is 100 percent true all the time.
Suppose you want to buy a video game. The store closest to you — and the one you usually shop at —has the game for $59. You find the game advertised at a store across town for $49. Don’t pay the $59! You should either find a way to get to the store across town or take the ad from the other store to your local store. Show the ad to the manager at the store and tell him or her you want the same price. This store wants your business — and your money. There is a good chance you will get the game for $49. Some stores call this a “best price guarantee” or something similar, but it’s a common practice that can save you a lot of money if you pay attention to how much various stores charge for the items you want to buy. You can compare prices online or by sifting through ads in newspapers and magazines.
Renting versus buying
Who says you have to buy everything that you want? If you are looking to read a certain book or watch a certain movie, you may not even have to buy the item. Instead, you might want to think about a few other options you have that cost a lot less, or might not even cost any money at all:
• Rental services: Services like Netflix (www.netflix.com), Gamefly (www.gamefly.com), or Booksfree.com (www.booksfree.com) require a small monthly fee, but allow you to borrow games, books, and movies for an extended period of time. You return the game or movie via mail when you are done with it and another from your list arrives at your home. Some rental services also allow you access to movies online, so you don’t even have to wait for the movie to come in the mail. How much you pay each month for these services depends on which membership plan you sign up for. Keep in mind: You will need to have a parent’s permission to sign up if you are under 18. You will also need a credit card or checking account to pay for your membership unless someone gives you a gift membership.
• Free services: You local library is one of the best places to find books, movies, magazines, and more. Usually the only fees you will ever have to pay are late fees if you return items after the due date. Also, if you live outside of city limits, you may have to pay a small annual fee for the use of the library. Even with these fees, this can still be one of the cheapest ways to get your hands on some things you would have to pay for otherwise.
$ave $mart Tip
If you have a favorite store where you usually spend the majority of your money, you may want to consider this store when the time comes to get a part-time job. Most stores offer employee discounts that can save you a lot of money. You will learn more about getting a job in Chapter 8.
Obviously, you aren’t going to stop shopping altogether. However, there is no reason why you shouldn’t save some money while you’re at it. Once you realize that you don’t have to pay full price for things, you will also quickly notice that your money lasts a lot longer than it used to.
Secondhand stores (also called consignment stores or thrift stores) can sometimes have the best merchandise at the lowest prices. Not only can you find books, movies, and games in these stores, but you can also find clothes, musical instruments, room décor, and all sorts of interesting things. Sometimes, the condition of these items might be a little rocky, but every once in a while, you will come across something that is nearly brand new. That’s the fun part about buying things secondhand; it’s like a treasure hunt. You can also buy used items online, and sometimes, this is the best way to get your hands on the things you want without paying full price. Consignment shops aren’t usually in the mall. To find one near you, search online or look in your telephone directory.