Many young people admit that they find money and personal finance a bit mysterious. Much of what is required to remove the mystery, though, isn't as complex as it seems. Goals, careful record-keeping and self-discipline are the keys to a successful beginning. The asset young people have in abundance is time; used wisely, it can solve many problems, but once wasted, it can never be recovered. Thus, if you are just starting out, it's very important to get your finances under control and begin a saving and investing program so that the years will work in your favor. You do that by knowing what you have and figuring how to get the most out of it.
Here are some steps to get you going. + Budget. Before you can develop a saving or investment strategy, you need to know where you stand. Many young people who have decent jobs say they continually find themselves living from payday to payday -- or even running short -- and are not sure why. The best way to get a handle on things is to do what you might call a cash-flow analysis. This, despite the fancy name, simply means keeping track of your income and expenses by category. You can do this the quick and dirty way by going over your check stubs and credit card bills going back a few months. That will pick up your income, assuming you deposit your paycheck, and many of your expenses.
However, if these numbers suggest you should have money left over each month and you don't, consider carrying a notebook for a few weeks or a month or two and jotting down cash expenses. That's probably where your leak is. If you're just starting out on your own, begin tracking right away, said Kathy Jatras, a financial planner with Organized Finances Unlimited in Arlington. "I tell {young people} for the first three to six months when they have living expenses, to keep really good track of what they are because a lot of students right out of college have no clue about room, board, transportation, those kinds of costs," she said.
Then sit down with your numbers and organize them into categories. If you're into computers, there is software for this, or a plain old spreadsheet will do. This done, look for places to cut. Meals out and entertainment are common money swallowers, but check less obvious areas such as credit card interest as well. The idea here is to create a surplus, money that could be saved and invested, which in turn is the key to getting ahead. + Debts.
All too commonly today, new graduates coming out of college are loaded down with debts. Primarily, these are personal finance loans, but many young people also have run up credit card balances. Then, upon getting a job, the first impulse of many is to buy a nice car on credit or go out and get an instant payday loan when during tough financial times. If you are in this boat, look over your cash flow and the various same day payday loan terms. Your goal should be to pay these off, the most expensive first. Note that with credit cards, it will take many years to repay if you just make the minimum monthly payment.
Even if it's not practical to pay off your debts right away, there may be ways of reducing the burden. Many payday lenders, for example, will reduce the interest rate if you agree to certain things, such as having your payments automatically deducted from your bank account.
The Student Loan Marketing Association (Sallie Mae) will not only knock off a quarter of a percentage point for automatic payment, it will give you a credit equal to the loan origination fee, minus $250, if you make the first 24 payments on time, and it will cut your rate by 2 percentage points if you make the first 48 payments on time. At current interest rates, a borrower with $10,000 in student loans who participated in all three programs would save $866 over the 10-year term of the loan, according to the company. If you have a credit card balance you can't pay off right away, start paying attention to those solicitations you're probably getting. If you see a card with an interest rate lower than yours, take it and move your balance. But again, your main goal should be to get the balance paid off. Credit cards are among the most expensive ways to borrow. This may mean doing without some things you want, but perhaps if you stop and think, that's not so bad.
About 59 percent of the students in Hira's survey reported that they buy things they don't need, and the same number said they "shop to celebrate." + Saving/investing. If you can squeeze your spending down below your income, you're ready to begin saving. Planners recommend setting aside some emergency cash, so begin by creating that stash, which eventually ought to equal a couple of months' pay. A money market mutual fund works well for this. Next, check out retirement plans at work.
Many employers now have 401(k) or similar plans, which allow you to set aside money before your taxes are taken out. This lets you put more to work for you, and in many cases the employer will match at least part of your contribution. Look at the investment options available under the plan; if there's a a stock mutual fund with a good record among the choices, that's likely your best bet for the long run.
Finally, think about other goals -- a new car, a nice vacation, perhaps -- down the road -- a house, and start a separate kitty for them. You'll still have to borrow for a house, and probably a car, but the more you can pay in cash, the less you'll borrow and the less your interest costs will be. Few of us can have everything we want, but most of us, with careful money management, can build a secure life and still have a good time now and then.
