In talking about education, and many of public education’s failings, the notion that kids simply aren’t taught about real-world, practical personal finance has come up a few times. I know people who are really great at handling money, regardless of how much they make. They make wise decisions in budgeting, spending, and saving, and they feel secure. Then I know plenty of others who really don’t know how to handle money, and it’s cost them, literally. The problem is usually this: no one ever taught them how to do it right. I don’t think many people really WANT to be “bad” at handling their money, but they just didn’t learn basic skills and rules.
I was blessed to be taught by my parents about wisely using my resources. For instance, I am a really great shopper (just ask me about all the dresses and other clothes I’ve gotten for myself and my kids at top-notch stores for totally cheap!). I also have been very careful going into any situation that might require me to take out a loan. My husband and I are now on our third house, and I think we’ve done pretty well each time we’ve purchased a home (with a mortgage, mind you). I don’t follow Dave Ramsay; I do respect the advice he gives when I read it and am thrilled he is a source of basic information for many who just didn’t know any better up until they came across him.
So I’ve been working over the years to make sure I consistently talk to my girls about money, with appropriate information at appropriate ages. With the oldest in high school, I’ve definitely given her very specific information and directions. I’ve talked to her about how banks work, about how loans and interest work. I’ve shown her how I budget for the month and how I pay bills. I am not sure how much she remembers, so I need to follow up again. But here I’m going to share a few of the top pieces of advice I hammer home to her.
- Learn how to make a budget, at least a fairly simple one. First, figure out what you have to spend monthly or yearly or at other regular intervals, and then break those things down to per-month units. If you don’t know how much you spend on food or incidentals or entertainment, keep a little booklet and write down every time you spend in whatever category you want to track. After a month (one that’s an “average” one, ideally, and try two, even, to get a better idea), tally it up. Enter that into your budget. You can use just a list in a Word program; you can use Excel or any other kind of software that makes you happy. You can have a paper list in a file folder. Doesn’t matter the type; just do it, whatever you like the best. And then — ONLY SPEND WHAT’S IN THE BUDGET (or less).
- Do not get a loan for anything you don’t absolutely need. Houses, cars, and education qualify. Pretty much everything else does not. Whenever someone gives you the option of paying for something on an installment plan, just firmly say “no, thanks.” If an appliance is more than you can afford with cash you’ve saved for a certain amount of time, for example, buy a simpler one or start with a used one. When I was first in a rental townhouse that provided washer/dryer hookups, for instance, I was thrilled just to not have to go to a laundromat. But I didn’t go and buy a new washer and dryer. I bought used ones at a local store that sold used appliances, and they worked great. In fact, I had used washer/dryers for probably a decade.
- Going along with point 2, if you’re buying a big-ticket item, do not allow the salesperson to give you numbers broken down according to “installment thinking.” If you have the money to pay for the item up-front, just say so and buy it. If you do need a loan, negotiate on the full price of the item (let’s think “used car” here, because that’s an acceptable option for something you can buy with a loan) and get the lowest possible interest rate. Shop around for this: there are plenty of options, like local credit unions, your bank, or even sometimes the credit available through the sales place (car dealership, for instance). Don’t let the person sweet-talk you by using monthly payment numbers. Tell him firmly you want interest rate deals and settle on the price of the item. If after all that, you find that the monthly payment is too much, you need to get a different car, one that costs less. Sorry if it has to be kind of a junker.
- Used cars are almost always the best deal. Even if you’re far enough along in your adult financial life that you have cash to pay for a car up-front, buying one that’s just a year old will likely be your best bet over the long haul. Homes generally hold their value or go up in value. You can buy one for $100,000 and sell it later for a profit, especially if you’re in it for a long time and there’s no recession. Cars automatically lose their value. New cars lose value the moment you drive them home. You can’t turn around and sell a car you bought new on the lot a month later for the price you paid for it, or even close. You’ll lose a lot.
- Don’t feel you have to have the newest of anything, particularly technology. Like cars, which depreciate immediately, brand-new technology immediately is eclipsed by better models. You can shop around and compare and figure out just what you need in a new TV or computer, and a month later you’ll wish you’d waited because technology evolves that quickly. But it’s OK. You don’t NEED those improvements. In fact, you’ll be fine without them for a good number of years. Unless your paid work is in the technology field, you don’t need to have or use the latest stuff at home.
- Watching money pile up in savings is a thrill. Spending can certainly be a thrill, too. But consciously socking away money you could have spent on something you didn’t need, for a particular purpose, whether it’s saving for something fun like a vacation or something necessary like a newer, better-running car or a newer appliance, is long-term satisfying. Nowadays, it’s easy to just go online at home and transfer money you were thinking about spending from your checking account into savings. And just enjoy watching your own dollars do a little work for you. That’s where interest comes in. …
- Interest can be your worst enemy. Or it can do your bidding. Unfortunately, the sad truth is that today, you don’t get paid much in interest for savings accounts. But at least you’re letting it work for you rather than being its slave. Loans always come with interest attached (unless you’re buying a brand-new car with a deal of 0% interest, which might sometimes be OK, but in general let’s stick with used, shall we?). And that interest keeps building the longer you have the loan, the longer you draw it out by paying the bare minimum or as little as possible. The concept of “compound interest” is essentially this: over time, a $1000 loan (let’s say) accrues interest, which then is added on to the original $1000, and then interest builds again over that sum that’s greater than the original. If you pay the tiniest amount (this is the worst when it comes to credit cards or consumer loans such as those at stores rather than banks), your $1000 will only decrease by that small amount you pay, even while interest is adding back onto it. Then interest is calculated on that. And on that bigger number. And so on. (Note that I am not a financial expert and am not trying to explain this from that kind of viewpoint. This is just basic advice.)
- Make sure you learn how to balance a checkbook/checking account/savings account. Whenever you write a check or take money out of the account by debit card (which are linked to checking accounts, by the way, and are not like credit cards except that they are the same size and shape) or transfer (hopefully to savings!!), WRITE IT DOWN and do the math. Subtract right then and there, or do it every evening if you make purchases/pay bills regularly during the day. If you get a deposit, then add! (Even better!) But then every month you need to do the double-checking. Your bank will give you a statement. Make sure you check off your own register, comparing it with the items on the bank’s statement. Sometimes you might have forgotten to write something down, you might have made a math error, or the bank might actually have made a mistake. So check as soon as you get the statement and compare and “balance.” You can avoid a lot of problems this way.
- Buy used for big items when you’re getting started. But in certain cases, when you have to buy something new, buy a good-quality (even more expensive) item. Then shop for a deal. Certain items are cheaper over the long run, when you have a little more money available in your budget, if you get a higher quality item now and then you won’t have to spend again to replace the item too soon. Shoes work this way; some kitchen items and technology work this way. It might be worth paying double or at least 50% more to get a really good-quality item that will last and perform better in the meantime than a cheaper one that is less well made and will need to be replaced sooner (and more frequently).
- The shopping strategy of buying higher quality goes along with this advice that might shock a lot of people: it is often cheaper to shop at nicer department stores that run regular sales than at cheaper all-purpose stores that don’t run sales. For example, I am a huge fan of Macy’s. It’s long been my go-to store for clothing and shoes. I’ve been able to come out of Macy’s with some nice-quality dresses or shirts for a quarter or less of their original “regular” price. (That leads to another note: most “regular” prices are just listed as a way for people to think they’re getting a great deal when the item is discounted, so don’t go too crazy.) What’s more, the final price is far less than I would have paid for a similar item at a store like Target or even discounters like Marshall’s or Ross. Sure, the latter stores are “always” discounted, but if you pay attention to sales, you can get a nicer item that’s not been run through the mill or was destined for a discounter from the beginning. And you have a much more pleasant shopping environment! (Let me also note that I very rarely shop outlet stores for this very reason: the “discounts” aren’t any better than what you’d get by good shopping at the regular store, and often the products have never actually been in the real store; they’ve been made cut-rate specifically to sell at outlets.)
- When buying any item, keep track of the regular, everyday prices for things you buy on a regular basis (I just know in my head the usual prices for everything I buy regularly, but if you can’t do this, write it down!). This mostly applies to food and toiletries and cleaning supplies. But it works for clothes (note No. 10 above). This is important because when you’re shopping and see something you use a lot and can stock up on (pantry items, cleaning supplies, for instance) on sale and discounted significantly, you already know it’s a good deal and can buy a bunch and save yourself money in the longer run. I find this is far simpler than keeping track of coupons. Most coupons anymore don’t apply to my regular purchases, so I end up clipping very few coupons from the newspaper and mailed flyers.
- Credit cards aren’t necessarily bad. But this really depends on your personality. If you know you’re going to go crazy and just spend because it’s easy when you have “plastic,” then don’t use them. If you are pretty careful, though, they’re a valuable tool. They are (somewhat unfortunately, in reference to those who aren’t careful with their use) a vital part of building credit, which is important if you do need to take out a loan (for house or car or education…) in the future. They are also pretty handy for emergencies, traveling, or other situations where you need to pay for something but didn’t expect to need to do so. But don’t let “exceptions to the rule” become the rule and mess up your budget and/or credit. Make sure you budget a certain amount for the items you get regularly and can use a credit card for. Then pay that balance EVERY MONTH IN FULL. I do this. I have a budget with my couple of main credit cards and know I will buy certain things with them (toiletries and cleaning supplies and some food at places like Target and Wal-Mart; gasoline for the cars; online purchases; gifts, etc.). I know what I need to buy and how much I spend monthly on average, and I stick within that. Then, I get points for my purchases, and I can get cash back. I’m not paying any interest but I get extras. I also can keep my check register from being full. I really like simplicity in there. But that’s just me.
Last, when in doubt, ASK FOR HELP! Ask your parents if they’re good at finances. Ask someone you know from school or a church or community group. If you have enough connections, it’s highly likely you can pretty easily find someone who’s willing to give you some input before you make, particularly, a big decision.