Money Management 101

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Money Management 101

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It's no secret we're living in tough economic times. No matter what country you're living in, it's likely you and your parents are feeling the impact of financial pressures. In the United States, for example, businesses are failing, and new layoff announcements are coming practically every day. Parents are concerned about losing their jobs or whether they're going to be able to pay their bills. At the very least, they're probably tightening their belts and postponing major purchases.

You, too, may be feeling the pinch of our faltering economy. Perhaps there are items your parents would have bought for you in the past, like designer sneakers and video games, to which they're now saying "No." Maybe you've noticed that clothing, electronics and entertainment costs have all gone up. If you're planning on going to college or moving to your own apartment in the next couple of years, you may be wondering how you're going to make it.

These are all reasons good money management is important. Your money only goes so far, so you need to use it wisely.

Of course, if you're still a teen and living with your parents, they're probably paying for your "essential" living expenses—a basic wardrobe, food, shelter, school supplies, etc. However, they may expect you to pay for the "nonessential" items with your own money—MP3 players, text messaging fees, jewelry, sporting equipment, entertainment, etc. They may also expect you to save for future "big ticket" expenses, like a car or college tuition. This is going to require you to carefully manage your money now.

In a down economy like we're facing today, sound financial practices are even more essential. Money is tight and getting tighter. You're going to have to work extra hard to keep your finances in order. The following steps will help.

Prepare a budget

The number one step you can take is to create a budget for yourself. Simply put, "a budget is a plan for how you are going to spend your money," says Karen Varcoe, Ph.D., a financial adviser and consumer economics specialist with the University of California Cooperative Extension. Budgeting helps you see how you are using your money and where you need to make adjustments.

The first thing you need to do is estimate your total monthly income. Include your allowance, money earned from a part-time or summer job, and even occasional income you get from things like babysitting, yard work or shoveling snow.

Next, make a list of all your monthly expenses. Put down everything you have to pay for with your own money, such as clothes, makeup, eating out, movies, music downloads, texting fees, CDs, video and computer games, and gifts.

Add up your income and then your expenses and compare the two. If you have more income than expenses, you're off to a great start. You can use this excess to put into savings. If your expenses are more than your income, you will have to reduce some of your spending. Decide what expenditures are most important to you or necessary, and which are not so necessary.

After you have a good idea of where your money is going each month, you can figure out where your money should be going. This will be your actual budget. Come up with a dollar figure for how much of your income should go to various spending categories each month—tithes, clothing, entertainment, spending money, short-term savings, long-term or college savings, etc. Other than tithes, the percentages for the other budgetary categories are variable. You will need to decide exactly what you want to use your money on each month, based on your priorities.

You can set up your budget on the computer or get a ledger book. Record your expenditures each month, and keep a running total of how much you've spent in each budgetary category. This will help you see on an ongoing basis if you're spending too much.

"If you get to the point where there's no more money left for the month in a particular category, stop spending," says Dr. Varcoe. "Don't let yourself spend what's not in
the budget."

Cut back, not out

When spending reductions are necessary, think in terms of "cutting back" rather than "cutting out," says Shirley Anderson-Porisch, a financial adviser with the University of Minnesota Extension. "Cut outs are a form of deprivation, which usually sets people up for failure. Cut backs get people moving in a positive direction, and sets them up for success."

Simply put, this means if you are spending $5 a week on snacks, rather than cut out these snacks altogether, you might just need to reduce the spending to $3 a week. After a year you will have saved $104.
Know the difference between needs and wants

Another aspect of budgeting is differentiating between needs and wants. "Needs sustain our lives; wants make life more comfortable, but aren't necessary," explains Ms. Anderson-Porisch. For instance, a pair of jeans may be a need, but the $200 pair of designer jeans advertised by your favorite celebrity is a want.

Chances are, you probably won't be able to fulfill all your wants as you go through life, especially in a down economy. If budget cutbacks need to be made, knowing what's a need rather than just a want will help you make the right decisions.

Save at least half your income

Ms. Anderson-Porisch also encourages teens to save at least 50 percent of their income. That could be divvied up between long- and short-term savings. Long-term savings would be money you would let build for several years or more, perhaps for college tuition or to use for a car down payment. Short-term savings would be for items you want to buy within the next few months, such as a high school ring, iPad or prom dress. These are items that cost more than what you receive in a single paycheck or allowance.

She advises you put your long-term savings in a certificate of deposit (CD) or money market account. These generally pay a higher interest rate than standard savings accounts.

With CDs, you do have to leave the money in the bank for a certain period of time, generally at least a year. Money market accounts typically have restrictions on the number of withdrawals you can make. But if this is for your long-term savings, these restrictions shouldn't be a problem.

Shop wisely

Shop around for expensive items like MP3 players, smart phones and watches to make sure you are getting a quality product at a good price. Don't buy the first one you see. Check out as many stores as you can, including online retailers, and compare prices. It's not uncommon for the same item to be much cheaper in one store than in another.

Before you go shopping, make a list of items you need or have budgeted for, and don't purchase anything that's not on your list. This means if you're going to the mall to shop for a prom dress, don't also buy a new pair of boots when you see them on display. If you see other items for sale that you might want, wait a few days before you buy them so you can think it over. Avoid impulse purchases, especially if buying these items would make you go over your budget.

Limit the amount of cash you carry

When you go shopping or out to eat with friends, take only a small amount of cash with you. "The less cash you carry, the less you can spend on impulse or frivolous purchases," says Varcoe. For instance, if you are going out for ice cream, you are consciously limiting how much you're going to spend if you only bring a $5 bill. You would probably spend more if you had a $10 bill with you. A few dollars saved here and there can really make a difference.

Don't buy on credit

If you receive a credit card offer in the mail, "throw it away," Dr. Varcoe urges. "When you have a credit card, it's way too easy to spend money you shouldn't or don't have."

For high school and college students, buying on credit is especially problematic, Varcoe says, because they don't have full-time jobs and cannot pay off the credit card balances they accrue. Not only that, but credit cards have higher interest rates than almost any other type of borrowing—sometimes 20 percent or more.

Yet high school students are increasingly being targeted by credit card companies. According to the Jump$tart Coalition for Financial Literacy, 34.7 percent of high school seniors use credit cards. Half of them use cards issued in their parents' names, and half use cards issued in their own names.

But it's not just high school seniors who are buying on credit. Nowadays, teens as young as 14 or 15 are receiving credit card solicitations. If teens don't obtain a credit card in high school, they are almost certain to get one during their freshman year in college.

"You may tell yourself you want a credit card only for an ‘emergency,' but as soon as you start using it, things can quickly spiral out of control," Varcoe says. She says many college students are "over their heads in credit card debt" even before they graduate—definitely not the way to start adulthood.

These are all important steps to consider while you are still a teen or when you become an adult, whether the economy is robust or recessionary.

Remember, "You're not just managing your money; you're developing financial skills you will use the rest of your life," says Ms. Anderson-Porisch. If you're money savvy, you will be much more ready to tackle whatever financial challenges come your way in the future.

For further study, request our free booklet Managing Your Finances.