Managing money isn't just one thing; it includes everything about how you handle all of your finances, from budgeting to investing, to saving and setting goals. In this lesson, we will learn some tactics to improve your financial well-being. It would be really helpful to nurture good money habits.
Needs point out the something you must have for survival. On the other hand, wants refers to something which is good to have, but not essential for survival. For the purpose of spending and saving money wisely, you must know the difference between needs and wants.
Yes, you need clothes. But do you need designer clothes? Yes, you need food. But do you need the most expensive steak on the menu?
II. BUDGETING
Budgeting creates a spending plan for your money and can help ensure there is always enough money to pay for food, bills, and other expenses. It helps you control your spending, track your expenses, and save more money. Additionally, budgeting can help you make better financial decisions, prepare for emergencies, get out of debt, and stay focused on your long-term financial goals.
For a moment imagine you are a college student. Look at the below template for the budgeting of finance by a college student.
Creating a simple budget based on your income and expenses is a good place to start. You can start doing this right away.
Tip: When you know your needs, you are in a better position to develop a budget and save for your future.
a. List down your monthly income, parental allowance, and savings.
b. Write down your estimated expenses for the month. Take things into account like books, school supplies, laundry, any food orders, personal care items and anything else you spend money on. Paint an accurate picture of your spending habits.
| Creating a budget does not mean that you can't have fun. So, do leave some amount for your discretionary expenses like a pizza outing with friends. |
c. Stick to your budget. Once you’ve created a budget, it’s just a case of sticking to it. It’s easier said than done but curb your impulses.
Here is a simple template you can use to make your own budget.
III. EMERGENCY/SAVING FUND
Life is full of surprises. In such times, the emergency fund serves as a safety net for "rainy days". Start an emergency savings fund for long-term financial health.
Build your fund by paying yourself first. In your budget, incorporate saving as a recurring expense. Similarly to paying your bills on a schedule, contribute to your savings on a schedule. Know that as soon as you receive income, a portion of it goes to your savings or emergency fund.
You can choose to have one fund (e.g., an emergency fund) or you can have two funds (i.e., one for savings and one for emergencies).
Begin with one fund. Put whatever you can in your emergency fund and do not touch the money unless you have a major emergency.
If you are more advanced, and your needs are thoroughly taken care of, consider having two funds. Build your emergency fund and use it for emergencies only. Build your savings fund and use it to save up for your wants (e.g., a vacation). If you decide to have two funds, make sure you contribute to them both; only use each fund for its designated purpose. For instance, if you do not have enough money in your savings fund, do not use your emergency fund to make up the difference so you can go on vacation. That is not what your emergency fund is for.
If you lack the discipline to have two funds, have one designated emergency fund. Only use the fund when you have an emergency.
The earlier you start saving, the more you’ll earn over time. If you’re not familiar with the concept of compound interest, it’s a simple but powerful phenomenon where you can increase the amount of money you have in a savings account by leaving it alone and letting it accrue interest.
Quick example: Say you deposit $1,000 into a high-yield online savings account on your first day of college and don’t add or withdraw money the entire four years you’re in college. Assuming a 2.1% annual interest rate, at the end of those four years you will have $1,088 in your account.
How? In the first year, you’ll earn $21 of interest. For the second year, instead of just $1,000 accruing interest, $1,021 is the amount that accrues interest. So your total at the end of year two is $1,043. Each year the amount of money in your account increases because the previous year’s total is taken into account when calculating interest.
Invest extra money for your future. Saving at a young age allows you to take advantage of the power of compounding.
Mathematically speaking, compounding is defined as, 'the increase in the value of an investment, due to the interest earned on the principal, as well as the accumulated interest. ' Simply put, it is a strategy that makes your money work for you. It could be regarded as a powerful tool to grow your wealth.
Compound interest can be defined as interest calculated on the initial principal and also on the accumulated interest of previous periods. Think of it as the cycle of earning "interest on interest" which can cause wealth to rapidly increase. Compound Interest will make a deposit grow at a faster rate than simple interest, which is interest calculated only on the principal amount.
With compound interest not only are you getting interest on your initial investment, but you are getting interest on top of interest earned on the principle! It’s because of this that your wealth can grow exponentially through compound interest.
| Simple Interest | Compound Interest | |
| Definition | The amount you earn from the money you originally invested. | The amount you earn from your initial investment plus the interest that has already accrued. |
| Formula |
\(P\times r \times n\) where P is principal amount, r is annual interest, and n is the period for which deposit is made |
\(P(1+\frac{r}{100})^{n}\ - P\) where P is principal amount, r is annual interest, and n is the period for which deposit is made |
| Example |
If you decide to invest $2,000 with a simple interest rate of 8.5%, you’ll earn $170 in interest after one year ($2,000 x 0.085). After five years, you’ll earn $850 (170 x 5) in interest. |
If you invest $2,000 at an interest rate of 8.5% compounding twice a year for 5 years, your end balance will be $3,032.43. You will have earned $1,032.43 in interest, compared to $850 in the simple interest |
Compound interest favors those that start early and stay consistent, which is why it pays to start now. It’s never too late to start — or too early.
One way you can loosen your budget and have a little extra money on hand is to cut down on costs. There are tons of ways to do this, some of which you might already be doing. Always buy used textbooks instead of new ones (and resell those textbooks when you're done), skip the expensive on-campus meal plan and cook yourself instead, or shop at thrift stores to save on new clothes.
Here are some further ways to help you get started:
Another aspect is earning more - this solves many problems. If you can do freelance or part-time jobs in the evening or on the weekend - that's all extra. All this money can go to build up savings. Or you could use that money to go on a trip or save for your college fees.
Here are some ways to earn some extra money:
If you ever want to get a credit card or borrow money at a low-interest rate, then it is crucial to maintain a good credit score. It also determines your car insurance rates, whether you pay a deposit when setting up utilities, and even whether you get hired for certain jobs.
You'll need a credit card that you use and pay off every month, as this helps you build a record of responsible borrowing. Just make sure you're paying your bills by the due date and not using too much of your available credit. Those are the building blocks of an excellent credit score.
Following factors affect your credit score:
Despite their best efforts, many people fall off their financial plans. If your budget is too restrictive, it can be suffocating. Therefore,
With hard work and dedication, you can manage your money well. Remember: spend wisely and live within your means.
