Benjamin Franklin once wrote that “time is money,” but despite all the time that we spend in school (much of it studying historical figures like the so-called First American), money is one subject that we don’t learn too much about. That’s a problem.
For starters, only 33 percent of people learn the basics of money management at home and 40 percent of adults grade their financial know-how at a “C” level or below, according to the National Foundation for Credit Counseling. Financial literacy therefore tends to slip through the curriculum cracks, and even when we do have someone to guide us, there’s a good chance that person may need a teacher of their own.
It, consequently, shouldn’t be a surprise that US consumers owe nearly $900 billion to credit card companies and more than $1 trillion to student loan providers; or that the United States ranks only ahead of Bosnia in terms of how prepared parents feel their kids are for financial independence.
More than a wake-up call, the clearly dismal state of financial literacy in this country should provide a call to arms as we wait around for Congress to address the budget deficit and prodigious national debt in some substantive fashion. We need to become active participants in our own financial future, and it all starts with building a solid base of knowledge on which to operate.
Sowing the seeds of financial success
While we can all certainly learn new things as we get older, “personal finance education must start at younger ages,” Vickie Bajtelsmit, academic director for the Jump$tart Coalition for Personal Financial Literacy and a professor at Colorado State University, told CardHub in a recent interview. “Kids are so much more receptive than adults.”
Not only will internalizing the basics of financial responsibility help you maximize limited funds while in school, but it will also enable you to hit the ground running once you enter the “real world” and, ultimately, retire earlier.
But where to begin? The apparent complexity of personal finance can be a barrier to entry for newcomers, but, in truth, the core concepts are extremely simple. With that in mind, we’ll offer some tips below for how you can get your financial house in order as the new academic year begins. Next
Don’t be intimidated by terminology
Every discipline has its own vernacular, but it seems that with finance in particular, people love throwing around fancy terms and acronyms that can easily fly over the heads of the uninformed. Don’t let that impede your education. Instead, simply make it a practice to look up any term you don’t recognize as you read about various personal finance issues. You’ll quickly find that only a handful of core terms really matter and that much of the most commonly used verbiage is actually interchangeable. Before you know it, you’ll have a pretty good working personal finance vocabulary. Next
Learn through experience
The best way to learn about personal finance is to get your hands dirty and maybe even make a few mistakes along the way. Yes, you can familiarize yourself with certain key concepts in a classroom type environment, but the logistics of everyday money management will reveal myriad challenges that you might not even consider when approaching things from a purely academic standpoint. This, however, doesn’t mean you should attempt to go it alone. Rather, it’s a good idea to regularly review your financial choices with a parent or teacher. Being forced to put ideas to words will unearth flawed logic, and a knowledgeable sounding board can provide personal anecdotes that ultimately enable you to avoid common mistakes.
“Teaching simple guidance can be effective,” says Shawn Cole, a Harvard Business School professor and leading financial literacy researcher. “I think another promising area is the decision to support, which would mean giving people real-time advice and guidance, rather than training them in high school and hoping that 20 years later when they’re making a mortgage decision they remember what they learned.” Next
Budget and save
Perhaps the most important financial lesson that a young person can learn is the value of a dollar saved. Because of compound interest – the process of earning interest on interest over time – the money that you are able to set aside now will grow exponentially as you get older. Not only will that make retirement a more attainable goal, but it will also prevent you from having to take unnecessary investment risks in order to achieve it. While no amount is too small, most experts recommend saving around 10 percent of your take-home income each month.
Saving effectively, of course, necessitates having enough self control to abide by a well-thought-out budget and avoid dangerous impulse spending. Fostering a more financially literate society “begins and ends with having consumers understand the basic concept of ‘self-control,’ says Ron Rhoades, chair of the financial planning program at the Alfred State SUNY College of Technology. “The ability to exercise self-control is the No. 1 determinant of success, in all aspects of life.” Next
Start building credit
Not only might your credit dictate what jobs you can land after graduation, especially if your chosen field necessitates a security clearance or the handling of money, but it can also impact your ability to move out of your parent’s house, lease a car, and find an affordable insurance policy.
Responsibly using a no annual fee student credit card is the most efficient way to build credit. Credit cards report account information to the major credit bureaus on a monthly basis, and as long as this info does not reflect late payments or maxed-out credit lines, your credit standing will gradually rise. Next
Put your own money on the line
It’s impossible to truly understand the value of a dollar when your parents pay for everything. You should therefore assume responsibility for some of your own costs as you get older and begin working part-time. This will force you to budget, prioritize your spending, and keep track of due dates. It will also indicate maturity to your parents – a currency in and of itself for young adults.
Another way to further personalize your learning experience is to forgo a student credit card in favor of a secured card. Secured credit cards require you to place a refundable security deposit that acts as your spending limit, thereby ensuring that you don’t spend more than you can afford to pay back and discouraging you from carrying a balance from month to month (no one wants to pay interest on their own money). There are currently a few secured credit card offers that do not charge annual fees, so using this type of card shouldn’t increase the cost of credit building. Next
People don’t dread tax season because filing a tax return is necessarily difficult. Rather, it’s because many folks don’t keep proper records throughout the year and are then forced to frantically search for receipts, pay stubs, investment records, etc., when April rolls around. This is just one example, but it underscores how important organization is to sound money management. Much like you can’t expect to do well on a test if you don’t attend class or keep detailed notes, financial responsibility will be an uphill battle if you don’t know how much disposable income you have, what you’re spending each month, when payments are due, etc. Next
Automate when possible
Between your class schedule, homework assignments, and slate of extracurricular activities, you already have plenty of deadlines to keep straight without adding bill payments to the mix. Setting up automatic monthly payments from a checking account (or even adding reminders to an online calendar) is an easy way to lighten your load and avoid careless mistakes that can damage your credit standing. While all of this information may seem daunting now, look on the bright side – you’re already well ahead of the curve. Back to the beginning
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