Page 2 How to Identify Needs vs. Wants Page 3 Spending Tips Page 5 Tips to Saving Money Page 8 Budgeting Tips How to Identify Needs vs. Wants Knowing how to manage money is one of the most important life skills you can master. Essentially, every well-managed, effective life plan starts with proper money management. So what s the key to great money management? Just like learning to drive a car, learning to manage money capably starts with learning some basics. Spending and Saving You may be familiar with the Yin/Yang concept in Eastern philosophy, which says nature is comprised of two opposing but necessary forces. This concept can easily be applied to money: spending (yang) and saving (yin). Spending and saving support each other equally and, if kept in balance, sustain a complete and balanced life. The two are interdependent; that is, they cannot exist without each other. For instance, if you never save for the future, the moment will come when you have no money to spend. Striking a good balance means you don t tip the scale in either direction tightwad or wild spender. All your actions with money are intertwined; one affects the other. Needs vs. Wants A need is something you must have for survival. Food, water, shelter, and clothing are good examples of needs. Without food you would starve, right? Food is a basic need. However, you should understand that you don t need a $50 prime rib and lobster dinner. You do need basic food that provides fuel to your body, but a lobster dinner would be considered a want. A want is something you would like to have. It s not absolutely necessary for survival, but you would enjoy having it. Nice cars, high-end clothes, vacations, plasma TVs, or expensive watches are examples of wants. When you manage your money, make sure to budget enough to pay for your needs and plan ahead for your wants.
Spending Tips Each of us has a limit on the amount of money we have available to spend. The ability to manage spending is important to achieving financial success. Of course, it s okay to spend money and purchase items you want when you can afford them. If you take time to learn how to shop wisely, your money will go a lot farther without breaking your budget! A sure-fire way to find out where your money goes is to write down everything you spend every day for a month. Keeping this money diary will show you what you buy on a day-to-day basis. You probably already have a good idea of your fixed expenses (rent, car payments, insurance, etc.) but your money diary will give you a handle on your everyday spending. Most of us have unaccounted cash that vanishes each month. Maybe we don t recall how many quick stops we made for coffee or a burger. To understand where your money goes, write down everything you spend money on every coffee, every burger, every bus or taxi fare. Everything! Group all your transactions into logical categories. Sit down once or twice a week to add up the totals by category. List all the cash spent. If you re like most people, at the end of the month some money will remain lost that is, you spent it, but you have no idea where it went. After 30 days of keeping the diary, ask yourself: what have you learned? Are there areas where you feel you overspend? The purpose of this exercise is to increase your awareness of how you spend your money, and it s the first step in developing a budget. After keeping your money diary for an entire month, chances are you ll start thinking a bit more carefully before you spend. This is a good exercise to repeat from time to time as your income and circumstances change. Your spending habits may be a lot different five years from now than they are today. Top Spending Tips Since you have limited funds to spend and you must live within your means, let s get real about your budget and finances. Once you master your spending habits, saving the money you need to chase your life dreams will become that much easier. Here are some tips to get your spending under control, and keep it there: 1. Shopping for entertainment Window shopping can be fun, but only if you don t lose control every time you spot a bargain. If you have the will power, definitely enjoy yourself window shopping. Create a wish list of items you want. Then you can save up to purchase them when you re able to afford it. Seeing the items you want provides strong motivation to work toward earning the money you need to buy them. 2. Beware of the good deal For a planned purchase, shopping the sales is a good idea. But buying an item just because it s on sale is not a good habit. If you can t pass up a good price, shopping the sales may not be a good strategy. For example, if you have a closet full of clothes with the sales tags still attached, your spending may not be under control pay closer attention.
3. Everyday habits Small everyday purchases add up to more than you may realize. A four-dollar Starbucks coffee five days a week adds up to more than $1,000 a year in unruly spending. Instead of buying sodas from a vending machine at $1.25 apiece, consider buying a 24-pack and tucking one in your bag each day. How much will you save? Can you really afford to pay that much extra for the convenience of a chilled vending machine? 4. Plan shopping and compare prices When you have a plan to buy a particular item, and you re sure you re not buying on impulse, take advantage of discount stores and the Internet to track down the best price. 5. Off-season shopping Shopping during the off-season can save you a lot of money. I saved a ton by purchasing my snowboarding gear in the spring, when the stores were getting ready for summer sports. 6. Shop with a purpose Know why you are shopping. Having a list and sticking to it may save you from making an expensive impulse purchase that you ll question as soon as you get home. Never go into a grocery store without a list when you re feeling hungry. You re sure to come out with cookies, ice cream, and hot dogs you didn t intend to buy! 7. Be creative A little creativity goes a long way, especially when you re tight on funds. I had a friend who was big into the latest fashions. She was working part-time and going to school, so money was very tight, but she always managed to look great. One of her secrets was to purchase jeans at a discount store for $30 a pair, and then have a tailor sew the back of the pockets so they looked expensive. Instead of paying $140 for designer jeans, she spent $38 and looked fabulous. Who knows you might even start your own fashion trend! 8. Consider the Opportunity Cost of your purchase If you understand basic economics, the term opportunity cost should be familiar. Opportunity cost is the cost of an item expressed in terms of missed opportunity. In other words, what else could you do with the same amount of money? So the opportunity cost of spending $150 for an ipod Nano may be quite high if it means you won t have the $150 for a more important expense for example, taking your girlfriend, wife, boyfriend, or husband on a promised birthday outing. If you spend wisely within a budget, you ll have more available funds to save and invest. That means a brighter, richer future for you and your family. Controlling your spending habits is how you ll reach your financial goals and enjoy life s experiences to the fullest.
Tips to Saving Money Saving money is the cornerstone to financial freedom. Setting aside money every month builds the foundation for establishing future wealth while letting you experience life now. If you regularly put away a portion of your hard-earned dollars, you ll be able to stop working at a younger age, do the things you truly enjoy, and avoid the emotional stress of everyday bills and financial challenges. Building a healthy savings fund enables you to enjoy your life to its fullest now. If your buddies suggest a weekend of golf or dirt bike riding, you have the money to go. If you want to go out for a nice dinner, you can afford it. You can enjoy time with friends or family instead of worrying about how the bill s going to get paid. Maybe you want a new computer or a fancy outfit. If you have money saved, you ll be able to purchase the luxuries you want. The best part is that you can afford it! Life is about experience. If you save money, you ll be able to partake more fully in activities, vacations, and holidays, and purchase those things you ve always dreamed of having. Putting Aside Emergency Money Savings provide an excellent money source to handle unexpected emergencies. Save to reduce your worry about sudden problems. Let s say your car breaks down and needs expensive repairs. If you have no savings, how will you get to work? Bus? Walk? Get a ride from friends or colleagues? But if you have an emergency savings account, you ll be back in the driver s seat in no time, without the stress and panic. Starting a workable savings plan at an early age helps you stick to your plans and live life securely, on your own terms. Can t Find the Money to Save? Yes, you can find money to save. Saving should be your top priority. Get into the mindset of paying yourself first. Instead of budgeting all your money for bills and expenses and then viewing what s left as possible savings, pay yourself first and then spend what s left over. Sound too hard? Here are two other solutions to give you enough money to save: 1) Earn more money 2) Cut down your expenses However you do it, storing away funds is vital! Save for a rainy day, fun, and for your eventual financial freedom.
Split it up! Separate your Savings Try saving money according to its purpose. Having real goals in mind makes the choice to save rather than spend much easier. To organize and allocate your money wisely, divide your savings into three specific categories: emergency fund, fun fund, and long-term savings. The Unexpected Your Emergency Fund Shoot for having six months worth of living expenses set aside in your savings account. If the worst happens you lose your job or encounter a health crisis this money can be lifesaving. Your emergency fund also can cover life s smaller crises. Use it to buy new brakes for the car, to replace a stolen purse or a damaged cell phone, without having to use a costly credit card. Simply spend a little of your emergency savings and then replenish the account as soon as you re able. Fun Fund You should definitely have a Fun Fund fun money is important. How you define fun is up to you, but you need money for those playful times. You only live once! The money you set aside in your fun fund is for the items you want. Making a wish list of items you want to buy in the future will motivate you to save money in this account. Then you can work toward purchasing items on your wish list by saving in your fun fund. For example, if you like to take a ski trip each December, why not set aside the money for the trip a few months before you go? Saving money for vacations, concerts, or a new wardrobe are all good examples of how to use the money you set aside in your fun account. And if you save up for the purchase, you ll have no need to rack up a huge credit card bill. Why Start Saving Long-term Now? The miracle of compound interest means that the earlier you start saving toward financial independence, the less money you ll have to put away each month to get the same results. Compound interest may sound like magic, but it s a legitimate way to get your hardearned money working for you. Those who start young have a long-term horizon to build wealth efficiently and effectively. The sooner you begin sticking to a financial plan, the closer you ll be to financial freedom. Long-term Saving Set up a long-term savings account to handle your investments whether they re literal financial investments or investments in your education or personal growth.
Financial investments get your money working for you, because they earn returns that you don t have to work for. We will talk about investing in greater detail later in this course. Once you ve set aside your six-month emergency fund, have a working budget, and have money you can allocate to long-term investments, it s time to start thinking about investing for the future. Planning for retirement should start when you re young the earlier the better. Why not let the magic of compounding interest increase your nest egg while you leave it alone? Maybe you dream of retiring on a boat off the coast of Greece. NOW is the perfect time to start saving to make that dream happen!
Budgeting Tips A budget is simply a plan for handling money. A budget serves as a roadmap toward living your chosen lifestyle and ensuring that you have enough money to do so. A workable budget has many benefits, including: Control Since a budget tells you how much money you have at any given point, you re in the financial driver s seat. You can plan to purchase items you want while having enough money to pay for the basic necessities. Budgeting greatly reduces financial stress. Organization Keeping your finances in order is vital, and financial planning keeps you organized. Organizing your finances will save you lots of time when trying to make a large purchase, get a loan, and/or complete your taxes. More money If you work within a budget, you will have more money every month. You ll avoid those little $15 fees that you may have missed before. Because you re more conscious of where you spend, you naturally will gravitate toward eliminating unnecessary expenditures. Opportunities As you stick with your budget, more financial windows of opportunity will open up for you. Good investments ones that earn money without work come to people who have savings built up. You build up your savings by sticking to your plan. Developing a Budget, Step-by-step Step 1 Know your monthly take-home pay Step 2 Understand your expenses Step 3 Have a savings plan Step 4 Implement the plan and make regular adjustments A budget takes into account your income and your expenses, and gives you guidelines on how to allocate any extra money you have left over. Circumstances naturally change, so you will set up and adjust your budget over and over throughout life. Your income will increase, as will your expenses and responsibilities. Once you set up your first budget, each subsequent version gets easier. You have something to work from a foundation. In this section you will find a worksheet to help you build your budget. Accounting for Expenses Now that we re almost ready to prepare a budget, let s take a last look at how best to account for expenses. It s as easy as one, two, three: 1. List fixed expenses that you pay every month (like rent, car payments, insurance, utilities, etc.). 2. Know your day-to-day expenses.
3. Finally, account for your annual expenses. For items you pay annually, divide the annual cost by 12 and include that amount in your monthly budget. For instance, you might pay your gym membership annually at $240. To account for this properly, divide the $240 by 12 (=$20) and set that amount aside each month to pay for the annual bill. Fast-track Financial Success Budget Budgeting is simple: 1. From your income, pay your necessary expenses. 2. Set money aside into savings accounts. 3. Donate time or money to charity. 4. Any money left over is yours to use however you want. Below is a sample budget to provide an example of how you might allocate your money. This first sample represents how you should budget prior to having six months worth of living expenses in your emergency account: 60%-70% of your income to cover fixed bills and everyday expenses 20%-30% of your income saved in your Emergency Fund 10% stashed for fun - the Fun Fund For example, if your take-home pay (net income = what s left after taxes are deducted) is $2,000, allocate your money like this: $1,200 (60%) to $1,400 (70%) to cover expenses $400 (20%) to $600 (30%) set aside for the Emergency Fund $200 (10%) allocated to the Fun Fund Your initial goal should be to build up your Emergency Fund as quickly as possible, so that you have a cushion in case anything happens. Once you have that set aside, you can begin to build your savings and other investments. After your six-month reserve is in place, I suggest that you allocate your money like this: 60%-70% of income to cover everyday expenses 15% for long-term savings 15% stashed for fun the Fun Fund 0%-10% for charity (the right time to start giving is now) So again using the same $2,000 take-home pay, your new money allocation would look like this: $1,200 (60%) to $1,400 (70%) to cover expenses $300 (15%) for long-term savings $300 (15%) for the Fun Fund Donate $200 (10%) or $200 worth of your time to charity Budgeting and saving are the cornerstones of your financial success. Make following
your budget a habit. Then you ll be able to afford things you want while securing your financial future.