Don't Break the Bank: A Student's Guide to Managing Money (3 page)

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A Letter to Students

Dear Student:

There are lots of old sayings about money: that it makes the world go around, that it doesn’t buy happiness, and even that it’s the root of all evil. Whether or not you believe any of those, it’s hard to deny that money will play an important role in your life. You need money to pay for your basic living needs—like food and shelter—and to buy the fun things—like clothing and electronics.

If you are like most young adults, your parents took care of money issues for most of your life up until this point. You may have gotten an allowance and perhaps have earned some extra money babysitting or mowing lawns, but for the most part, your parents probably handled your expenses and earned most of the household income.

But you are quickly approaching (or have already reached) the point where you need to know more about money. You may be getting ready to apply for a job, or perhaps you have a cell phone bill or other expenses to pay. And you might be starting to worry about how to save or invest some of the money you earn.

Don’t Break the Bank: A Student’s Guide to Managing Money
can help you learn the basics about earning, saving, budgeting, and investing your money. This book is divided in specific parts on major money topics: what money is, how to earn it, why it’s important to save it, and how to invest it. You will also learn tips on how to create and stick to a budget, and you’ll find out why good credit is so important. The habits and decisions you make right now can affect your finances for a long time, so we want to help you get the best possible start.

Bottom line: you’ll learn how to spend, save, and manage your money in a smart way—and plan a budget that splurges so you can have fun without, well, breaking the bank.

We hope you will find this publication useful in helping you learn how to manage your own finances. If you have questions or feedback on the
Don’t Break the Bank
, please contact us at:

Peterson’s Publishing
2000 Lenox Drive
Lawrenceville, NJ 08648

Sincerely,

Peterson’s Editorial Staff

10 Steps to Increase Your Financial Fitness

1. Be honest about where you are.

It’s human nature to avoid pain, but denying a problem will only make it worse. Statistics show that more than one third of Americans purposely avoid thinking about their damaged financial lives. Until we get honest with ourselves, we are unlikely to improve our financial health. To become financially fit, it’s important to know things like:

• Your credit score—What is it? What does it mean? How do you get it?

• How much you owe and to whom—Are you paying rent, insurance, everyday expenses?)

• How much you have in savings—Are you spending every cent you have? How much should you be saving?

• How much you have saved for retirement or when to start a retirement account

• Where your investments are held and how they are allocated

2. Know where you want to be.

Changing habits can be tough. To stay motivated, keep your eyes on the prize. What would a healthy financial life do for you? How would it make you feel? What would you have? Where would you go? Identify your goals around your career, education, retirement someday, travel, health, and family. Where do you want to be in five years? In ten years? The more specifically you identify what you want, the more energy you will unleash to get yourself there.

3. Beware of your thoughts.

Are you an over-spender? Do you neglect saving? If you answered “yes,” you are an average American. Perhaps that helps explain why 80 percent of Americans say money is the Number 1 source of stress in their lives. To change bad habits, it is often essential to identify the beliefs that underlie them. Our financial behaviors make sense when we understand our beliefs about money. These beliefs, called money scripts, are typically outside our conscious awareness, but they drive all our financial behaviors. Some problematic money scripts include the following: “More money or more things will make me happier,” and “I can never have what I want, so I might as well get what I can when I can.” When we base our financial lives on erroneous or incomplete beliefs, we set ourselves up for failure.

4. Forgive yourself.

Our feelings and beliefs about money don’t develop in a vacuum. We are taught them or we arrive at them when trying to make sense of confusing situations. As children, we are prone to making incomplete conclusions. For example, if our family is rich and unhappy, we may conclude that money led to our unhappiness, when the discontentment could be better explained by other issues. As adults, we rarely return to our past, identify our money scripts, examine them, or change them. As a result, their control over our financial lives can be insidious. So regardless of your current financial situation, have compassion for yourself. Most likely, your behavior toward money is a result of where you came from. The good news is, the more you know about money management the more you are empowered to change.

5. Commit to change (if you are ready).

Change takes time, energy, and effort. To change, we must believe it is important to do so. To examine whether you’re ready to change, write down the pros and cons. What are the pros of staying where you are, such as continuing to buy what you want, travel, or not have to think about finances (at least for a while)? What are the cons of continuing to do what you are doing, such as spending your money on entertainment instead of being able to pay your car insurance? Or getting into credit card debt so the $40 shirt you bought becomes an $80 shirt due to interest? You will commit to change only when your list of benefits outweighs your list of reasons to stay right where you are. Even if you are not ready to transform your financial life, consider taking Step 6 anyway. When you are ready to commit to improving your financial fitness, you are well on your way.

6. Apply some “financial first aid.”

In health care, first aid is meant to prevent further harm and promote recovery. If someone is bleeding, first aid may involve applying pressure to the wound. Instead of losing blood, over-spenders bleed money, and much of it is borrowed. Financial first aid involves putting a stop to overspending and oftentimes halting the use of credit cards. Shop with cash to help avoid impulse buying. It might seem like a small action, but it can be a giant leap toward financial fitness. Studies show we spend 30 percent less when we pay with cash. So take action now to stop the bleeding.

7. Make a plan.

To stay on top of our finances, we need a plan for spending, saving, and giving. A spending plan allows for meeting financial obligations and needs, while allowing for saving and giving. Your plan may include reducing spending in some areas, while setting aside more money in others. Once your plan is in place, track it. You may find some checking and budgeting software helpful. You may choose to save 10–30 percent of your income. You may choose to set up direct deposits to your savings account to ensure you pay yourself first.

8. Take action.

It takes about 30 days of practice before a new behavior becomes a habit. With a plan in place, you can begin tracking your spending, finding ways to save money, and spending money on the things that matter most. Living a life in which your financial behaviors match your values and goals feels good. Being conscious and purposeful about spending can help us appreciate and enjoy life more.

9. Expect challenges.

It is important to know that you may slip back into old habits. For the most important changes, relapse is common and should be expected. The important thing is to not beat yourself up about it. Get back on track as soon as possible. See bumps along the way as learning experiences.

10. Ask for help.

The journey to financial health can be long. There will be setbacks along the way. If you find yourself repeating mistakes or having trouble following through on your plan, seek the help of a parent or another trusted adult.

Source: Dr. Brad Klontz, on behalf of H&R Block Dollars and Sense
http://www.hrbds.com

Part I :

Money, Money, Money...

You probably know a lot about money. You know how much you need to buy what you really want. And, of course, you know how tough it can sometimes be to get your hands on money. But how much do you know about money itself—as in, actual currency? You’ve probably never given it much thought, but there are lots of interesting things to learn about paper currency and coins. You’ll find out what the words and symbols mean, how inflation affects your money, and what it’s like to use money in other parts of the world.

Chapter 1:

Money Makes the World Go Around

There’s no denying that money plays an important role in our lives. Virtually everything we do involves money in some way. We need money in order to eat, keep a roof over our head, buy clothes to wear, and keep our lights, heat, and other comforts going.

Most people spend a lot of time thinking about money—and what they would do with it— if they ever had a great deal of it.

But how much do you actually know about money itself? In this chapter, we’ll take a look at the history of money, how money gets printed, the various types of bills and coins, the effect of inflation on money, money around the world, and alternate forms of currency.

The History of Money

Timeline of Money in the United States

1690:
The Massachusetts Bay Colony, one of the 13 original colonies, issues the first paper money to cover costs of military expeditions. The practice of issuing paper bills spreads to the other colonies.

1730:
Ben Franklin’s Philadelphia printing company prints Colonial Bills, which feature nature prints—raised impressions created from casts of real leaves. This doesn’t just look pretty; it actually is a clever way to make it harder to make counterfeit bills.

1764:
Britain imposes a total ban, which prohibits the colonies from printing any paper money.

1781:
The Bank of North America, located in Philadelphia, becomes the country’s first official bank.