Most of us what we learn about personal finance has been instilled in us by our parents, both by listening to what they have told us and by watching what they do with their money. Unfortunately, our parents were also learning through trial and error when it came to personal finance and their course of action might not be the best, and certainly might not be the best for you. Times have changed drastically and your lifestyle is not similar to that of your parents.
All this means that by the time you start earning your own money, you will likely start off with both pre-conceived notions of what you ought to be doing with it and very little idea of what you should really do with it. This results in young people grossly mismanaging their money - either overspending or making very poor investments. Luckily, there are a few things that can help every young person start looking at the way they manage their money, which are not limited by income, nationality or lifestyle.
Here are some things that every young person needs to know about personal finance.
Keep an Eye on Your Money
A mistake many young people make early on in their careers is not tracking their expenses. The liberty of having one’s own money to spend without being questioned is extremely freeing that being answerable to even oneself seems distasteful. However, this results in many years going by with many a paycheck having come and gone, and having no idea what happened to all that money. Was it spent on food? Traveling? Clothes? And if so, how could so much money have been spent on those things? Tracking your expenses does not mean limiting your expenses or sticking to a budget. It simply means knowing where you spend most of your money. This habit will also help you find out if you are losing any money, through any bank errors or through outright theft and fraud. Simply having this knowledge will result in your making certain decisions that will end up in money saved as a result.
Tip: There are many mobile apps that help you collate your daily expenses and categorise them automatically, providing you with an expense report.
Don’t Fall into Needless Debt
Most young people will never have as much money as they would like to have, sufficient to live the lifestyle they dream of. Most young people simply have to manage their lifestyles with the amount of money they are able to bring in. This often leads to frustration, especially if your friends and coworkers seem to have much more money than you do. The need to own similar things (like phones, cars, games, clothes etc.) and do similar activities (like traveling, night outs, parties etc.) would become very high, and many young people turn to payday loans, personal loans and credit cards to help finance their idea of a perfect life in comparison to their friends’. This kind of behaviour is commonly known as “Keeping Up With The Joneses” where people feel the need to keep upgrading their lifestyle beyond their means simply because they feel it is required in their social circle. While utilising personal loans, credit cards and payday loans are not bad per se, the reason for getting into debt (especially long term or high interest debt) at a young age must be worthwhile enough.
Tip: Hardly anyone is as rich as they appear to be.
Save, Save, Save
“A penny saved is a penny earned.”
A person who has a million rupees in the bank is often considered more financially secure than someone who earns and spends a million rupees. The value of saving is made even more apparent considering interest rates. For instance, saving Rs. 5,000 today will mean that you will still have that money in a few years (plus interest); however, if you had bought an outfit costing the same amount of money, you would not even be able to wear it for more than a few years. Every single financial guru or blog will stress the importance of savings - and that is correct. Start from as little as you like but integrate savings into your personal finance routine from a young age onwards.
Investment vs Savings
Many people make an argument for investing your money rather than saving, and this has more than a bit of truth in it considering the depreciation of currencies. Rs. 5,000 today might not be worth the same in ten years; however, if you had invested that Rs. 5,000 into something that grows in value, your initial investment is still secure. That being said, investment by definition carries risk. Therefore, it is best to save some money in cash, invest some money in low risk ventures and leave room to take a deep dive into various high-risk, high-return investments..
Practice Self Control
No matter how extensive your financial plans might be, you will find it difficult to achieve these without quite a bit of self control. Practicing discipline when it comes to personal finance from an early age will help you go a long way in managing your finances in the future, especially in distinguishing your needs from your wants. Discipline is not only limited to avoiding impulse purchases and shopping sprees. Exercising self control in personal finance is all about moderation in everything. This allows you to experience a little bit of everything while having a tight grip on your finances.