Anyone who has studied the recent recession and other financial crises understands the importance of financial planning. For more than a decade, indiscretions from consumers and businesses alike have had a profound impact on the global economy. It seems as though every year is spent collectively reevaluating the way we go about our finances as both individuals and as pieces of a greater economic whole.
But financial planning need not be complicated, nor does it have to keep you from using your money the way you want. It's really about being aware of the money you have and creating priorities for how to spend it. This guide has been designed to help you learn more about financial planning and the steps you can begin taking now to ensure that you avoid a "financial crisis" of your own in the years to come.
Step One: Creating a Financial Checklist
Many college students and other young people will learn rather quickly how important it is to keep their expenses in check. It's easy to become bogged down with ânew' financial obligations, such as college tuition, rent, food, and entertainment. Getting started now with a financial checklist of your own may save you time, stress, and money.
Creating a checklist is simple. All you need to do is record your monthly income (from parents, part-time employment, financial aid, etc.) and your recurring monthly expenses. The goal is to reconcile (or balance) your expenses with your income so you don't end up spending more than you have. Doing this will help you avoid trouble with nasty credit card debt or a low credit score.
For more information on creating a financial checklist, as well as some other great information about financial planning, this informative article from Western Washington University is a great read.
Check Your Financial Knowledge: Microeconomics
If you took economics in high school, you may be familiar with the term "microeconomics." Unlike macroeconomics, which deals with big picture economic issues such as inflation and unemployment rates, microeconomics gets into more specific economic issues concerning individuals and businesses, such as cash flow and opportunity cost. While we don't expect you to be an economic expert, being familiar with these concepts will definitely help you craft a solid financial plan.
One of the most recognizable formulas in the world of microeconomics is the "cost-benefit analysis." Most of us conduct this analysis every day, often without even knowing it. A cost-benefit analysis is a simple determination of whether the benefit of something you spend money on matches or exceeds its cost.
For example, let's say you go to your local "buy-in-bulk" grocery store and decide to spend $60 on buying your favorite coffee in bulk. Normally you spend $10 a week on the same brand of coffee at the corner grocery store, but the bulk purchase you just made should provide you with enough coffee to last eight weeks. A quick cost-benefit analysis shows that you end up saving $20 by purchasing coffee in bulk.
Something as simple as buying more up-front really can end up saving you a significant amount of money over time.
Step Two: Cut Your Expenses
Now that you've successfully completed a financial checklist guided by microeconomics, cutting out unnecessary expenses from your checklist is the next step. There are three possible conclusions you can make upon reviewing your checklist:
- Your income is more than your expenses. (This is what you want)
- Your income is less than your expenses. (This is what you DON'T want)
- Your income and expenses are the same. (You don't really want this either)
If you fall under the second or third categories with little chance of increasing your income in the near future, you will want to consider cutting your expenses where possible.
Sometimes this process can be easier than you think. If you use a cell phone, for example, take a moment to consider how many minutes you use per month. In many cases, the number of minutes the average person spends talking on their cell will be less than the number of minutes for which they currently pay. Therefore, downsizing your cell phone plan is often an excellent way to cut expenses right off the bat.
Here are some more great expense cutting tips for students:
- Consider taking the bus or your bike to school instead of driving.
- Cook your own meals instead of going out to eat.
- Sell your used textbooks online instead of going back to the campus bookstore.
- Identify how much money you spend on "non-essential" items, such as movies, video games and going out on the town, and consider cutting back on some of those expenses.
Step Three: Manage Your Cash
Once you have created your financial checklist and cut expenses where appropriate, the income you receive per month will ideally exceed your monthly expenses. This is known as "positive cash flow." We realize that reaching this goal could be a challenge, given that students may not have a very substantial source of income while they attend college. Even if your cash flow remains slightly negative or just breaks even, learning how to manage your cash now is a great way to prepare for the future.
While this may seem counterintuitive to what we've discussed thus far, once you graduate college (or even before you graduate), you may want to consider applying for a credit card. This is an important step toward building your credit history. Building a good credit history now may allow you to borrow money later for important things you may not be able to afford with cash alone, such as a car or even a house. Having a credit card is a great way to show lenders that you have financial responsibility when it comes to using credit and following a sound financial plan.
Any time you have positive cash flow, saving a portion of your income will be a top priority. In the long run, saving money can help you afford the vacation you've always wanted, paying off unpredictable debts, or even retiring comfortably. The best way to save money is to not question the immediate value of doing so, and instead to just keep on doing it.
For more information on what students can do to begin managing their cash today, Get Rich Slowly hosts a terrific article featuring 27 great cash management tips college students can put into action today.
Your Money, Your Future
We hope you were able to take away a few things to help you get your financial plan started the right way. Remember, now is really the perfect time to start. Remember, what you do with your own money is entirely up to you, but achieving financial independence after college could entirely depend on the financial decisions you make today.