Fast Fact Notes Chapter 3

Chapter 3 – Finance Fundamentals
The Fundamentals of Managing your Money

Knowing how to manage money is one of the most important skills you need to master in life. Essentially, proper money management will give you a well managed and effective life plan.

So, what is the key to great money-managing? Like learning to drive a car, there are some basic strategies to guide you. Follow them, and you won’t make the money schmo mistakes – and the problems of others won’t happen to you, too.

Spending and saving
Spending and saving equally support each other and - if kept in a balance - can lead to a balanced and complete life.

Needs vs. Wants
A need is something you must have for survival. It is something you can't live without. Shelter, clothing and food are all good examples of needs. If you don’t have food you would starve, right? That is a need.

A want is something you would like to have. It is something that is not absolutely necessary, but you would enjoy having. Ipods, high end clothes, vacations, Xboxes, and watches are all examples of wants.

Money pros have enough money for their “needs,” and purchase “wants” only when they can afford to do so.

Budget Breaking: SPENDING
We all have a limit to the amount of money we have available to spend. The ability to manage your spending is important to achieving financial success.

More importantly, if you spend wisely and within a budget, you will have more money available to save and invest - which means a brighter and richer future for you, your family, and your friends.

Here are the top tips to get and keep your spending under control.

Shopping for entertainment - It can be fun to window shop, but only if you don’t lose control every time you spot a “bargain.” If you have to spend money to have fun, you’ll bust your budget every time.

Beware the good deal - Shopping the sales is a good idea for something you have planned to purchase. Buying just because something is on sale is not a good habit.

Everyday habits – Small, everyday purchases add up more than you may realize. A four-dollar coffee, five days a week, adds up to over $1000 a year in unruly spending. Plan your shopping and compare prices as much as possible!

Off-season shopping - Buy at the end of the season for the following year – you’ll get blowout prices most of the time.

Shop with a purpose - Know why you are shopping. Have a list and stick to it.

Consider the Opportunity Cost of your purchase – In economics, it means that if you choose one thing, you can’t choose the other. What is the opportunity cost of spending $150 for an iPod Nano? It may be very high if it means you will not have the $150 for something that is more important to you—for example, taking out your girlfriend (or boyfriend!) for pizza on Fridays.

Money Pros are able to control their spending and purchase items they want at discounted prices.

 

Finance Fundamentals: How to Budget?
Keep a Money Diary
Most of us have cash that vanishes each month—to unknown stops for coffee or a quick burger. To understand how you spend your money, write down everything you spend money on: every coffee, every burger, every bus or taxi fare. Everything. Keeping a money diary will allow you to take better care of your spending.

Sit down once or twice a week to add up the totals by category
List all those cash withdrawals and try to account for all of it them. If you are like most people, at the end of the month you will have “lost” some money. You spent it, but have no idea where it went.

The purpose of this is to make you aware of how you spend your money. Once you’ve followed your spending for a month, you can

Develop a budget
Fixed expenses—rent, your cell phone bill, and tuition are relatively easy to budget. You know what to expect. Variable expenses—meals out, movies, and small purchases can be harder to get a handle on, and that is where the money diary challenge exercise will help.

Budget building: SAVING
Saving money is the cornerstone to living a financially free lifestyle. The ability to set aside money each month is the foundation for establishing your future wealth while being able to enjoy time with your friends “now.” By putting away your hard earned dollars, you will have the ability to stop working at a younger age, allowing you to do the things you truly enjoy, as well as freeing you from the emotional stresses of everyday bills.

Maybe you want a new computer game or a fancy outfit. Well, with savings you’ll be able to purchase the luxuries you want. The best part is you are able to afford it!

Life is about experiences, and by having money saved for things you like to do, you’ll be able to partake in more activities and holidays, and invest in things you have always dreamed of having.

Put aside emergency money
The first thing to save for is emergencies. Savings are also a great source of money for problems that come up unexpectedly. Reduce your worry about unexpected problems. Say your car breaks down and needs an expensive repair. Well, if you have no money saved, how are you going to get to work? Bus? Walk? Bum a ride from friends?

On the other hand, if you have money in the bank—in an emergency savings account—you can get back in the driver’s seat with less stress and panic.

Sound too hard? There are two other solutions to not having enough money to save:

• Earn more money
• Cut down your expenses

Money Pros have money saved and feel comfortable they have money available for investing or to cover unexpected emergencies.

 

The Influence of Advertising
Each day we all get bombarded with messages about spending money, and this can make saving a very hard thing to accomplish. Even banks employ hard-sell tactics to try to win you over as a customer. The vast number of ads on TV, radio, on billboards, on your ride to school and even in your school, are promoting those wonderful products “that everyone has to have,” such as

Cigarettes
You do not need to smoke, and it doesn’t impress anyone. Nobody really likes it smoking the first time they try it, but after that the sensors of the brain are hooked. The tobacco companies spend billions on making smoking seem ‘cool’ and satisfying. They want you to need (become addicted to) their product.

Lottery
Another slick use of advertising, the lottery ads talk of winning big - but take a look at the true odds: you have a better chance of getting struck by lightning than winning any of the games!
You can come up with a dozen more examples of your own, based on things you want to buy or things you’ve already bought!

The best defense is logical thinking - When an ad gets your attention and you suddenly think you need whatever they are selling, step back and evaluate. What is this advertiser trying to convince me of? Do I really need it? How often will I use it? Is there a cheaper alternative? Am I just buying this on impulse because I happened to see it? What is its true value to me? How long do I have to work to earn enough to pay for the purchase? This can stop you in your tracks fast.

Money Pros are free thinkers, and all advertisers’ messages are evaluated logically.

 

Finance Fundamentals: Budgeting Basics
A budget is simply a plan for how to handle your money. It acts as a roadmap to help you live the lifestyle you want and have the money to do it. There are many benefits to having a budget, including:

Control - Because you know how much money you have at any given point, you are in the financial driver’s seat.

Organization - It is vital to keep your finances in order, and having a financial plan allows you to stay organized.

More money - Working with a budget, you will find you have more money every month.

Opportunities - Sticking with your budget, you will find that windows of opportunities will open for you financially.

To summarize, here’s how to developing a budget, step by step:

• Step 1 Know your monthly take-home pay
• Step 2 Understand your expenses – keep a money diary
• Step 3 Have a saving plan
• Step 4 Implement the plans, and make regular adjustments

 

Separate your savings - splitting it up!
Try saving money according to what you want to do with it. Having real goals in mind can make the choice to save - and not spend - much easier. You want to divide your savings into three specific categories in order to organize and allocate your money: emergency fund, fun fund, long-term savings.

The unexpected - your emergency fund
I suggest that you have six months of living expenses saved and set aside in a savings account.

Fun Fund
A “Fun” Fund is important. How you define “fun” is up to you, but it is so important to have money for those playful times. You only live once!

Long Term Saving
The long term savings account is set up for your investments, whether financial investments or an investment in your education/personal growth.

Money Pros separate their savings so they have money to have fun now and in the future.

 

Accounting for expenses - Easy as one, two, three
You have your fixed expenses that you pay every month like rent, car payments, insurance etc.

Having completed the money diary challenge, you have a good idea of your everyday expenses like food, entertainment, etc.

The last items you need to account for are your annual expenses. Items that you pay annually should be accounted for each month (dividing the cost by 12). For instance, you have a gym membership that you pay every year and that costs you $240. To account for this properly you should divide the $240 by 12 to find out how much you need to set aside each month to pay for this bill.

Fast track to financial success budget
Budgeting is simple:

1. From your income, pay necessary expenses
2. Set money aside into savings accounts
3. Donate time or money to charity
4. Leftover money is yours to do whatever you want

Money Pros have a working budget that guides their purchase and investment decisions.

 

Giving back
There are people in serious need out there, and you could be the one that helps them. If your car breaks down in the middle of the desert and you have no phone, water or food—how would you feel about the Good Samaritan that stops to help you?

He would be your hero—so, go out there and be somebody else’s hero.

To truly receive all you can out of life, you need to give. What you give—time, money, or both—is an individual choice. But the role that giving can make in your life cannot be denied. When you help others you will learn more about yourself and others. By getting involved in charity, you will gain a broader view of the world and appreciate what you have all the more.

Money Pros are rewarded because they give from the heart to the less fortunate.