Editor’s Note: This article by Rachel Sullivan of Tulane University was a winning entry from a 2016 Financial Poise Essay Contest: Financially Fit in Your 40s. The winning essays demonstrated financial poise through their clear, practical, and actionable strategies.
When I was about ten years old, my dad started teaching me about money and how to save for the future. Whenever we were on long car rides, I would ask him questions about the stock market, and he would answer with all he knew.
He’s no genius in the eyes of the financial industry. In fact, he’s not even in the financial industry. He’s a humble contractor from a small town. He’s a genius in my eyes, though, for teaching his young daughter the concept of money, how it grows, and how important it is.
Ever since those car rides, when I struggled to understand how money and markets work, I’ve formulated rules for myself in regard to my spending and investing habits.
In high school, I downloaded a budget app where I kept track of all my accounts and transactions. I read books, asked questions, and made mistakes. Through these mistakes, though, I learned. I’m now a finance major at Tulane University, and I’ve changed and adapted those little rules over the years. I don’t know much, but I do know how important it is to save for the future. I also realize that saving money isn’t everything. Here are my most important rules.
This seems completely obvious, “don’t buy things you don’t need.” However, many people don’t understand this. They see something on sale and buy it. They spend their money as if it’s unlimited and don’t think about the consequences. I’ve done the same thing. When I started working, money was a magical thing, as was online shopping.
Instead of getting a five-dollar bill here and there from my parents, I was making an hourly wage and, in my naive eyes, making a lot of money.
So instead of saving this money, I bought silly things. Cheap jewelry on eBay, a hammock chair that there was no place for, and expensive shower gel. I spent every penny I earned on things I didn’t need. I was a victim of marketing. I can’t tell you how many Bath and Body Works products are sitting in my closet unused. Good for B&BW, though. They have a great marketing team.
Instead of buying that new, unnecessary hammock chair, I could have put that extra money into a savings account with a good interest rate or into a mutual fund. I made and spent about $2,000 until I realized how irresponsible I had been. If I had put that into my mutual fund, it would have grown to about $3,524 to date. Instead, I have a hammock chair in my closet.
Not buying frivolities to save money isn’t a novel idea. Unfortunately, people often find it hard to distinguish between necessities and wants. People learn once they step back and evaluate, and they learn by making mistakes and gaining experience. Following this rule will save you money, decrease clutter, and make more time for other activities.
Spend time with other financially responsible people. As I mentioned before, I attend Tulane University, a private school where the student demographic is very wealthy. I, however, am not wealthy.
While some students can pay for tuition out of pocket, I need student loans. I don’t have regrets, though, as I see the value in the investment in education. I do regret the money spent as a result of being pressured by people who can afford much more than I can. For example, during my first semester, my wealthy friends would suggest going out to eat at an expensive restaurant, and not wanting to feel left out, I would join them even though I could barely afford it.
This type of thing happened way too often. I found myself always running out of money, and I had to stop monthly contributions to my investments and savings because of it. I was working but still had to dip into my savings account often to afford to live the way I was choosing to live.
During the next semester, I realized that I was being irresponsible. I found a happy medium in contributing to my mutual funds and savings accounts again, but could still enjoy all that New Orleans has to offer. I found a group of friends who also had to work for their money.
Think about weight loss theories urging people to lose weight with friends. Research shows that those trying to lose weight are more likely to be successful if they spend time with others with the same goal. Similarly, those who surround themselves with people inclined to pay their debts will be more likely to repay their own.
Don’t throw things of value out, also came from being a broke college student. I sometimes see things on the side of a road with a sign that says, “FREE.” How can somebody throw something so expensive out? Once I saw a perfectly tuned piano on a curb.
Before throwing something away, it’s always good to check sites like eBay or Craigslist. There’s an entire industry dealing in used comic books, that range from $3 to $3 million. One person’s trash is another’s treasure and an opportunity to save for the future.
Don’t spend more than you make in a week on one purchase. This may seem impossible, but I only mean this to apply to a checking account which should be used for small purchases and day-to-day expenses. You should always have an emergency savings fund and a recreational savings fund. Dip into these when you want to buy that $500 concert ticket or need to spend $1000 on a car repair.
I started doing this successfully in high school. When I needed $200 for tires, I used my emergency savings money and didn’t feel the pain of it. I contribute about $10 or $15 each month to both accounts, and it adds up. I still have adequate spending money, but emergencies don’t throw me.
The last, and most important rule I have for myself, is to save for retirement. My friends laugh at me when I tell them I have a retirement fund, but the best thing young people have going for them, no matter their income, is time. Compounded interest is a magical thing.
Assume an interest rate of 7%. Chrissy and Lauren were born in the same year. Chrissy invests $5,000 each year from age 25 to age 35 (10 years). Lauren starts investing when she’s 35 and continues until she is 65 (30 years). When Chrissy is 65 years old, she will have $602,070 after investing a total of $50,000. Lauren will have $540,741 when she is 65, after her total investment of 150,000. Chrissy invests less money for a shorter time and still ends up with a greater total, all because she started earlier and had the advantage of time.
Right now, 31% of all Americans aren’t saving for retirement. Even if they start now, they’ll have to save more, and for a longer time, than they would have if they had started saving in college. For people my age, time is our most important asset.
Most people recognize that a penny saved is better than a penny earned. The main logic behind this is that a penny in your pocket is worth the full one cent, while a penny earned is taxed. When I think about that sentence, though, I realize that a penny saved will be worth more in the future if you’re smart about it.
Here’s my philosophy. We college students are young, so it’s imperative that we save for the future. However, we want to live for today and enjoy ourselves. And it’s not that difficult. Follow these rules, invest your money wisely, and you should be financially fit in your forties. In fact, if you start a retirement fund at a young age and don’t spend money irresponsibly, you should be financially fit for your whole life.
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When this article was written, the author was a 19-year-old student at Tulane University pursuing a double major in Finance and Economics. It was originally published on September 21, 2016.
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