Wednesday, April 4, 2007

New Graduates and Focusing on Finances, Part Five - The Final One!

Finally, the last two foci on my list! I apologize for the long delay; the weather here has been beautiful lately, and I spent a lot of time in the garage putzing and working on the '75 Yamaha. I even took a half-day of vacation on Monday so that I could best use the great weather and continue my progress on the restoration. More on that later. Regardless, here's #9 and #10!

Focus #9: Create and maintain a budget.
This document is going to be your rock. It will guide you, help you make good, sound decisions, and keep you focused on your financial goals. It will keep you grounded and set you free at the same time.

It is absolutely imperative that you learn to work with a household budget. There's lots of good websites out there to help you get started, but here are my main points:

1) Know where you money is going. Track each dollar that you spend. You'll quickly realize where the leaks in your spending are, and where you can save some money. Once you know where it's going, you can make better decisions regarding where it should be going.
2) Give each dollar a job. Make sure that each dollar you receive in income is given a job. Make sure each income dollar is either put towards an expense, saved, or invested. Once each dollar has a task to perform, it's much more difficult to waste them. Idle dollars are easily blown on frivolous things.
3) Most importantly, spend less than you earn. That is the ONLY way to get ahead. If you're consistently spending more money than you have coming in, you're in a downward spiral into financial disaster.

I used to have a very elaborate spreadsheet that performed all the calculations, did all the tracking, and reminded me of bills. But, it got to be very big and clumsy. Now, I use a small program called YNAB Pro (available at It works beautifully.

Focus #10: The time to invest is now!
Compound interest is a beautiful thing. The earlier you start investing, the more time you have for it to work for you. More than any one mutual fund or stock selection, the age you start investing will determine how much wealth you actually build. This may be difficult for some to grasp, so here's a real-world illustration:

Employee A, we'll call him Dave, starts putting away $100 a month when he's 22 years old, right after he graduates. Dave's money grows at a conservative 8% a year, and after ten years on his 32nd birthday, he decides to stop contributing and just let the money grow. Employee B, we'll call him Phil, graduates at age 22 but waits until he's 32 to start investing for retirement. He sets aside the same $100 a month, gets the same 8% return, but continues investing until he's 64 years old. So, who's got more money at retirement?

Dave does. When they both retire at 64, Dave will have $234,600 and Phil will only have $177,400. Even after only contributing 1/3 of the money that Phil did, Dave's way ahead. If Dave had just continued to contribute the same measly $100 a month until 64, he'd have $412,000! That's over $175,000 more than Phil, just by starting ten years earlier.

The lesson here is to start saving early!

To review my Ten Financial Foci:

Focus #1: Get a good, low-fee checking account and know how it works.
Focus #2: Use direct-deposit.
Focus #3: Get a high-interest savings account.
Focus #4: Start an emergency fund and feed it automatically.
Focus #5: Don't fall into the lifestyle trap.
Focus #6: Ditch your debt.
Focus #7: Make sure you're covered.
Focus #8: Take inventory.
Focus #9: Create and maintain a budget.
Focus #10: The time to invest is now.

I hope the foci I outlined over the last couple days have been insightful and inspiring to new graduates or future graduates. Getting a focus on your finances now, when you're still young is immensely beneficial later on. So, pass these lessons on to any graduates you might know!


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