The money came. You worked. You saw. You got paid. And now you're feeling fine - ready to buy whatever your little heart desires. Slow down, hungry eater. We know we sound like your mom, but how you spend your money now will determine how you spend your money later. (GM didn’t listen to us.) Also, always wash behind your ears and remember that money doesn't grow on trees. For realsies, if you master the four basics of Spending 101, you'll breeze through your financial future on cruise control. Here's what you need to know:
Amateur Hour: Spend, Spend, Spend...On Yourself
We know how tempting it is to blow your money on movies, Farmville, video games, clothes, gadgets, trips, BFFs and all the other finer things in life. Mass Effect 3 and the new Arcade Fire album? We here at Shmoop spent our precious pennies on those things just like you did.... but we spent some money on ourselves first by putting a portion of our checks into a savings account. Here's why:
Thanks to the miracle of compound interest, dollars you save today will grow larger with time than dollars you save next year. Saving 10 to 15 percent of your paycheck, starting when you're young, will buy you a future that's (mostly) free of financial stress AND get you in the habit of thinking about your paycheck in the long term. Win-win.
Gas, groceries, rent, insurance, entertainment, tuition—those things require your cash, but in the future you will require it more. The easiest way to save is to have someone else do it for you. Employees who automatically deposited part of their paycheck saved an average of $90 more per month than those who didn't according to NACHA Electronic Payments Association. If your employer doesn't offer direct deposit, head to the bank before heading to the mall. Future you says, “Thanks.”
Intermediate: Make Money With Money
Wouldn't it be nice if, instead of you giving the bank money, they gave you some too? Instead of hitting you with fees, someone came out, gave you a hug and said "Thanks for being here. I'd like to reward you with some money." Well dreams do come true, though you probably won't get the hug.
Thanks to compound interest, money you save today will grow bigger and bigger as time rolls on. Invest just $50 a month in a fund bearing a 5% interest rate starting right now and in 10 years you'll get nearly $2,000 extra on top of your original investment to hit the town with. That's 2,000 tiny bonuses just for saving your money. Keep that money in for 20 years and you'll get an additional $8,000. Investing isn't without risks, though.
Saving money is a bit like taking a leak—there are good places to do it and bad places to do it. While places like savings accounts provide almost no bonus for your hard-earned cash, CDs, money market accounts and retirement vehicles like 401Ks and Roth IRAs provide substantially better overall returns.
Advanced: Needs Vs. Wants: Fight!
You've got a job, you've paid yourself and you've put that savings into an account that's actually going to pay off. With just those three things in place, you are now more financially savvy than 90 percent of the US population.
The reward for getting those three things right is being able to blow the rest of your paycheck, strategically of course. Making good financial decisions boils down to separating wants from needs.
Paying for your needs—the groceries, gas, tuition, utilities, rent, car payments, auto and health insurance you absolutely have to have each month—must come before the movies, cable TV, dinners out and bar nights you think you have to have each month. We would be lying if we said that paying for health insurance is ever going to feel better than buying a great meal. It never will be. But it's the right thing to do to have a financially sound future. C'est la vie.
Make a Budget
Nothing is more boring than looking at how much money is coming in, what's going out and where it's all headed. Nothing. Not watching paint dry, not listening to your BFF whine about her boyfriend for the ump-millionth time, not that history DVD your substitute pops in in lieu of teaching. Nothing. With that in mind, it's still important.
While a paycheck provides you with fiscal ammo in the war to satisfy your every desire, a budget is a battle plan that can make your ammo go farther. There are some tools that can make creating a budget a little easier. Mint.com links directly to your bank account and tracks every dime you spend on credit and debit cards. You'll have to enter cash purchases on your own, but the site will tell you exactly how much you're spending on needs versus wants. Once you have a clear picture of where your money is going, even minor adjustments to your spending habits can save you thousands and position you for fiscal domination in the not-so-far future. MWHAHAHAHAHAHA!!!!
Extra Credit: Worrying about money is soooo 2010. Leave it in the past with Shmoop's Guide to Saving for College.