Personal Finance for Students - Run it like a Business

Hey, what's up everyone? So this is going to be lesson one in the Personal Finance for Students video series. And in this lesson, we are going to be talking about giving your money a job. So we're gonna go through income versus expenses, investments, budgeting, how you want to have your money accounted for each and every month, and you wanna give it a job going into the month. So you wanna have a game plan, everything planned out so that you make sure that you are spending money according to your priorities and what is important to you, that you're taking care of big ticket items, things like starting to save in an emergency fund or paying down debt, that you are controlling your own destiny and not just flying by month after month without knowing where your money's going, keeping track of everything, racking up debt, not getting anywhere financially because it's only going to lead to more stress as you go through life. So getting started on the right foot, it is very important. And you are in the fortunate situation that you haven't really gotten thrown into the real world yet where all of this is getting thrown at you. So starting these habits from day one, it is a great way to get going and making sure that you're gonna have financial freedom in life and get going in the right direction. All right, let's get to it. All right, so let's start off by talking about three things that people who are very successful with their personal finances, people that become wealthy, three things that they do. The first one is they track everything. So they know exactly how much income they have coming in from all different sources, from their job and investments and whatever else. They also track where their money goes. They track their expenses every month. They are very financially aware of everything that is going on. They run their lives like a business. People who are not good with their money, who get into credit card debt, who struggle financially, who live paycheck to paycheck, they just wing it. They do not track this stuff. They are not financially aware of everything going on around them. So the first thing is just be financially aware. Track where your money goes every month. Get involved in this stuff. Have an interest in it because it makes such a huge impact on your life. The second thing is that they focus on their income versus their expenses and the difference between those two. So I refer to this as the happy gap all the time. So people who are very financially successful, they have a very large gap between their income, their monthly income and their monthly expenses. For example, if you are bringing in $10,000 a month and you are only spending $4,000 a month, then that means that you have a gap. You have that happy gap of $6,000 a month that you could then deploy. So that leads me into the third thing which is people that are very wealthy, they take that number, that difference between those two and they do smart things with it. They invest it. So they build up an emergency fund so that they always have cash on hand so that they don't have to rely on credit cards or going into debt. They take that money and they save for their future, for retirement savings. They invest in different things. They invest in real estate, in stocks, in bonds. They invest in assets that are going to give them an income and give them security later on in life. They buy businesses. They use that money to start businesses. So those are three things that people that are very successful with their money, that they all have in common. So in this lesson, we're going to focus on the first two things. Tracking everything and being very aware of your financial situation and then also giving your money a job. Focusing on the amount that you have left over, your income minus your expenses, that amount that is left, giving it a job and making sure that you're making smart decisions for your future. So the first thing we're going to do is I'm going to share a personal cashflow statement and walk you through it so that you have an example that you could follow. Now with technology, most people are not writing things down, you know, using a pen and paper anymore. Like people do use spreadsheets still, like an Excel spreadsheet to track their expenses, but a lot of people are just using mobile apps. Things like Write Capital or Mint are very popular ones where you could link all of your accounts and it will track your expenses for you so you could see exactly how much money you're spending on groceries, for example, or going out to dinner or whatever the case may be. So I'm going to share my screen. We'll walk through an example just so you have an idea of what it looks like so that you could start to create one for yourself. So now even if you're still in high school or if you're in college, you're still spending money. So it's still a good idea to create some sort of system or budget where you could see exactly where your money is going every month. So you could start doing this right now. All right, so let's start. All right, so this is called a personal cashflow statement. As you can see, on the left-hand side, we have monthly income, and then on the right-hand side, we have monthly expenses. So let's start with monthly income. So now we have a married couple in this example here, okay, so two-income household. And Michael, he's making $6,500 a month of gross income. So now gross income, that means before any taxes or deductions are taken out of his paycheck. So when you have a job, unfortunately, you're going to have to pay taxes on that income, and your employer, they will withhold those taxes out of your paycheck and send them directly to the IRS. So once your taxes are withheld, and then any other deductions, so like your health insurance could be payroll deducted right out of your paycheck, or if you're making 401k contributions, that will come directly out of your paycheck. Also, you pay taxes like Social Security tax and Medicare taxes. Those are taxes that go to the government to fund things like Social Security and Medicare, which hopefully will still be around by the time you retire and could use those programs later on in life. So after all of those deductions come out, then your net income, that is what is going to be direct deposited into your bank account. That is what we call your take-home pay, what you'll actually be able to spend after all of these taxes and deductions go out. So it's always a good idea to understand what is in between your gross and your net income so you could see what is the breakdown of where your money goes before you could actually get your hands on it. All right, so now if we go over to the right-hand side for the monthly expenses. Now, I like to break out the monthly expenses by fixed expenses and then variable expenses. And I also like to list them by the biggest payment all the way down to the lowest payment. So in this example, some fixed payments are going to be your mortgage or your rent payment, your car lease or car loan, any student loans that you might have, life insurance policy, cell phone cable, insurance plans. All of those are going to be the same payment each and every month so you could account for them. It's pretty simple. You know that you're going to have these bills coming every month and you can set them on autopilot. Then you have your variable expenses. So this is where you could hopefully cut some fat from your budget if you need to save additional money, pay down debt or whatever the case may be. So this is going to be like groceries, eating out, entertainment, your electric bill, credit cards. And I always like to throw a miscellaneous amount in there, typically 5% of whatever your gross income is. And the reason I do this is because we always underestimate. Money just seems to disappear every month and it's not easy to track everything to the dollar. So if you go to an ATM machine, you pull out some cash and you go and you buy something, you might not be accounting for that through your mobile apps or whatever you're using. So I always like to have this 5% number in here to just give me that buffer. So at least I'm trying to estimate in more of a worst case scenario rather than underestimating and being short every month. So you have to see how it plays out for your own budget. The last thing you want is at the end of the month to be like, ah, where did my money go? I spent much more than I thought I did and I don't really know where it went. So that's why I kind of use this 5% of gross income to use as a miscellaneous in here for my budgeting. And then below that, you see we have investments and savings. So now in this example, they're a family, they have kids, so they're saving for their kid's college through a 529 plan, $200 a month. And they're also saving to build up their emergency fund by $200 a month. So they're giving that money a job, right? So they have $400 left over and that's the job that they've determined is most important to them, to build up that emergency fund and to save for their kid's college. But if we also look back over to the left side, they are saving for retirement as well. So those payroll deductions, $400 a month for Michael and then $500 a month for Lucy that they are using to save for retirement. So right here, we have a good overall view of money coming in and money going out and they've given their extra money a job, right? So when it's all said and done, you could see the difference there. It's not even $100 that's not being accounted for. So maybe we would try to give that $100 a job and say we'll throw $100 into maybe a brokerage account or to buy some stocks or to do whatever to pay down credit cards a little bit faster than what they're currently doing. But for the most part, they are tracking all of the money coming in versus money going out and they're aware of their situation. Now this personal cashflow statement, it doesn't tell us their entire story. I would like to know what their balances are on these things. Like how much money do they have in their retirement accounts? How much money do they have in their emergency funds? How much do they owe in student loans, on a car loan, on credit cards, right? We need to know those balances so that we can start making smarter decisions and prioritize. Like for example, if they owe a tremendous amount on credit cards where they owe 20% interest, that is a ridiculous amount to pay and you have to go attack that thing. It has to be priority number one. So in that case, then maybe they would stop contributing to their 401k or stop adding money to the kid's 529 plan because they really would need to pay off those credit cards and attack that because the last thing you want to do is pay 20% interest to anybody. So it doesn't tell the entire story, but at least it's the first step. It's being aware and understanding your finances and your cashflow. It really is so important and it's the first thing that you want to do. You want to get into a great habit of knowing where your money goes and accounting for everything. I call it turning the lights on or taking inventory, really understanding your personal finances and people who are great with money, they know these numbers cold. They have apps that are tracking this. Like for example, I could tell you to the dollar how much money my family spends on groceries or on going out to dinner or on my kids or on Amazon every month and that doesn't mean that I completely change my behavior based on it, right? If we spend a certain amount of money going out to eat every month and we hit that limit, it doesn't mean that I'm not going to go out to eat anymore if I've already used up the money that I typically spend on that. All it means is that I'm making conscious decisions, that I'm spending money on things that are important to me. If I get the chance to have a date night with my wife for example, I'm probably going to take that opportunity even if I've already spent more than I would like that month going out to dinner as long as I'm still hitting all my goals and I'm saving my money and I'm prioritizing everything and I'm not carrying bad credit card debt. So as long as I'm making smart decisions, then I don't feel guilty about splurging every once in a while or spending a little extra money on things that might be important to me that I might be enjoying. But the first step is just knowing where you stand and what your cash flow looks like so that you could then start making good decisions around this stuff. All right, so now I know I threw around a lot of terms in this first lesson and you might not fully understand how they work or what they mean, things like the taxes or investing in the 401k and how that works or even credit cards and how the interest works on those and we're going to cover that in future lessons. But for this first lesson, I just wanted you to get the basics of how people actually manage their cash flow on a month-to-month basis and how they see everything and how they're fully aware of everything going on in their financial lives and how they run it like a business. All right, so we'll leave it at that for lesson one. I hope that you found that helpful. In lesson two, we're going to be talking about the daily management of your finances. So things like bank accounts and credit cards and where they fit into the picture, using a debit card, using mobile apps like PayPal or Venmo or Cash App in order to send people money or to buy things. So we'll talk about all that in lesson two. I look forward to seeing you over there. See you soon.