Money Management is never an easy thing to learn, and it isn't something that school necessarily teaches you. Financial literacy and money management skills are some of the most crucial things one needs to learn before becoming independent and going off into the world. Robert Kiyosaki, the author of Rich Dad Poor Dad (the #1 personal finance book of all time) says,
If you don't know how to care for money, money will stay away from you
And nobody wants money to stay away from them. So, to make it easy for you to make your money stay with you, here are my top 5 money management tips for teens.
1. Learn About the Magic of Compounding
First of all, to manage your money, you need to have money. To earn that money, you need compounding. This is one of the most important things that is taught in maths to high school students, and it is important to pay attention to this particular topic in school.
In basic terms, compounding is the mathematical process of multiplying your potential investment into a bigger investment.
How does it work?
Interest is basically the charge a bank gives for borrowing your money. In compound interest, unlike simple interest, you both earn interest on the money you save, and on the interest that is amassed over the years.
Compounding is a process that is continuous in nature.
Let’s assume Mary invested $5000 at an interest of 10%.
In the first year, she will earn an interest of $500, which is 10% of the $5000 she originally had.
In the second year, Mary will earn 10% of $5000, i.e., $500, and 10% of the interest (%500) earned so far, i.e., $50. Thus, the total interest earned will be $550.
In the third year, she will again earn 10% of $5000, i.e., $500 and 10% of the interest earned so far, i.e., 10% (500+550) = 105. Thus, the total interest earned in year three would be $500 + $105 = $605.
The amount that Mary will receive at the end of year 3 will be $6655.
A whopping $1655 more than what she originally invested!
This is why it is said that the maximum benefit of compounding can be reaped over the long term. So, the earlier you start investing, the better!
If you still feel like you need some real life examples of how compound interest needs time to work its magic, but will eventually change your life, see this-
Do I need to say more?
2. Start saving as little as you can, as much as you can, and as early as you can: The Saving Habit
If one starts to set money aside for the future from an early age, it can start a lifetime of a healthy savings habit. To start saving, set a short-term or long-term goal to buy something that you always wanted, or just a rainy day fund, and that’s it. Start putting a little money towards your goal every time you get money, be it your own earnings, birthday money, or pocket money. This way, when you eventually get a job and start earning, you will be in the habit of saving and this will be incredibly useful for when you retire, or if you want to grow your wealth.
3. Create a Budget
After you have an income, be it from weekly pocket money, or a part-time job, you should set a weekly or monthly budget for yourself, so you don’t spend more than what you earn. To do this, I would recommend the 50/30/20 rule- 50% of your money goes towards your needs, 30% towards your wants (to have fun, or pursue your passion), and 20% if your income is to be saved. After you have created a budget for yourself, you just have to stick to it and follow it religiously. To do that, I would recommend the app “Toshl Finance”, which allows you to do no-strings attached budgeting and helps you in tracking your expenditures. Toshl is an app that I love for its simplicity and rich features. Not to mention, it’s free too! Also, if you tend to overspend, the best app for you is “PocketGuard”, as it has great algorithms that track your expenses and set spending limits.
4. Always spend less than what you earn: Avoid Debt Like The Plague
Ensuring that you live a lifestyle that aligns with your means is one of the most important things you can do when it comes to money management. Try to build up your discretionary income, which is the income that is left after you have spent your money on your needs and wants. This income will come in handy later when you have retired and do not have a regular source of income. If one spends everything one earns, one does not save. When one does not save, one can never become wealthy. This will likely need to them borrowing money from somebody to pay for future expenses.
We should avoid that. Avoid debt like one avoids viruses.
Make frugality your habit. Being frugal doesn’t mean you’re a miser. Being frugal means that you think about your future. Being frugal leads to you being independent in your old age. And who doesn’t want that?
5. Learn to differentiate between assets and liabilities: Your Needs vs Your Wants
In dictionary terms, an asset is a resource with economic value. Assets include things like cash, real estate, machinery, factories, houses etc., basically things that increase in value overtime. Liabilities, on the other hand, are stuff that you owe other parties. These are all the debts you owe, like mortgage debt or bank debt, or taxes you owe, or, if you are a business owner, wages you owe to your employees.
In simple language, assets put money in your pocket, liabilities take it out!
Now, when it comes to personal money management, assets are the things that will add value to your life and are crucial for you to function properly. For example, you are a writer. You have enough money to buy a phone or a laptop. In this case, a phone will be less useful to you for the purpose you need it for. In this example, the laptop is an asset, as it will help you in your writing, while the phone becomes a liability, as it will only hinder your work and reduce your productivity.
In daily life, assets are your needs and liabilities are your wants. Assets are the reason why the rich get richer and the poor remain poor. The rich buy value. The poor buy debt. So, the next time you buy something, ask yourself, “Do I really need this? Is this an asset or a liability?”
It's absolutely critical for everybody to learn money management. Someone once said,
The art is not in making money, but in keeping it
People who don't know how to manage their money end up working for people who do. The thing that everybody should realize is that one shouldn't save what is left after spending, but spend what is left after saving. And that realization is what makes all the difference between a well-off person and a broke one. It's on us to choose which side of spectrum we fall on.