Your Finish Rich Plan - A Personal Finance Blog

Act Your Age Financially: Ages and Stages of Money Management

I read this two days ago on the Blueprint for Financial Prosperity blog.

“If you imagine that everything you buy is on a “path,” then you’ll want to progress on this path in a nice orderly and chronological way. The prime example is a car. If you work during high school and college, save for a car, you’ll probably get a “beater” or otherwise inexpensive car because that’s what you can afford. The point is to get from point A to point B in a means faster than by foot or by bicycle (or by parent). Knowing the awfulness that is a beater helps you appreciate the awesomeness that is a car that doesn’t need a rolling start. Unfortunately, some people get the benefit of their parents’ finances and get a beamer (BMW), rather than a beater. Those kids also, in many cases, seem to have much higher expectations of what the world is supposed to do for them (this is not a good thing). Those kids were supposed to go down this “transportation path” but were spiked in somewhere farther than they were supposed to be, thus causing them developmental harm.”

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And further down:

“My point is that so many people don’t follow the path from the beginning or time warp through the journey to a point in the future. They get a job and their first though is to buy a luxury vehicle because they see executives driving them and they want to be a big shot. They see football players with enormous televisions on MTV Cribs and they want an enormous house with a pool and a pool table. They see the luxury brand names being worn by celebs and they want to feel special too so they break the bank getting LV. What funds all this? Credit.”

I remember watching one episode of the Fresh Prince of Bel Air (Father Knows Best, Season 5), where Ashley wanted to go to public school in order to experience the “real world” of public education, thanks to inspiration from Will. To make a long story short, Phil was categorically opposed to it but eventually agreed by the end of the episode. Why am I bringing this up? When it was time for the couple to come to terms with the fact that Ashley was going to attend public school, Vivian made a point that goes something like this “Maybe in trying to give our kids everything we didn’t have, we’re forgetting to let them have what we DID have”. Need I say more?

Actually I do… Instead of short-circuiting our children’s financial growth and putting them in a lot of trouble down the road, we should instead have them take the road less traveled (but oh so more painful) of growing in stages. Here are just a few ideas young adults should consider at key stages of their life to make sure their financial growth doesn’t end up stunted.

High School

• Consider earning money outside of your home, whether it’s babysitting, lawn mowing, or working in a movie theater or another “real” business. A job can provide a sense of accomplishment and responsibility. It also can be a good opportunity to learn about careers and to “network” with professionals.
• Learn the concept of “paying yourself first” — that is, automatically putting some money into savings or investments before you’re tempted to spend it. Start small if you have to and gradually build up.
• Consider opening a bank account, either on your own or with a parent or other adult. It’s a good way to learn about managing money. You also may want to start using a debit card — you can use it to make purchases but you won’t pay interest or get into debt because the money is automatically deducted from your bank account.
• Take a personal finance class or join an investment club at school.
• If you’re planning to go to college, learn about your options for saving or borrowing money for what will be a major expense.
• If you (and your parents) are comfortable with getting a credit card, you should know that there are cards designed just for teens. One is a credit card with a low credit limit that can keep you from getting deeply in debt. Another is a pre-paid card that comes with parental controls, including spending limits.

College

• Realize that as you pay bills and debts on your own you are building a “credit record” that could be important when you apply for a loan or a job in the future. Pay your bills on time…and borrow only what you can repay.
• If you decide to get your own credit card, choose carefully. Take your time, understand the risks as well as the rewards and do some comparison shopping. Don’t apply for a credit card just because you received an invitation in the mail or a sales person was offering a free gift on campus.
• Protect your Social Security number (SSN), credit card numbers and other personal information from thieves who use someone else’s identity to commit fraud. Examples: Use your SSN as identification only if absolutely necessary and never provide it to a stranger. Safeguard your personal information when using the Internet or borrowing a computer provided by your school.
• Consider a paying job or even an unpaid internship at a workplace related to a career you’re considering.
• If possible, set aside money into savings and investments.
• Try to take a class in personal finance. Read money-related magazine and newspaper articles.

Starting a Career

• Keep your credit card and other debts manageable. Maintain a good credit record.
• Save money for both short-term and long-term goals. Contribute as much as you can to retirement savings, which often can be used for other purposes, including a first-time home purchase. Take advantage of matching contributions that your employer will put into your retirement savings.
• Do your best to stick to a budget and control your spending, especially if you’re still paying back student loans or working at an entry-level job.
• Although insurance sometimes seems like a waste of money, you only need one accident or catastrophe to wipe you out financially. Think about disability insurance (to replace lost income if you become seriously ill) and health insurance (to cover big medical bills).
• Check into low-cost or free insurance offered through your employer.

Starting a Family

• Continue saving and investing money, including in retirement accounts.
• If you don’t already own your home do some research to see if this is a good option for you. A home purchase can be expensive but it also can be an excellent investment and a source of tax breaks. Check out educational resources for first-time homebuyers.
• Make sure you are properly insured, including life, health, disability and homeowner’s or renter’s insurance.
• Talk with an attorney about the legal documents you should have to protect your loved ones if you become seriously ill or die. These documents typically include a will, a “durable power of attorney” (giving one or more people the authority to handle personal matters if you become mentally or physically incompetent) and a “living will” (specifying the medical care you want or don’t want if you become hopelessly ill and cannot communicate your wishes.)

The point is not to live a miserable life in order to prepare for the future: life is lived in the present. Instead, it’s about learning to keep a balance so as not to jeopardize that very future. Every person who learns to go up the financial ladder in stages rather than artificially cheat their way up through credit is one less person that will have to try and climb out of crippling debt or bankruptcy.

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