Five Great Financial Questions to Ask
For many of you who read AIEmail, the next few months will mark the big transition from high school to college. You’ll probably also be taking on a higher degree of responsibility for managing your own finances. Even if you’re classified as a dependent student, there’s a good chance that you’ll be making financial decisions in a more hands-on way than ever before. With that in mind, here are five great questions to ask yourself as you move into more of an adult financial life.
1. Have I balanced my income with my expenses?
If the answer is “no,” this is a great time to make the shift from just winging it to developing an actual spending plan based on your income and expenses. You can monitor and adjust as needed, but to reach your goals (such as buying a new car or someday buying a home), starting with a reality-based financial plan is a good idea.
You may already have some regular income (through a part-time job, errands, or an allowance), and you probably have expenses (clothes, entertainment, for example). If you have a car, you may pay for your own gas and insurance.
This week, you might try keeping a record of the money that comes in and goes out. Here’s an easy way to start: get a regular sheet of paper and draw a line down the middle. On the left side, write down all of the money you get (your income). On the right side, write down all of the money you spend, noting the amount, the date, and what it was you bought. Even this level of budgeting is an important first step, and you can learn more by visiting the "Managing Your Money" section (www.aie.org/managing-your-money/) of AIE.
2. Which “wants” can I afford?
Right now you probably don't have to worry about many of your actual needs (a house payment or rent, grocery bills, electricity, and so on). Your parents probably pay for those things. But as you venture forward, those responsibilities will become yours.
Thinking about your expenses, ask yourself, which of these items are needs and which are wants? As you consider each item, remember that a need can be met in a basic way or in a more elaborate way. For example, you need appropriate clothes, even though you may want a particular brand. For making good decisions about money, recognizing the distinction between wants and needs is one the best tools available.
3. Would a reasonable person lend me money?
Your credit report is basically your financial report card. It provides a record of your borrowing and money management history, and is used to calculate your credit score. Lenders refer to your credit report to determine if you are a good credit risk for approving a loan. If you have a good credit report, you are more likely to get more credit and a better interest rate (interest is the price you pay for credit) than someone with a poor credit report.
We’ve got more detailed information for you here (http://www.aie.org/managing-your-money/credit-scores-and-reports/credit-reports.cfm), but you should know that your credit report will include information such as your bill-paying history, how many accounts you have and what kind, and any late payments or other negative information, such as collections accounts.
4. Am I being smart about debt?
As you move on to college or a career, be wary of getting too deep into debt. You are the only person who can keep an eye on your money. If you don't pay attention to what you spend and save on a regular basis, you are likely to find yourself in difficult situations because you can't meet your basic obligations.
Debt, in and of itself, is not a bad thing. In fact, without debt, most people would be unable to purchase homes, vehicles, or other big-ticket items. However, debt can become a problem if you fail to really think about what you can afford to repay. Unfortunately, many individuals don’t think things through. They find themselves over their heads in debt, paying more on interest than on the original debt!
Learn as much as you can about debt and how it can impact your financial health. One good option is to visit Consumer Credit Counseling Services (www.moneymanagement.org) or the Jump$tart Coalition (www.jumpstart.org) to learn more about debt.
5. Will I thank myself later?
When considering options for saving for the future, remember that a little can go a long way. For example, if you were able to save $100 each month and earn 6 percent annually in interest, in 25 years you could have over $100,000!
If you haven't already, consider opening a savings account. If you have a checking account and you receive income regularly, consider setting up an "automatic transfer" once a month from your checking to your savings.
Remember, the more you save now, the more you'll be able to do in the years ahead. Invest in the future — your efforts will benefit you greatly throughout your lifetime.