Finances, barely-an-adult style(Part 1)


Welcome to adulthood. Among all of the other things you were suddenly supposed to be knowledgeable about, is finances. You know, the ins and outs of money; stocks, retirement funds, insurance, budgeting, separated funds (retirement, freedom, vacation, etc), high vs low interest savings accounts, ROIs, and whatever the hell a dividend is…. We were never taught these things in school, but we’re expected to suddenly know all about them as an adult, like magic it was supposed to pop in to your head when your turned 20. Only… I think there was some premium I was supposed to pay to get that bit of DLC, or a box I forgot to check off on some form in high school that requested I get let in to the class that taught this stuff.

Well, for all of you that missed the memo as well, here are the absolute basic on finances. And I mean absolute basics, if I told you everything now, I wouldn’t be able to drag it out and make a blog trilogy out of this. Let’s look at the must haves for surviving on your own; an overall budget, an emergency fund, and how compound interest works. (for either investing, or a savings account)

So firstly, let’s talk budgeting, these things are super important and a real game changer if you’re just doing it all in your head at the moment. A budget is how you track and account for how much money is coming in to your pocket, and how much money is going out of it. (bills, rent, food, gas, insurance, everything) The reason you need to have a budget written down on paper is so you won’t be surprised when you suddenly run out of money. A budget consists of 2 lists; all of the money you’re earning on a monthly basis, and all of the money you’re losing on a monthly basis. The money coming in is probably just your main job and if you do something else on the side, like selling drugs. Your money being lost side needs to include EVERYTHING, every little thing you’re commonly spending money on monthly. Here are the common ones: gas, food, electricity, cable, internet, phone, rent, car insurance, life insurance, etc. Write each item out and average how much each is per month(note that electrical will change throughout the year the most), this makes up the expenses side of your budget. To be safe about it, and so you don’t tell everyone you ended up homeless by reading the A2A blog, subtract 10% off your income total(or multiply it by 0.9) and then add 10% to your expenses total(or multiply it by 1.1). This will give you a nice buffer to prevent any expenses or the random sick day you didn’t account for from dragging you to the streets.

If your income total is higher than your expenses total, congratz you’re building wealth, if your expenses side is higher than your income you need to reduce the amount of bills you’re paying or get a better job. Cancelling your cable bill or reducing your bills to a lower quality for cheaper is the better option, finding a job usually takes time where as those should be changed by your next bill.

Secondly we have your emergency fund, the only thing (other than your parents or a rich friend) that’s really keeping you from the streets. Go to your bank, ask to open up a savings account where you can stash an emergency fund, and start tucking money away. It doesn’t matter how fast, just keep putting money in on a regular basis and never ever touch it. Seriously, don’t touch it. That money is there when everything goes to absolute hell, when you lose your job, your car breaks down, AND your cat dies. If you’re day isn’t that bad, you’re not in enough trouble to need to dip in to your emergency fund. Typically you’ll need at least 3 months of expenses tucked away in there, the most you’ll want is about 6 months or so, beyond 6 months and you’re just becoming a hoarder. It doesn’t matter how broke you are either, putting any amount in this emergency fund per month is better than nothing. Remember it’s the only place you can turn when the poop hits those whirling metal blades. Quick math for those who say they’re too broke for an emergency fund, 20 dollars a week(2 hours work-ish) stuffed away in your emergency fund turns in to 1040 by the end of the year. That’s enough to deal with the occasional car trouble at least, it’s far better than the alternative of having to resort to credit cards or a payday loan. The companies behind those are bottom feeders who are looking to prey on you when you’re at your worst, recognize them for what they are and do everything you can to avoid having to deal with them. Have an emergency fund in case you end up dealing with a “Job losing, car braking, cat dying” kind of day.

 And finally, we have compound interest, this is the cool stuff. Depending on who it favors… If you’re in debt then compound interest will destroy you, if you’re above zero it is one part to the secret of getting and staying rich. That’s no exaggeration, there’s an illustration out there(try to find it using google) with two rivers, one pulling you down a cliff and the other to a paradise style lake. Once you’re caught up in the current it’s hard to fight it and get in the other river….

So what is compound interest? Well, let’s look at the tiny example of having a savings account with a 1% interest rate. So if you put 100 dollars in this savings account and leave it there, the bank you have the account with will pay you that 1% for keeping your money in the bank. They do this because they get paid partially for holding on to money, and so they pay you to encourage you to keep your money in the bank instead of pulling it out. 1% of 100 dollars is 1 dollar, obviously, and it isn’t much right? Well prepare to have your mind BLOWN! That 1 dollar the bank gave you, is now 1 more dollar that you’re being paid interest on. So the next time you’re paid interest it’s 1 dollar and 1 cent. Crazy right? You earned an extra penny for doing nothing. So now you have 102.01$ in he bank, until the next time set of interest payments come around and you’re paid 1.0201$ instead of the 1.01. So now you’re making 2 pennys every interest payment instead of just 1. And this slowly increasing set of moneys builds momentum, and the longer it grows the faster it ramps up until it gets to the point where you’re earning some actually noticeable amount of money just for holding your money in the bank.

I know that sounds like a really pitiful amount, and it is. But let me ask you, would you rather plant, water, and harvest a huge field of crops every single year, or would you rather plant apple trees? The apple trees will take longer to set up, but after they’ve grown, all you have to do is collect your apples when they’re fully grown. As you watch all your neighbours work their fields all year round, you just have to go out once a year and collect the harvest. The apple trees sound pretty great huh? Even though you won’t see a return in the first few years, you’ll eventually be rewarded with a great field of low work fruits.

This being said, the flip side of compound interest looks like a hole that seems to just keep getting deeper. When you’re in debt you have to deal with interest as well, but instead of the bank paying you, you pay the bank more money. And when you’re already below zero, that means tagging on more money to how much you owe….

I’ll go further in to how compound interest can help the average person become rich or turn even the most hard working homeless. I’ll also explain investing in general terms. But for now, keep an eye out for part 2 of “Finances, barely-an-adult style”.

This weeks advice

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