CHAPTER
1

Your Financial Base

In This Chapter

• Personal finance and your financial future
• Getting real about your financial position
• Learning what you’re worth financially
• You might have more than you think!
• Taking care of your financial base

So you want to learn more about personal finance? That’s a good thing! Your relationship with money begins when you’re very young, and it’s important to develop and practice good financial habits throughout your life.

If you’ve graduated from college or gotten a job and are just starting out, it’s an exciting time in your life. It’s also a time when it’s really important to be smart with your money. Getting a good financial start will make your life a lot easier later on. Getting off on the wrong foot financially could result in real problems for your future, such as a poor credit score or uncontrolled debt.

Definition

Personal finance is all about you and your money. The emphasis of the phrase is definitely on the word personal.

How well you accomplish your personal financial goals determines where and how you’ll live, and eventually it will influence where your kids go to school and the quality of your retirement.

To understand personal finance as it relates to you, you need to first have an understanding of your financial base. Your financial base includes your income, which, incidentally, includes more than your salary. Any bank accounts you have; investments such as a 401(k); and stuff you own, like a car or personal property, are included, too. Your financial base also is based on what you owe, such as student and/or credit card debt, rent, or a monthly car payment. Getting a handle on your financial base is necessary so you can figure out how to live within your means and start saving money for your future.

Maybe you graduated from college and didn’t have any trouble landing a high-paying job as an engineer or computer systems analyst. But if that’s not the case and you either aren’t employed or you are working in a job you’re overqualified for, try not to be too discouraged.

Although the national unemployment rate at the beginning of 2016 was at its lowest level since 2008 and jobs were being added every month, younger workers were disproportionately unemployed and underemployed. Forty percent of all unemployed Americans were in the 18 to 25 age group, meaning 4.6 million young people were without jobs. Among those who were working, many were earning less than $25,000 a year.

If this situation sounds too familiar, hang in there. Keep looking (you’ll read some tips for landing a job in Chapter 11), and don’t give up. If you’re living at home, as nearly 40 percent of women and almost 50 percent of men between the ages of 18 and 34 were in 2015, you have the advantage of relatively low expenses. If you’re working and living at home, you have a great opportunity to save some money. If you’re already living on your own, you need to figure out how to handle all your expenses and start saving for your future.

A major concern for many millennials—the age group that in 2016 is between about 18 and 34—is student debt. If you’re among the 70 percent of college graduates with student debt, you have to figure out a strategy for repaying those loans.

And your college loans might not be the only money you owe. If you have a credit card, it’s likely that your average annual percentage rate hovers somewhere around 21.4 percent, according to a study of the top 50 banks by Magnify Money (magnifymoney.com). You’ll learn a lot about dealing with credit cards and debt in Parts 2 and 3. For now, we’ll simply advise you to keep your debt as low as possible and manage your debt payments.

Pocket Change

According to the Pew Research Center, people between the ages of 18 and 34 are, or will soon become, the largest living generation in the United States, overtaking the aging baby boomers.

Regardless of your current financial situation, it’s important to be realistic about what you have and what you owe. Consider your income—or lack of thereof, if that’s the case. Think about the expenses you have and how you’re managing them. Take a look at how much you owe and how long it will take you to get out of debt. When you combine all those factors, you can determine your net worth.

Determining Your Net Worth

If you’ve got a job, you’re probably bringing home a paycheck. Very few people show up at the office every morning just because they love to be there (interns excepted). The paycheck at the end of the week or every 2 weeks might not be the only thing you like about your job, but it’s probably pretty high on the list.

Even if your salary isn’t what you’d like it to be, it’s likely to still be your primary source of income. When you begin to consider your net worth, or your financial situation, your salary is very important. For most of us, the salary pays the bills, boosts savings accounts, and sets up emergency funds.

Definition

Your net worth is what you get when you add up all your financial assets and then subtract all your financial liabilities.

When you examine your financial situation, however, you might be pleasantly surprised to find out you have more than you realize. You could have overlooked some money, for example.

To determine your net worth, you have to know exactly what you have and exactly what your expenses are. After you’ve thought carefully about any and all funds you might have in the form of savings, bonds, mutual funds, or whatever, take a minute to fill out the following net worth worksheet (using the value of the asset as of the valuation date). A lot of the included categories won’t apply to you, but some will. It should help you to get a better understanding of exactly what you have and what you’re worth.

Assets

Liabilities

Think carefully about what you might have. Were any savings accounts set up for you when you were a kid? What about savings bonds? Some families are great at buying U.S. savings bonds for birthdays. Have you put aside money someplace for emergencies? Do you have money saved for a car or a house?

Dollars and Sense

According to the U.S. Bureau of Public Debt, $14 billion worth of unclaimed savings bonds are sitting in government accounts. It’s estimated that 55 million Americans own these bonds. If you think you may have been given savings bonds but aren’t sure, you can check by entering your Social Security number on this U.S. Treasury Department website at treasurydirect.gov/indiv/tools/tools_treasuryhunt.htm.

If you have any bonds or savings accounts on which you’re earning interest, the interest on them counts as income. Your income tax refund, bonuses, and any monetary gifts you receive also count as assets and must be included when you’re considering what you have. If you have a cash value life insurance policy, the amount of cash value is counted toward your net worth. (Read more about cash value life insurance in Chapter 19.) Generally, though, when we talk about income, we’re primarily talking about your salary.

Looking for Hidden Financial Assets

Most people start working pretty much from the ground up when it comes to accruing money. When you first start out on your own, it usually isn’t very hard to figure out what you have. Sometimes, though, you might overlook money you’ve accumulated or that other people have accumulated for you. Hardly anybody has a long-lost rich uncle who dies and leaves behind a fortune, but many people do have well-meaning relatives who try to help them along by setting up bank accounts or buying bonds in their name. Consider whether you may have any of the following assets. If you do, they’ll affect your net worth.

Accounts

Relatives often set up bank accounts in a child’s name, which, for one reason or another, sometimes get forgotten and overlooked. Or maybe you have some money left over in a 529 college savings plan.

Mutual Funds

Mutual funds, including stock funds, bond funds, hybrid funds, U.S. funds, money market funds, and so forth, should be included when calculating your net worth. If you get statements from a company such as The Vanguard Group, Charles Schwab Corporation, Jack White and Company, or Fidelity Investments, you have mutual funds to consider.

Definition

Mutual funds enable you to pool your money with that of a large group of investors. Professionals invest the pool of money in stocks, bonds, and other securities, and you own shares that represent the investments.

Stocks (Equities)

Some families give shares of certain stock, such as Disney or Apple, to kids to introduce them to the stock market or as gifts.

After you’ve carefully considered all your sources of income and other financial assets, add them up and determine what you have. Only when you’ve fully explored what you have will you have a better idea of how you might address your wants and needs, as discussed in the next chapter.

Dollars and Sense

As you take inventory of what you have, using an app that helps determine net worth can make tracking and tallying your assets easier.

Protecting Your Financial Base

If you’re financially strapped at the moment, consider it a temporary situation and focus on the future. If you have a job and are making enough money to support yourself, you’re off to a great start. Sure, there will be things you’d like to have but can’t afford right now, but that’s okay. Keep telling yourself you’ll be in better financial shape next year, and enjoy the experience of being out on your own.

To stay on the right financial track, remember these three things:

• Resist the temptation to use credit cards to buy what you want but can’t afford. You’ll get yourself in trouble if you do this and end up with less money in the future. Be patient, and know that eventually you’ll have more buying power.
• Be aware of financial opportunities, and take advantage of them when they’re available.
• Save even small amounts of money, starting as early as you can, to yield larger results for your future. Putting away even $10 a week gives you nearly $500 saved at the end of a year. If you invest that amount of money each year beginning in your 20s, you’ll be surprised at the amount of money you’ll have when you reach your 50s or 60s.

Many people miss chances to improve their financial positions because they simply don’t know what’s available to help them do so. By reading this book, you’ve shown that you’re interested in your personal finances and are willing to take the initiative to learn how to get—and keep—your finances healthy. The sooner you start making the most of your money, the more money you’ll have later.

We look closer at the following areas of financial opportunity later in the book, but it’s important that you know what opportunities to look for.

401(k) Plans

We get into more detail about these little gold mines in Chapter 21, but suffice it to say, 401(k)s are a great way to save money. If you’re eligible to participate at work, be sure you do. Individual retirement accounts (IRAs), Roth IRAs, and other retirement plans also are good vehicles for saving.

Compound Interest

Starting to save even a little money when you’re young will pay off big time after a few years. The longer your money is invested, the faster it grows. That’s called compounding, and it’s a great way to see your money grow. We cover this more in Chapter 13.

Lower Interest Rates

If you’re paying 18 or 20 percent interest on your credit card, you might be able to get a significantly lower rate just by shopping around and asking. A couple points can make a big difference. Check out Chapter 5 for more on credit cards.

The Best Possible Bank Accounts

If you’re paying big bucks in bank fees, you’re not making the most of your money. It takes some work, but it’s worth it to look around and compare what’s available. We get into this in more detail in Chapter 2.

A Budget

Most people wouldn’t consider a budget a financial opportunity, but it definitely is. Preparing and using a budget gives you a chance to see where your money goes and offers an opportunity to cut back and save. We explore budgets in Chapter 3.

Learning Opportunities

A wealth of financial information is available for anyone willing to take the time to find and study it. The internet is full of smart websites and financial blogs offering information and advice, and free personal financial planning websites abound online. Apps are available to help you save, invest, bank, and shop, too. Many of the most informative resources are mentioned throughout this book, and Appendix B lists additional ones you can check out.

If you resist credit card debt and take advantage of financial opportunities, you’ll be taking a giant step toward your financial goals. Ask for help if you’re confused about a financial matter. Many issues concerning money, investments, and so on can be complex, even to people who study them on a daily basis, so don’t be discouraged if some financial issues seem baffling at first. They’ll become clearer as you learn more.

If you seek advice from a friend or family member, you’re likely to hear what’s worked best for them. What worked best for them, however, might not be what will work best for you. Nobody wants to sound like a complete idiot, so you’re likely to hear about the great financial move your brother made when he started his first job, while he completely skips over the bonehead deal he made when buying a car.

Money Pit

Be sure you take all the financial advice you get with a large grain of salt. If you follow the advice of every financial guru who comes along, promising on one talk show or another to quadruple your investment in 6 months or less, you’re likely to end up losing some serious money along the way.

The Least You Need to Know

• Personal finance affects nearly every aspect of your life.
• Regardless of your financial situation, it’s important to be realistic about what you have and what you owe.
• Your net worth is all your financial assets minus all your financial liabilities.
• When you think and research carefully, you might discover you have overlooked some financial assets.
• There are important steps you can take to stay on track financially.