Past a certain age, life starts to pile up new responsibilities on you. And eventually, there will come a day when your umbilical cord from your family is going to be detached. By then, the more you are prepared, the stronger you can build the foundation of your independent life.
Becoming proficient in financial literacy is a critical cornerstone to this transition into adulthood. A lack of knowledge and skills to deal with personal finances often leads to devastating results. By knowing about financial basics such as budgeting, building credit, saving, and growing money through investments, one can avoid all sorts of predicaments like dependency on predatory lending, bankruptcies, homelessness, and deficiency in economic development.
As a college student, you are in the perfect time window to make that transition. Many young individuals use college to extend their childhood, drifting without a plan. But by focusing on developing the right skills and mindset, you will pave the way for success in achieving your life goals and dreams.
Start Investing as Early as Possible
Most of the world’s widely used currencies, such as the U.S. dollar, the British Pound, and the euro, are fiat currencies, meaning that their values are tied to the monetary policies of central banks. To achieve economic objectives, central banks deliberately adjust the money supply and control its circulation in the economy. They do this by using tactics such as printing more money, influencing interest rates, and selling government bonds.
What does this mean for you? Your cash reserves are constantly losing their value on an annual basis, which in turn, diminishes your purchasing power over time. You can’t afford to stand still on the moving train of the economy. You need to preserve the value of your money by protecting it against inflation. Or, even better, earn a rate of return greater than the inflation rate to make your money grow. This is the basic premise of investment, and in it, time is of utmost importance.
Getting into investing early has a lot of benefits and advantages. First, it gets you into the habit of deferring gratification. When you regularly set aside a portion of your income for investment, you are holding off on spending it in the here-and-now. This is a very constructive habit to cultivate and reinforce at a young age for successful financial planning.
Second, due to the power of compounding, which is the concept of reinvesting earned interests back into the principal of an investment, your portfolio grows exponentially the sooner you start investing. Third, since you have a much higher tolerance for risk at a younger age, your potential for larger gains is much higher. This, of course, does not mean you should take uncalculated risks or build needlessly aggressive portfolios. Leaning on the wisdom of seasoned stock analysts is crucial, especially for those who are just starting out. However, you have a larger capacity to recover from losses at a young age because you have time by your side.
Learn How to Budget and Stick to It
The mere thought of the word “budget” will have some people run for the hills, but learning how to set, review, and maintain a budget is non-negotiable if one aims to stay on top of their finances. Budgeting gives you better control over your spending, allows you to set financial priorities, and helps you achieve your financial goals faster. It also helps you prepare for a rainy day.
The first step to budgeting requires that you track your cash flow, i.e., where your money comes from and where it goes. It lets you see how much you make and how much you spend over a set period of time, and what direction your finances are heading. If your cash flow is negative, meaning you have more money going out than coming in, fixing it should be the number one priority. Spending more than you earn is not a sustainable lifestyle, and it will lead you down a debt spiral and ruin your finances if it continues to go unchecked.
You can start with the 50/30/20 rule of thumb, which allows you to spend half of your income on your essential needs, 30% on your wants and desires, and put 20% into emergency funds and savings. Instead of waiting until the end of the month to save the surplus, which amounts to nothing for many, pay yourself at the beginning of each month and take control of your cash flow. This way, you will begin to climb the mountain of your financial goals one step at a time.
Escape the Trap of the Scarcity Mindset
Getting financially literate is all about learning the skills and know-how to live within your means, which is crucial for living a financially responsible life. But this principle should never steer your focus away from looking for ways to expand your means. If you are more concentrated on cutting your expenses than increasing your cash flow and income streams, you will fall into the trap of a scarcity mindset.
We human beings have a high aptitude to adapt to the circumstances we are in. So by obsessing over fitting inside the boundaries, we lead ourselves down the spiral of underachievement. Instead, we should always aim for a prosperous life and use the fundamentals of financial literacy as a means to that end.