Introduction to Personal Finance

by Apollo Colligan
Business and Economics Club

Money matters can seem daunting. We are taught from a very young age to fear losing it: whether it be from our parents not being clear with their finances or never being taught how to invest and save. This ignorance leads to fear, as something that secret and grown up must be scary. However, the only way to grow your personal wealth and ensure financial security is by understanding how, why, and when to save, invest, and spend. 

Saving

Saving is the concept that one shouldn’t spend all of their money as soon as they make it, but rather they should take some of that money and put it aside. What’s the point of this if you’re going to spend it later though? Why not spend it now and get immediate value for my money? There are a number of reasons: saving allows for a buffer, or a safety net, in case your income decreases. Now, you may think that you don’t have an income; however, any cash you make or are given is considered income, whether that be birthday money or an allowance. Additionally, saving is not just for “rainy days,” but it is the primary way to grow wealth. Banks have different types of savings accounts that pay you based on how much you deposit in them (watch for more on this in a future blog post!). This is important because it is the foundation of the idea of passive income, which is making your money work for you to increase your wealth! In addition, saving is typically the only way to have enough funds to make large purchases, such as saving your allowance until you can buy a new video game.

Spending

Expenses are everything you pay for. There is a difference, however, between mandatory expenses and non-mandatory, or discretionary, expenses. The main difference is that you need to pay mandatory expenses while you don’t need to pay for discretionary expenses. A helpful comparison can be seen in groceries. Groceries are a mandatory expense, but choosing to shop at an expensive store like Erewhon vs. budget-friendly Trader Joe’s is a discretionary expense. You should indulge in some discretionary spending, but make sure to be careful in spending your money on those products or services you truly value. Mandatory expenditures must be prioritized before making any financial plans. The only way to grow wealth is by minimizing discretionary spending to maximize savings or investments. It is helpful to practice minimizing unnecessary spending now when you’re young, as it sets up the habits of spending you will have the rest of your life.

Prices of a box of crackers at Erewhon (left) and Trader Joe's (right). Keep in mind that the Trader Joe's box is bigger too!

Forging Your Financial Future

There are numerous resources for gaining financial knowledge, and this blog will serve as both an introduction to personal finance as well as general financial information. However, it will not be a comprehensive guide. The most important avenue for financial education are your parents. Following this article, I highly recommend speaking with your parents about their financial strategies, such as how they make budgeting, investing, and savings decisions. Later, in the coming weeks or days, you can ask them whether they have any investments and why they chose to invest there, how they save for retirement, and what sort of college fund or savings plan they have.

This blog post outlined the concepts of saving and spending, which form the foundation of everything in personal finance. Upcoming blog posts will delve deeper into economic concepts and more nuanced financial strategies and information, as well as recent events and how they affect you and your budget. The next article will introduce you to credit, debit, and how to form positive spending habits.