College and Career Education

Day 8 Lecture Notes

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Tracey Kobayashi

50 Phelan Ave, NGYM
San Francisco, CA 94112
(415)452-7311
tkobayas@ccsf.edu

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Personal Finance

Planning for Your Future

Saving a little now can yield greater return in the long run due to the power of compounding. Compounded interest follows a basic formula:

If you deposit $1000 today into an account earning 5% per year (compounded once a year), you will have $13,760.88 in 2055, 50 years from now. If you put $2400 into account earning the same interest in 20 years from now in 2025, you'll have $10,372.66. I know, you're thinking in 20 years, you'll be able to put more than that away, and that socking away $3600 will return $15,558.99, but wait...there's more

If you deposit $1200 a year starting now for the same time period, and interest is compounded yearly, you'll have $251,217.59 at the end. But if you start depositing $3600 each year in 2025, you'll only have $239,179.85.

Living within your means and putting away even a small amount of money on a regular basis, and avoiding debt, are positive steps in securing your financial future. No, you don't have to sacrifice all your short-term fun for long-term security.

Budgeting

Reasons for budgeting...

• Benchmark for goals and measure of progress.
• You control your finances instead of finances controlling you.
• Tool to stay within your means.
• Help with savings goals -- setting aside money for savings and investments.
• Frees up cash to use on things that really matter instead of wasting it on things you don't even remember buying.
• Helps prepare for emergencies or large/unanticipated expenses.
• Reveals spending patterns so you can assess and refocus.
• Budgets can get or keep you out of debt.

Small but regular expenses add up! This is how much the "average" person may spend each year on some common items...

Planning a budget...

• Categorize your expenses from the last 2-3 months.
• Add other categories you think necessary.
• Calculate your average monthly income: wages; interest, etc.
• For each expense category, try to set a budget amount that realistically reflects your actual expenses while setting spending targets that allow you to save money.
• Balance your current expenditures with your budgeted amount.
• A negative number means you're spending more than you're bringing in, and you probably should consider altering your spending habits. A positive net income is great! Transfer most of it to a short-term savings or investment account. When you accumulate enough to meet the minimum amount for a longer term vehicle, research possible investment options with your parents -- I recommend a no-fee index fund.
• Analyze your spending to identify where you can comfortably make cuts. Update and analyze regularly.

Remember to tailor cateories to fit your own situation! Make them detailed enough to be useful, but not so detailed you become bogged down in trivial details.

Although you're at a point where your income depends almost entirely on your parents, that doesn't mean tracking your spending habits and tailoring them to your needs isn't a good idea. Learning to manage your finances early helps you develop and maintain good fiscal habits.

Reconciling Your Statements

Financing Major Expenditures...Like College

Some financial tools you may find interesting with regard to funding your college education...

• Financial Aid Calculator
  from SmartMoney
• Personal Finance Tools -- College
  from Kiplingers
• Foolish Calculators -- College
  from the Motley Fool
• AMEX Financial Planning
  The calculators and tools are especially helpful! There are also college planning tools.

Definitions

• Compound Interest: paid on deposited funds as well as accumulated interest.
• Budget: a sum of money allocated for a particular purpose.

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Information in this section © 2005 Tracey Kobayashi, unless otherwise noted.