Why You Should Manage Your Personal Finances

I've been regularly posting on my blog for more than half a year already, yet I think I have neglected one of the most important topics that need to be addressed: why should you even bother learning about personal finance?  Of course, some of us may automatically say "obviously, it's to have more money."  But that isn't the real reason. There is a reason why we even want money in the first place—so that we can pursue our interests and find what makes us the happiest.  Everything always comes down to seeking happiness and how it comes to each and every one of us is almost completely unique.

Why Stocks?

The stock market is a pretty popular place to put your money.  If you have ever seen the news, a section is usually dedicated to how the stock markets moved that day and many people have investments in various companies.  But first of all, why does the stock market exist?

Companies usually get listed on the stock exchange as a way to raise money.  Individual investors have the opportunity to give companies money in the hopes that the company is able to use that money in a solid business plan to make more money.  However, this is only in the case of an IPO (initial public offering) where a company first sells shares to investors.  During the normal day-to-day trading on the stock exchange, however, people buy or sell shares of stock to one another.  There are instances where the company may initiate a stock repurchase to buy back its shares when they think their shares are undervalued, or priced too low, but for the most part the counter-party to a trade is another investor (or fund manager, etc.).

Why "The Smart Nickel"

I'm going to spend a post just talking about my blog to give my readers a better idea about my goals and what I hope to achieve as well as why I decided to go with "The Smart Nickel" instead of "The Smart Billion Dollars."

I sincerely believe that it is not impossible for anyone to generate at least a 5% return on their money.  With credit cards and their cash back, it is even possible to earn back 5% of what you spend.  But hopefully, my blog is able to convince many college students the importance of saving for the future and the potential your money has to grow itself over time.  So the nickel comes from the possibility to make a nickel on each dollar, which may not sound like very much but it adds up.  And that's how I made the name, but please continue to learn about the goals of this post.

Why Budgeting?

After talking about credit cards to help facilitate spending, budgeting seems like the next logical step.  Budgeting is a critical control technique to try to take out emotions from our purchasing habits so that we don't overspend and put ourselves in debt.  However, people often don't take the initiative to budget because of the limitations it puts on them and it is a little tedious to do.  There are lots of applications to help you budget, and I by no means have tried them all.  I will try to focus on some of the major reasons why you should budget and talk about how to do so easily with basic programs in a later post.

First, why should you budget?  I believe that it is extremely important to know where your money is going.  A lot of people think that the number one reason is to limit their expenditures, but I would argue that the primary reason you should budget is to be aware of what you are spending your money on.  Is most of your money going into rent and groceries or high-end restaurants and shopping malls?  Setting limits is fine, but there isn't any extrinsic force that will punish you for going over your budget limit.  You are in control of your finances; as long as you are aware of what you are spending your money on then budgeting will have been successful regardless if you stayed under your limit or not.  This means though that every time you make a purchase, you will have to record it somewhere.  This can be pretty tedious for some people but I will talk about certain tools you can use in a later post.

The next and more obvious reason to budget is to control your spending.  A lot of people suffer from impulsive shopping and often spend more than they can afford.  This is often overdone in combination with credit cards (a few articles I have written which you can see here) since with a credit card, you don't actually need to have the cash on you to spend it.  And business often try to do everything they can do facilitate consumer spending.  Do you know why milk and eggs are always in the back corner of every grocery store you visit?  It is so that you have to go through the other aisles first, to entice you to see something else you need to buy.  Online shopping has exploded with the internet and now all you need to do is enter a credit card number and click a few buttons to spend as much as you want.  Now, while you are still in control of your spending urges, you can logically plan out how much money you can afford to spend in the next week, month, or year and how much you want to save for future spending.  These limits that you set don't have to be concrete, but they should be a very good guide about how much you are logically willing to spend over a given timeline.

Let's say you budget $200 for food this week.  However, your best friend gets a job offer in the middle of that week and you all decide to go out to a very fancy restaurant to celebrate. You end up going over budget.  Have you failed at budgeting?  No, you had a general idea of how much you were going to spend and you know what circumstances led to you going over budget.  Obviously, this example is a little different from setting a budget of $200 for clothes and then getting so excited over a sale at the mall that you spend $400, but in either case you can look back and see how your actions measured up to your expectations.  In the shopping case, maybe it would be good to total up your purchases before going into the check-out line.  Or maybe you should increase the size of your shopping budget if you are okay with spending that amount.  However, given a limited pay check, whatever you move into shopping will have to come out of something else and if it turns out that you would have to cut food or rent, you may end up rethinking your spending habits.

Again, you are in control of your finances.  Hopefully, this post has been able to show you how useful a tool budgeting can be in order to meet your goals and expectations.  My next post will be about how to specifically budget by using excel, apps, or other programs.  Combined with later posts about savings and investing, hopefully you will be able to create a comprehensive idea about how you can maximize the value of your money in the present and for the future.

Why Credit Cards?

This post will primarily be about what is a credit card and how you can use one to make money on the money you spend.  I will go over credit card reviews in the next post most likely, but you can look at some credit card comparisons here.

A lot of college students actually don't use a credit card, or at least a lot of my friends do not currently own one. Yet I believe a credit card, used wisely, can actually be one of the best ways to make some money back.  Nowadays with the rewards programs offered by many credit card issuers, it is easy to make back 1-5% back on your normal purchases and you are essentially getting paid to spend what you normally spend.  For those of you who have a savings account (which I'll go over in a later post), this means even more potential earnings since you delay payment of your purchases by a month or more which allows your cash to earn interest in the bank.

First of all, what is a credit card?  A credit card is a plastic card with a magnetic stripe which you can use at most businesses.  You have some credit with an issuer, let's say $500.  Essentially, when you make a purchase with your credit card, the company giving you credit promises to pay the business you are shopping at and then bill you at the end of the month for the total purchases you make, up to your credit limit of $500.  Why would a company offer to pay for you?  Credit card companies make money through two main sources: interest on late payments and fees charged to merchants.  You usually get a grace period of around 25 days after you are billed to pay the amount you spent that month, and if you pay it in full before the grace period ends, there is no interest charged.  If not, then whatever balance you have not paid off will accrue interest (usually 10-20% which can add up, so make sure you pay your bill in full every month if you do decide to get a credit card).  Also, if you swipe your card at your local grocery store for $10 worth of groceries, the store actually only receives perhaps $9.50 and the last fifty cents go to the credit card issuer and the credit network you are with.  There may be a minimum fee along with a percentage, which is why a lot of stores often have a minimum purchase requirement to be able to use your card.

Why should you use a credit card?  The first reason many people start getting a credit card, especially when they are in college, is to start building up a credit score.  This credit score, called a FICO score after the company that handles the process, is a measure of how risky a person is with credit.  It is used for other credit cards, car loans, mortgages, etc.  The main metrics used to determine your FICO score include your credit card payment history, the length of your history, amount of debt you currently have (in proportion to your total credit limit), new credit you have recently opened, and the different types of credit you have.  The score itself is between 300 and 850 and normally determines whether you qualify for loans and other forms of credit above, as well as how high of an interest rate you will be charged.

The second reason is to be able to afford things you normally wouldn't be able to (and not have to carry around a lot of cash all the time).  By using a credit card, you could buy something you wouldn't be able to afford until next week when your pay check arrives.  Although I use my credit cards the same way I do cash, there are some people who forget about how much they spend in a month and often go overboard.  However, if you use a credit card the same as you do cash for necessary purchases, you can actually make money off the rewards you get back, which brings me to the third reason.

This is probably the most overlooked reason since many people underestimate how much 1% on how much a person spends in a year really is.  It can easily get up into the hundreds of dollars a year for essentially buying the same things you would buy normally.  And, depending on how you manage your credit cards, you could end up earning back 5%.

So to sum up, getting a credit card at any age is important to start building your credit history, to have the option to spend more than what you actually have, and to earn cash back for almost no extra work.  Especially as a college student, it is important to learn how to become fiscally responsible and manage your personal finances.  Of course, the critical note to remember is that credit cards can be very dangerous without full control over your spending habits.  Many people fall victim to spending more than they can afford just because it is available and they don't have to worry about paying it until later.  If you do get a credit card, only spend what you have the cash for and make sure you follow a budget (I'll talk about a budget in a later post and how it shouldn't be as much of a restriction as it should be a guide).  In the end though, credit cards are the logical first step toward personal finances, and I would strongly recommend getting them.  Hopefully, this post has shown why they are important and you can read a future post to decide how to pick which card is right for you.