Money WhizDom: Plan from your first paycheck

Adhvith Dhuddu, CT Regular Columnist

Tuesday, October 30; 9:26 PM

Your five fingers correspond to five unique things that you can do with your money. You can save it, spend it, invest it, pay off your debt and give it to charity. Every transaction in your life will correspond to one or more of these five functions.

A frugal person will tend to save more and reckless individuals will spend most of their lives paying off debts. Of course, the ideal combination is to have huge investments and savings with no debt and little spending. You can achieve this easily by following a regimented routine beginning at a young age.

Everyone gets excited about a first paycheck, but few people have a plan outlining how to use the money. Inconsistent spending habits and occasional debits from the savings account will leave you in a financially unstable situation.

The aim of every financial plan should be to first get rid of debts and then to increase savings and investments. Most of us take on debt (college loans, credit card debt or car payments), but it is smart to pay off your debt early and you don't necessarily have to follow the monthly payment scheme. Following the monthly payment scheme is the least optimal option for you; it's what the credit card or mortgage company would prefer you do so that they can optimize their returns. It's simple, the longer your debt is outstanding, the more interest isaccrued and the more you end up paying. There is no harm in making more than the required monthly payment to accelerate clearing your debt.

As conservative as it may sound, having consistent spending habits with few outliers will help you in the long run. After clearing your debt, it's important to stack away some cash in savings before you venture into investing. If you love taking risks early on, buying stocks and exploring real estate options will help. Another good practice is to enroll in an automatic savings plan, or ASP. Most banks offer this service and after your approval will transfer a portion of your salary to a higher-yielding savings account on a bi-weekly or monthly basis.

A simple and efficient way to evaluate your financial stability is to treat yourself as a company. Every organization has a balance sheet, listing its assets and liabilities that it releases along with its income and cash flow statements when it reports quarterly earnings. Company assets (which increase the company's value) include land, cash, machinery, etc., and its liabilities (which drain on the company) are its obligations such as loans, outstanding payments, etc.

You can make a similar balance sheet to list your assets and liabilities. Your assets will include cash (checking, saving, money market accounts, etc.), investments, CDs, home value, etc., and your liabilities will cover credit card debt, house, car and tuition loans, etc.

Now, calculate your current ratio to see how financially stable you are. After summing up your assets and liabilities, your current ratio is equal to total assets divided by your total liabilities. If this resulting number is more than two and you plan to consistently pay off your debts, you are financially well balanced. If the resulting number is less than 1.5, you need to start spending less, clearing off more debt, and increasing your savings. Doing this on a quarterly or semiannual basis is a good practice.

Time and money are two things you need to manage well in life, and a university education teaches you how to manage your time well. Getting a head start on how to manage money well in the real world is always an advantage. So, don't get a job and continue to stay "just over broke (JOB)" throughout your life. Manage your money well from your first paycheck on and become a financially competent individual.

Online link to this article:

http://www.collegiatetimes.com/stories/2007/10/30/money_whizdom__plan_for_your_financial_future_from_your_first_paycheck