|Scripture||The wise have wealth and luxury, but fools spend whatever they get. Prov 21:20|
|– How much should you spend out of how much you make
– What should you spend on
– How to create and manage a spending plan
|Materials Needed||Power Point|
|There are a lot of theories on how to spend your money. When you are young, you tend to think that you can’t save any money because you don’t have much money; however, everyone can save and everyone should have a focused spending plan (don’t use the word budget…budget’s are hard to follow and boring, but a focused spending plan is fun and exciting). A focused spending plan will allow you to pre-determine what you should spend money on now and what you should save for the future.
Let’s start with the first step, what obligations (bills) do you have that you must spend money on? Make a list of all your fixed costs…yes EVERYTHING: phone, internet, gas for your car, car payment, car insurance, rent, utilities (electricity, water, trash, gas). Now that you’ve made a list, calculate the total amount of your monthly obligations. Next, calculate your estimated food costs. This might be hard because you don’t always know how much you spend and it can be unpredictable but do your best. Add 15% onto each amount to cover for things you haven’t figured in. This should be 50% – 60% of your take-home pay.
Next, take 5% – 10% of your take-home pay and INVEST IT. I know what you’re thinking, “Only rich people invest.” That’s not true! A lot of “rich” people became rich by investing. In fact, ask any “rich” person what advice would you give to someone who is in 12th grade and I suspect 9 out of 10 of them would say start investing at a young age. This introduces the power of compound interest, two of the greatest words in personal finance. If you are nervous about investing, don’t be. It is easy to go to wealthfront.com or betterment.com and open an investment account. There is no minimum, and it is very simple. Here’s the trick though…do NOT touch it. This is money for the long haul. This is money to be there when you’re 50. “But I really want the new iPhone, the new Jordan’s, the new PlayStation…” You can still have those things, but that is a different portion of your focused spending plan. This portion, the savings portion, is like planting a tree. If you cut the tree down too soon, you’ll have little to no firewood. If you wait 30 years, you’ll have a massive tree with tons of firewood. Other people your age will still have little trees, but they’ll all be smaller than yours.
Next, 5% – 10% of your take-home should be for savings. Open a high-interest savings account (usually you can find 2.4%) and put 5% – 10% of your take-home income in that savings account. This is for short-term, midterm, or long-term goals. Short-term goals are christmas gifts, vacations, shoes (new Jordans). Midterm goals are like down payments for a car or college. Long-term goals are for big purchases like a down payment on a house.
Let me show you how savings works with compound interest: if you made $7.25 per hour for 30 years (which is impossible because of inflation, but for the purposes of this exercise we’ll leave it the same) and you worked 40 hours a week for 52 weeks out of the year (allowing for 2-weeks of vacation) and you put 10% of your income into a 2.4% savings account, you’d have nearly $51,000 saved in 30 years. Sounds great, right? That’s being super conservative. Let’s now take that same money and open a betterment.com investing account. This is an investing account that automatically invests your money for you so you don’t have to. It’s super easy to use. The average interest rate from the stock market over the last 30 years has been 6.73%. This is much better than a savings account. Now let’s say you took that same 10% and put it into Betterment, after 30 years you’d have over $113,000.00. That’s contributing about $1,100 per year for 30 years. This is the power of compound interest. Don’t think you could ever be a millionaire? Think again, using the power of compound interest and your focused spending plan, you could be a millionaire. I recommend searching for compound interest calculators online and seeing for yourself how you can earn a substantial amount of wealth.
Finally, the best part of the focused spending plan: the guilt-free spending! This should be 20% – 30% of your take home pay. This is for the things you love! Restaurants, movies, shopping, weekend trips, etc. Whatever you want. Since you have your fixed costs, your investing, and your savings set-up now you can spend without feeling bad! It feels too good to be true, but spend away!
Congrats! Now you are all set-up to be successful. Now you can focus on increasing your income which means learning more or new skills, going to college, getting better at what you do, etc. You are on your way to being rich!
|Let’s do it
☐ Yes, there could be an advanced level portfolio assignment with this lesson?
If Yes, explain the advanced assignment.
|Reference Material||I Will Teach You to be Rich. Second Edition. Ramit Sethi.
The Millionaire Next Door. Thomas J. Stanley
The Total Money Makeover. Dave Ramsey
|Developer & Short Bio||Andrew Geren. Andrew was born and raised in Wichita, Kansas. He is a Wichita State University and Kansas Law School graduate. He currently works as an attorney at DeVaughn James Injury Lawyers in Wichita, Kansas. He and his wife attended law school at KU together and took out student loans to pay for their law degrees. After graduating they focused on paying off their loans and in only 5 and a half years they paid off approximately $304,000.00 in student loans. Andrew and his wife credit this achievement to conscious spending and diligently focusing on paying the loans.|