Knowledge and Insights

Entering The Real World

group helping each other climb

The school year has kicked off and, with it, the Money$peak program is entering high schools in the region. The Mercadien Foundation surveyed The Mercadien Group’s young professionals to learn more about the shift from school life to the real world, as translated by those polled. We asked, “What do you wish you knew about personal finance before you entered the real world?” Do you identify with the following responses we received?

“I wish I knew to delay gratification. I either spent money when I didn’t have it or I spent money on something I didn’t need when I should have been saving it.”

Delaying gratification is the ability to resist the temptation of an immediate reward in order to receive a larger reward later. This can include anything from spending money unnecessarily and being unable to make a significant, large purchase down the road. Remember, the average U.S. household has nearly $10,000 owed in high-interest credit card debt. Saving to make a purchase instead of immediate gratification can reduce the ultimate price paid by 50% or more!

“I wish I’d fully understood the power of compounding interest, as a saver and borrower.”

Compounding interest is the interest added to the principal of a deposit or loan so the added interest also earns interest from then on. Person A saves $5,000 annually from age 25-35 (total investment of $50,000) and then stops investing and retires at age 65. Person B saves $5,000 annually from age 35-65 and then retires (total investment of $150,000). Person A, who saves starting early and invests a third as much, ends up with more money at retirement than person B.

“I wish I knew that even when paying the minimum balance on a credit card, interest is charged on the remainder of the balance and all transactions thereafter until the balance is paid in full.”

Credit card interest is not your friend. The average U.S. household has more than $7,000 in credit card debt. With just $2,000 of credit card debt with an annual interest rate of 20%, making minimum payments of 3% of the balance will mean it takes 15 years and costs $2,240 in interest to carry the debt until it’s paid off. Your $2,000 purchase actually costs $4,240.

“I wish I knew the envelope system.”

The envelope system has been a popular method for maintaining a budget for decades. The core concept is to keep cash to meet separate household expense categories in physically separate envelopes. This method commonly includes items that vary from month to month; but is used to place a cap on them (ex: groceries, restaurants, entertainment, gasoline and clothing). This method can encourage creative use of resources. If you’ve already used up all of your grocery envelope for the month; it’s time to raid the cabinets and finish the leftovers in the fridge!

“I wish I knew to always have a plan B.”

Most of us expect to have a job the majority of our lives and eventually retire. We might have an emergency reserve, but it’s probably not big enough to cover every possible financial disaster. Backup plans often center around insurance or alternate investment or saving options. Do you have an employment alternative? Practice writing down a few financial disasters you could potentially face and the backup plan for each of the items. Having gone through the possibilities equips you far better than “winging it” and lets you know the gaps that need coverage.

In the early stages of our lives, we’re all learning new skills that need development and refinement. As we age, we should keep an open mind to continue learning new skills and techniques for redefining established skills. Sometimes, best practices change the way we’ve always done something and we need to rethink the way we evaluate a situation. Want some additional skills and lessons?

Visit the Mercadien Foundation website to receive the full 30 day list!