An Introduction to Money Management

managing money guide

When you were younger, you likely thought that your parents had the magical ability to get anything they wanted by swiping a card or handing over a few bills.

But then one day, they explained why they couldn't buy you a Barbie or toy truck every time they went to the store and you realized that money was something that people work for, save, and spend.

At some point, you later discovered that people make different amounts of money and that some families have more or less of it.

Way back in history, there were other ways to pay for things.

You might have exchanged the grapes that you grew on your farm for the olives your neighbor grew. But money was created to deal with the problem that sometimes you really wanted milk despite the fact that your neighbor who owned cows hated grapes. Rather than go without, you sold your grapes to people in another village and then paid the farmer for his milk with the coins.

Things are a bit more sophisticated now, but money still works the same. Adults work and get paid for their time and then they buy the things they need or want (or that their kids need or want) with the money they make.

This guide will go over the basics of how money works and the best methods for dealing with it.


Why Is Money So Important?

Like to eat Fruit Loops for breakfast? Go camping in the summer? Play football or take dance classes? Everything you do costs money. Without it, you wouldn't have delicious sugary cereal, or memories of eating s'mores with your family around the campfire.

Money pays for the roof over your head and the shoes on your feet. It pays for the food that keeps your nourished, medical treatments that keep your healthy, and almost everything else that keeps you alive and well.

But Money Doesn't Define You

So, what happens if your family doesn't have as much money as your friends’ families? Maybe you don't get to go on cool vacations to tropical islands or participate in expensive after-school activities. Perhaps you only get Fruit Loops on special occasions or when your family buys the store brand.

Some kids would have you believe there's something wrong with you if don’t wear brand name clothes or if your family struggles with money. But how much money your family has shouldn’t affect how you feel about yourself. What matters is who you are inside – whether you’re the goofy kid who tells jokes that everyone laughs at or the smart student who always gets an A+.

There are lots of reasons that some families have more money than others. Maybe your parents came from a poor background and had to work much harder than the parents of other kids. Or maybe one of them decided to stay home after you were born to make sure there was someone ready with snacks when you got back from school.

Whatever the reason, it's important to know that how much money your family has doesn't say anything about who you are.


Budgeting

Once you realized that money didn't grow on trees or come from unlimited credit cards, you might have wondered how your parents decide what to spend their cash on. They likely use a budget to make spending choices.

A budget is a way to track the dollars that come in every month and decide how they’re spent. Some of your parent’s money is undoubtedly budgeted to pay their rent or mortgage to keep a roof over your head. Then, they have to put money aside for food - whether for groceries or for ordering in on Pizza Friday.

After that, your parents need to pay for boring things like gas, car payments, insurance, phone bills, cable, internet, and utilities. They also likely put money aside for the future by saving for things like a fun vacation to Disney World, the down payment on a bigger house so you don't have to share a room with your brother, their retirement, and your college education (if you’re lucky).

Whatever is left over might go towards fun things like nights out at the movies or a trip to the local amusement park.

You can create your own budget if you get an allowance or make extra dough by cutting lawns or babysitting. If you make $75 per month, you may decide to be responsible and put $20 towards your college fund (I know it sounds boring now, but you will thank yourself when you're older!).

After that, you could put another $35 aside to spend on entertainment – things like going to the movies with friends or hitting up Taco Bell after school.

Want to buy something expensive like an iPad or a video game you’ve had your eye on? You could put $20 aside to start saving for that. 

Simply subtract your expenses from your income (in this case, let's say $100/month) to see what you have left, if anything at all! If you don't, you need to figure out what you can cut out to make room for the more important things.​

Sample Budget:

Expenses

College Fund: $20

Entertainment Fund: $35

Big Purchases Fund: $20


Total $75

Can You Afford Your Expenses?

Income: $100

- Expenses: $75


Leftover: $25

But a budget only works if you stick to it. Be sure to keep track of the money you spend by writing all your purchases down in a notebook and checking it at the end of the month.


How to Spend Smartly

Buying that cool new gaming system or a fancy pair of jeans might seem like a good idea at the time, but you could regret it later when your friends all have money to go to the movies and you're broke. Here are 3 rules for smart spending:

Compare: If you're going to be paying through the nose for an expensive purchase, make sure you can't get a better deal. Check flyers and go to a few stores to see how much the same thing costs elsewhere. It's very easy to compare products online, as well. Don't just buy the first thing you see! Check if there are alternatives for cheaper. 

Get a cheaper version: Those $200 jeans look great on, but you can likely find a $50 pair that look just as good. Better yet – find out where the good thrift stores are in your city and score a pair of $200 jeans for just 10 bucks. There is almost always a cheaper alternative to anything you want to buy. Make sure the cheaper version isn’t just as good before you open your wallet for the more expensive option

Figure out your wants vs. your needs: Just like you didn't really need the new American Girl doll, or Star Wars themed Lego set when you were a kid, you don’t really need that new video game that was released this week or a new jersey. You have a bunch of games that you still enjoy playing and you already have a jersey with another player's name on the back! But maybe you do need to take a babysitting or lifeguard training course so you can get a summer job. You should prioritize saving money so you have enough whenever a need comes up.


How to Make Money

From becoming a professional clown to raking in cash as a YouTube star, there are almost as many ways to make money as there are people. Here are some of the main ways that people pad their bank accounts:

Get a job: Whether they show up at the office in a business suit or drive around in a cop car, most people make money by holding down a job. While you might be too young to have one yourself, you can start thinking about what you might want to be when you get older. After all, there are a lot of options - from a rocket scientist to a video game tester and everything in between.

Start a business: Don’t like people telling you what to do? Always coming up with great ideas for how to improve everyday things like kitchen sponges? Take your wifi-enabled kitchen sponge idea and start a business! Starting a business could make you a millionaire or it could end up as a flop, but you might really enjoy working for yourself.

Freelance: Many people decide they don’t want a permanent boss, but trying to be the next kitchen sponge tycoon doesn’t interest them. They end up freelancing! They might write articles for magazines or help small businesses with their accounting. If you’ve ever babysat for a family or gotten paid to shovel snow for a neighbor – you’ve freelanced yourself!


How to Save Money

In a way, saving money is easy. You just don’t spend it.

But it can be hard to save money when there are all sorts of temptations to spend. From a trip to the corner store to a few hours at to the mall, there are lots of things you’ll see that you’ll want to buy. But if you’re saving your cash for a concert next month or for your future, you’ll want to keep that money locked away in your piggy bank or in a savings account.

Have a goal: Saving money is easier if you have a clear goal for how much you want to save and what you plan on using it for.

Get a buddy: Whether it’s your mom or dad or your best friend, tell someone about your savings goal and encourage them to remind you of what you’re saving for when you’re tempted to spend.

Find ways to save more: Get creative if you want to meet your savings goal quickly. Look for ways to earn money around the house or from neighbors by doing extra chores. Or ask your parents to help you sell some of your old toys that are lying around the house not being used.


How Interest Works

Perhaps you’ve heard of something called ‘interest.’ If so, you might be wondering what interest is and how it can help or harm you.

Basically, interest is the amount you pay for the privilege of borrowing money. It’s like if you were to borrow $5 for lunch today from your friend. They might need the money themselves soon and so they might tell you that if they lend it to you, you’ll have to make it worth their while by paying them back $6 instead of $5. That extra dollar is interest!

Similarly, when adults borrow money to buy their homes or their cars, or put money on credit cards, banks and other lenders charge them a percentage of how much they borrow in interest.

But interest can help you too! Let’s say that you put money in a savings account. The bank then uses that money to lend it out to other people and as a thanks to you for making that possible – they pay you interest. In a way, your money then works for you!


Bank Accounts & Banking

Savings Accounts

Afraid your siblings will raid your piggy bank while you’re not looking? You need a savings account! You can get your parents to help you sign up for one at the local bank if you don’t already have one. You earn more interest on money kept in a savings account than you would if you only had a checking account.

That allows your money to grow more quickly. But it might be more difficult to get that cash out if you want to buy something. Savings accounts often limit withdrawals to once a month.

Checking Accounts

Sick of carrying around cash and then dropping your change on the floor and having it go rolling in every direction? A checking account is a bank account that you use to pay for things you buy. It will hold your cash and keep it safe, but still allow you to use your funds without charging a lot of fees to get at your cash.

Many banks have special no-fee or low-fee checking accounts for people under 18, but you’ll need your parents to help you set one up. They often have a limited number of free transactions each month which means you can only use it to buy things so many times before they start charging you a fee each time you take out $20.

Just be aware that you’ll earn less interest on your money in a checking account than you will in a savings account!

Debit Cards

Debit cards are a star-crossed perfect match for a checking account. They let you use the money in your checking account by swiping your card at The Gap or the local ice cream parlor. The money is then automatically taken from your account.

You can set up a limit for how much you can take out at a time if you’re worried about spending too much!


Credit

We talked about paying interest when you borrow money earlier, but did you know that not everyone pays the same amount in interest? One person might apply for a credit card and have to pay 19% in interest and another might apply and only have to pay 11% in interest. So, what determines how much interest you pay? Your credit!

Credit is a bit complicated, but its basically a measure of how likely you are to keep your word. If you tell your parents that you won’t eat any cookies before dinner and you eat cookies before dinner anyways, they might be less likely to keep the cookies where you can find them or only buy cookies under certain conditions.

Similarly, if you borrow money and don’t pay it back on time, the banks and lenders might be worried that you won’t pay it back the next time you borrow it. Something called your credit history tracks how well you’ve handled the money they’ve given you in the past.

If you’ve were late repaying - they might decide not to lend to you or they might only lend you money if you agree to pay a higher percentage in interest. This additional interest protects them in case you don’t keep your word.

Someday, you’ll want to build good credit so that you can borrow money when you need to. Luckily, it’s pretty simple to do so. When you borrow, be sure to make all your monthly payments on time and don’t borrow too much!

Credit Cards

Credit cards allow you to buy things when you don’t currently have the cash to do it. Essentially, you’re buying something using someone else’s money and you’re promising to pay them back. Because they’re letting you use their money, they charge you interest for it.

Unfortunately, a credit card company is not going to help you buy the new gaming console when it comes out when you haven’t saved up for it. No, you have to be at least 18 to have a credit card.

But while credit cards can be helpful when you’re in a pinch, with great power comes great responsibility. When you borrow money, you commit to a minimum monthly payment towards paying the company back. Miss your minimum payment? Your credit score will suffer and that will make it harder and more expensive to borrow money in the future.

Not what you want!

But many people use credit cards even when they have money to buy what they want. Using a credit card and paying the amount charged back at the end of the month is a great way to build your credit score. It shows credit card companies that you’ve got this – you can borrow from them AND quickly pay them back. You’re trustworthy. That way, if you ever have to borrow money in the future, you’ll be able to do so because banks and lenders will know they can trust you – and they’ll give you a low interest rate too.

That’s why it’s so important to get a credit card when you turn 18 – so long as you don’t look at is as free money. Unfortunately, nothing in life is free. If you spend money and pay it off responsibly, you’ll be able to build your credit quickly and easily.

Loans

There are lots of reasons why you might need a loan when you get older – to buy a car, to buy your first home, or to pay for emergencies. But the first loan you’re likely to get is a student loan.

Loans are a little different than credit cards. You borrow a specific amount of money to pay for something, but rather than have to pay a minimum payment every month, you have a specific period time that you have to repay your loan by and you have to make identical payments every month towards that goal. You’re also charged interest, but it tends to be less than you would be charged if you paid for it with a credit card.

Student loans help you pay for school costs, and most people have to take some out to go to college – but you don’t want to take out too many! If you get into too much student loan debt, you could spend the next 10 to 20 years struggling to pay it off. That won’t be any fun.

Rather than take out too many student loans, make sure to consider the cost of college when choosing schools and what kind of help they’ll give you in terms of scholarships and aid. After all, going to a fancy, expensive college often won’t make much of a difference on how much you make in the future – even if it impresses your parents' friends. But they won’t be repaying your student loans – you will!


Sharing Money

Whether you family has a lot of money or not very much, I can guarantee you that there are other families with kids your age who have even less. An important part of being a good person is helping others when they are struggling.

That might mean helping your sister with her Math homework, buying a Slurpee for a friend you know can’t afford one, or organizing a can drive at your school for people who don’t have money to put food on the table. But you can also share money by making a donation.

There are all sorts of charities that you might want to donate to. Maybe you want to help out sick kids who have cancer, or give to help save endangered animals.

Whatever you do with your money, make sure to always put a little aside to give back to those who are less fortunate than you! It will make the world a better place.