So.... Everyone is basically broke for a few years when they move out one their own. The question is how do you get from being a broke teen to a well-off adult? What does it take to get a house, a car, afford regular vacations, etc? With the rising price of food, how can anyone be expected to buy organic stuff and still afford that ATV, boat, trip to Paris?
This is not a tutorial on becoming a 1%-er. But it might help you learn the very basics on how to get into the middle class and stay there!
For the purpose of this essay, let's assume that when I say Lower Class, I don't mean that these people have less value as humans. I'm talking strictly monetary value here. I mean people who work 40 to 60 hours a week at a low-paying job (fast food, WalMart, gas station, etc), and barely make enough to pay rent and buy cheap food. These folk usually have large debts, and usually can only afford to pay the very minimum amount due per month. This is where I started when I was 18, working at Burger King part time for $4.50 an hour.
The Middle Class are those who work 40 to 60 hours a week and can afford a mortgage, a decent car for each adult (over 18), good food, some savings, and maybe a little left over for a yearly vacation or so. This is where I am now, and it took me 10 years to get myself here (I did not figure all this out right as I turned 18, of course). They might even have a 401K account to save for retirement. They also have some debt, but it's under control, and they can pay it off little by little.
The Upper Middle Class works 40 or less hours per week, and makes good money, enough to buy a house, a nice new cars, eat the very best food, go out for a nice dinner 2 to 4 times per month, gets yearly vacations and has some left over for play, and no huge debts to stress over. These guys have retirement all planned out. This is where I intend to be in 10 years or less.
The Upper Class are those who make more money than they can spend, and I'm not qualified to discuss that fortunate situation. I have not figured out how to make that final jump yet, but I have some ideas....That's another topic, for another time.
How? How is this magic done? This is what I asked myself when I was 22. I spent a few years asking everyone I knew how to better my own position, and when I was 27 I committed to following a few bits of advice. I wish I would have done this when I was 18, I'd be much better off now if I had! It's never too late to start, though. Actually, it was not hard to do at all. It's mostly a matter of paying attention, and following a very few common sense rules, which I will explain.
1) Know your limits.
Know how much you will earn in a month. This is called your Net Income.
Know how much you need for bills, food, rent, gas, insurance, car payment, school supplies, etc. All the bills that cost the same amount every month, add them all up. These are your Fixed Expenses.
Subtract your Fixed Expenses from your Net Income, so you can see how much money you might have left over. I shall call this your Working Income. The Working Income should be about 1/3 of your Net Income. In other words, all your rent/bills should be less than 2/3 of the total of what you make. If your Working Income is less than 1/3 of your Net Income, it can still be done, but it will take longer. Or you can get a better job or a second job. Pick up some Babysitting gigs or something. Get a roommate. Trade your car in for a bike.
Now, for the next 2 month, track every penny that you spend on food. This amount will change per month, and the price of food will go up over time, but if you track it attentively for 2 whole months (or more), you will get a pretty good idea of how much food will cost you. Find the average, subtract that from your Working Income. Whatever you have left over is what you have to work with, to get started. It probably won't be very much, at least at first. I think my total came to about $20 per month when I started all this.
2) Know your debts.
Debt is not the same thing as bills.
Bills are charged monthly, like rent, but they stop when you stop using the service (like if you move out), and the amount of some bills can change every month (like in winter when you use the heater, that will cost extra in most cases).
Debt is something that you have agreed to pay off, like a student loan or a car loan. Sadly, student loans don't go away as soon as you graduate, you still have to pay them off, even if you can't get a good job in your field of choice. Car loans don't go away if the car breaks or stops running.
There is a tricky thing that the banks do with loans: They charge interest. Basically, that means that they charge you for the privilege of borrowing money from them. Also, it will be compound interest, which makes it nearly impossible to calculate, and ends up charging you a lot more in the end. For example, a simple 10% interest might be like if you borrowed $100, and agreed to pay them back $110 by a certain date. Compound interest often looks like a good deal, but it's really not. They might offer you a $100 loan with a 10% compound interest, compounded monthly. You might be tempted to think that this will also come out to paying $110 back at the end. Wrong. Even if you make every payment on time, you will end up paying them back a lot more than what you borrowed, and the longer it takes you to pay it off, the more they get to charge you. If you miss a payment, or have to skip a month, they get to charge you even more. Compound interest is basically a way to screw you, and make you think you are getting a good deal. Sadly, pretty much any sort of loan will come with compound interest. It's a fact of life. Having a good credit score will help you get lower interest rates, but I will discuss credit scores in another essay.
Example:
A $100,000 loan at 10% simple interest rate paid over 10 years, means you will pay them a total of $110,000. You have lost $10,000 on this loan.
A $100,000 loan at 10% compound interest rate paid over 10 years means you will pay them $270,704.17. You have lost $170,704.17 on this loan, which more than twice what you borrowed in the first place!
Here is an online compound interest calculator, in case you wish to play with some numbers and see what you are really agreeing to when you take out a loan: http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Why is it important to know your debts?
You need to know your debts, and how much interest you are paying on each one. Always. Otherwise you will get taken for a ride, and you will end up paying back much more than you thought you were agreeing to. The average 4 year degree costs around $100,00.00 these days, or close. Even if you agree to pay that ridiculous amount, if you agree to compound interest, and make every payment on time, you will actually be paying back almost 3 times what you borrowed. You need to be aware of this!
Trick #1: Unless your contract states otherwise, you can pay debts off early, or pay a little extra on every payment, and you end up spending less in the end. That's the flip side of Compound Interest. Take as much of your extra money as you can spare, even if it means skipping the Starbucks in the morning, and pay it towards your smallest loan every month. Eventually, you will pay the smaller loan off, which frees up more money each month. Then you take all the money that you would have put towards the small loan, and pay it all towards the next smallest loan, and so forth. Kill all the loans in order of size, smallest to largest. The faster you get rid of loans, the less interest you will pay. Interest is basically wasted money.
3) Spend Wisely.
Spending wisely does not mean always buying the cheapest item.
Why do rich people always have lovely, high quality stuff? Well, it's because they buy lovely, high quality stuff, and then keep it forever, because it's high quality.
Of course, you probably won't be able to afford a $10,000.00 couch with a lifetime warranty. I can't afford that, either. But given a choice of a $100 couch with a 1 year warranty, or a $150 couch with a 3 year warranty, get the $150 option. It will last longer, and that means you won't have to spend another $100 every year to live with a crappy cheap couch. Get the better one, and take good care of it, and you won't have to spend money on another couch for several years. Plus, it's probably a nicer model.
Trick #2: There is this ridiculous psychology surrounding the lower class. It's a thing that companies do to get more money out of you, while making you think you are getting a good deal. They make a horrible cheap product, and sell it for only slightly less than a better model. People who think of themselves as poor usually go for the cheapest option, which inevitably breaks the second the warranty runs out, forcing them to pay for another cheap product. In the end, buying a $100 couch every year costs you $300 over 3 years, but if you had bought the $150 couch, it would last you at least 3 years, so you would only have spent $150 on couches over 3 years. Paying a little more for a better product ALWAYS pays off. Pay attention to what you spend your money on, and focus on getting better quality stuff. It sucks at first, but once you get your living basics sorted out, you will save more money faster in the future this way.
4) Savings: It's not just a dream anymore.
I remember dreaming about having some savings, enough to get me by in case I lost my job. It's so hard to save effectively when you live paycheck to paycheck!
- Get a big empty jar. Wrap paper or cloth around it so you can't see what's inside. Glue the lid on, and cut a slit in the lid to make a cheap piggy-bank.
- Every week, drop $5 in the jar. NEVER take anything out of it. Forget all about the money in the jar. It no longer exists. Mark your calendar when you do this, so you can be sure never to skip a week.
- After one whole year of doing this, take all the money out of the jar, go straight to the bank, open a savings account and put ALL the money in it. (a savings account often requires an initial deposit of about $200, hence the piggy bank)
- Go online and set up an automatic payment from your main account, so that it drops $20 per month into your savings account automatically. You may put extra into the savings account, but you may not take anything out of it. If you can manage it, put more in every month!
- Forget about your savings account. You are only allowed to access it in case of extreme emergencies, like if you lose your job and your friends are not willing to feed you anymore. Seriously, I couch surfed at my best friend's house for 2 months and ate nothing but my Employee Meal at Taco Bell before I broke into my savings. True story.
At this point I try to drop $150 per month into my savings. I've been at this level for a few years now, and sometimes I drop in a little extra.The result was that when my husband lost his job, and spent 10 months unemployed, we could still pay the bills and eat, and we did not lose our house or have to sell the cars. It's THAT IMPORTANT! Doing this will save your buns someday, I guarantee it.
In closing: if you want to get out of the Lower Class, you will need to know your limits, know your debts, spend wisely and establish some savings. It won't happen overnight. This is something that you start doing NOW, and work at it every day, and someday you will discover that you have nice things, your debts are under control, you know exactly when you can afford to splurge on something, and you even have something in savings for emergencies. Over the years, you will get better paying jobs, too. That helps a lot. This process takes patience and dedication. You may stumble along the way, and if you do, just remember to get back on track as soon as you can. Don't dwell on it, just make it part of your daily habits.
OK, enough for now. =)
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