Shopping well isn't just about saving money. Photograph: Peter Cade/Getty
1.The sooner you start managing your money, the richer you'll be
When
you are young it is quite tempting to think there is no rush to manage
your money; it is easy to imagine that you have plenty of time. But the
longer you leave it the more difficult it will be. Suppose you want to
have savings of £10,000 on your 30th birthday:
You could save 78p a day from the age of 13
You could save £4.47 a day from the age of 25
You could save £27 a day from the age of 29
Every day counts when it comes to making the most of your money, and it is never too early to begin.
2. It isn't just about money
Shopping
well isn't just about saving your money; it is about saving your time.
Suppose, for example, that you earn £3 an hour looking after your
neighbour's children. If you spend £15 on a CD in a record shop when you
could have brought the same CD in a supermarket for £9, then you aren't
just wasting £6. You are wasting two hours of your time (two hours at
£3 an hour = £6). Time you might prefer to spend doing something else.
3. What is capital? What is income?
One
of the most important money concepts is to understand the difference
between "capital" and "income". Capital is something - it could be
money, a property, shares or some other investment - that generates an
income for whoever owns it.
A good way to remember the difference
is to think of a fruit tree. The tree itself is the "capital". The
fruit is produces is the "income". You continue to own the tree
(capital) and it continues to bear fruit (income) every year. Your wage
or salary is the income that comes from the capital of your labour -
hence the expression "human capital". Money is not just money - it is
either capital or income.
4. If in doubt, just say no
Credit cards are an expensive way to borrow money. Photograph: Ian McKinnell/Getty
The big risk with a credit card is that you will run up large debts that
you have no way of paying off. If you need to borrow money, there are
much cheaper ways to do it. And if you don't want to carry cash when you
go shopping, use a debit card. Don't let the banks fool you into taking
a credit card out. Unless you have a real need, just say no.
5. When you borrow, you are kissing goodbye to "future" income
When
you borrow, what you are doing is giving away some or all of your
future income. Let's say you borrow £250 at 12% interest and repay it
over 36 months. What you are giving the lender is £9.44 of your monthly
income for the next three years. What you are paying for this privilege
is a grand total of £90 in interest.
6. Don't get caught in the minimum-payment trap
Lenders
want you to repay them. Wrong. The last thing most lenders want is for
you to pay back the money you owe them. Why would they, when they can
make massive profits at your expense? This is why lenders frequently set
very low minimum monthly payments. By making sure that most of what you
repay them is interest (and not the debt itself), they can prolong the
agony for you and increase the profits for themselves. Nothing makes
lenders so happy as a customer who falls into the minimum-payment trap.
7. The language lenders use to make you feel special
Lenders
use language to great effect to make borrowers borrow more. To begin
with, they flatter their customers by telling them that they have been
"specially selected" or are in some other way honoured to be offered a
particular loan. Then they play down the expense of the loan with
expressions such as "low cost" and "value for money". Finally, they
focus not on the interest rate or term but on the monthly payments,
which they will describe as being "easy" and "convenient".
8. You control the risk
Not the best way to invest your money. Photograph: Action Images/Matthew Childs
One of the first questions every investor has to ask him- or herself is:
how much risk am I willing to take? In general, the more cautious you
are, the less reward (or profit) you can expect. Whereas, if you are
willing to take a greater risk, you will be in with the chance of a much
higher reward.
A bank deposit account is not at all risky. But
your reward will only be a small amount of interest every year. Gambling
on a horse, on the other hand, is very risky. If it loses the race, you
lose all you money. But if it wins, you could make a huge profit.
9. Insurance doesn't provide total cover
It
would be very rare for anyone making a claim on their insurance to
receive every penny they ask for. This is because most policies have
something called an "excess". This is an amount of money that the
insurance company expects you to pay if there is a claim. Suppose your
excess is £100. If you put in a successful claim for £500 of damage, you
will get £400 - that's £500 less the £100 excess. The bigger the
excess, the less expensive the insurance.
You should also be
aware that an insurance company's idea of what a car is worth and your
own may differ. If you make a claim, expect at best to receive the car's
"market value", which is the same as its second-hand value. If you want
to insure your car for what you paid for it (a good idea if you've
borrowed money to buy it), you can take out something called guaranteed
asset protection (Gap) insurance.
10. Don't be an ostrich
If
you want to build up enough wealth to make sure you can give up work at
a reasonable age and never have to worry about money, then don't forget
about pension planning. And in particular, don't act like an ostrich
when it comes to the pensions crisis. To guarantee yourself a
comfortable retirement you need to start planning early.
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The Teenager's Guide To Money by Jonathan Self is published by Quercus Publishing at £7.99. Copies are available from the Guardian Bookshop.