ChipsTips: A guide to simple money management

Disclaimer: The author is not responsible for whatever happens to your money.
Follow this advice at your own risk!

No one likes being broke. Sure, nuns and communists might tell you otherwise, but for any functional member of society, money is like toilet paper: You might be able to do without, but it ain't gonna be pretty. Maybe you've snagged a summer job; maybe you're already employed. Maybe you've made a fortune from sports betting (which is illegal, by the way). In any case, Chips is here with a few money-management tips to guide you through the slightly scary, but ultimately rewarding, task of looking after your cash.

Saving is smart spending in disguise

In a way, all money matters boil down to this: It's not what you earn, it's what you save.

Take sophomore Denisse Quiroga. Quiroga works part-time at Papa John's Pizza and makes a decent wage, about $400 a month. Because she lives with her family, she has all her living expenses covered. But technically, Quiroga doesn't have a cent to her name. She doesn't even have a bank account.

So what happens to the money she makes every month? "I just spend it on myself," Quiroga says. She means it: Quiroga pays for her cell phone ($60 per month) and buys all her own clothes. What's left at the end of every paycheck she spends on little luxuries: visits to the beauty parlor, presents for friends and the like. While Quiroga would otherwise qualify as a paragon of teen financial responsibility, she makes one mistake: she doesn't save.

And why should she? It's not that Quiroga is incapable of managing her money; when her friends have birthdays, she makes sure to hold back a chunk of her paycheck to buy them gifts. She knows her way around a balance sheet. No, Quiroga clearly isn't clueless — she's pessimistic.
What is the point, she asks, of saving the odd dollar she's left with at the end of every paycheck? "With the money I get right now, all that's left after I pay for my things is pocket change," she explains. "If I got paid better, I'd save more."

An admirable thought. But when it comes to saving, every cent does count — even that pocket change. It may sound hokey, but it's true.
That's due to the strange nature of compound interest. You can think of it as an indulgent, kind old godfather of sorts. Compound interest loves youth. It rewards youth. An account earning compound interest won't accrue much in one, two or even three years. But give it 10 or 20 years, and your money could double or even triple. Interest is a waiting game, and as a teen, you have the advantage. Who else can plan for 20 or even 30 years to come?

It's why financial counselor Andrew Kash advises all students to put some money away. "At this age, teens should be focusing on saving," he says. Since most high-school students don't have to pay for food, utilities or a place to stay, much of the money they earn can go straight toward building a stabler financial future, he says.

But Kash also adds that the future should not have to come at the expense of your short-term happiness. "You don't have to shortchange yourself," he explains. "You want to be able to hang out with your friends, take your [significant other] out to date, all that fun stuff. But it's good to have goals."

And it's saving that can help you achieve your goals. The goal could be to buy a car, a video iPod or those sexy new Prada boots. Or it could be a long-term goal, like saving for college, retirement or just a boring rainy day. It doesn't matter. With a saving plan, you'll be able to achieve those goals without completely depriving yourself of what you want. But be honest: While the day-to-day luxuries — nice shoes, venti fraps — are sweet, the big-ticket items are so much sweeter.

• Aim to save regularly. A dollar a week is a good start.
• Make a habit of putting aside 10 percent of all of your paychecks. You won't even notice it's gone, promise.
• Keep track of your "little" luxuries. They add up. What'll it be: five Starbucks coffees or that new Weird Al CD?
• Smash that piggy bank; it's doing you no good. Any money not earning interest is money wasted.

Your money's gonna tank in the bank

Sophomore Brittany Smith has heard all of this advice before. She has a job, a savings account and a goal (she wants to buy a car). Smith has also been saving diligently, depositing about a quarter of her monthly paycheck from Panera Bread. But she's still not working her money to its full potential.

Maybe an analogy will clear things up. Money is a lot like a baby: It craves attention. When you park money in a savings account and leave it there, it's like sticking the baby in the crib and going clubbing until dawn. One is a crime; the other one should be.
It's not that saving is bad — quite the contrary. But once you've saved up to a certain extent, it doesn't make sense to maintain a savings account at the bank.

You can blame inflation. The current rate stands at 3.36 percent, according to the latest Consumer Price Index report. If compound interest is the nice old godfather, inflation is the shady guy across the street who hits you up for your lunch money. What compound interest giveth, inflation taketh away. At the moment, most bank savings accounts offer less than one percent interest. Subtract inflation, which acts as negative interest, and your money will actually be depreciating as you let it sit in the bank.

The solution is to find a higher interest rate. Most banks offer certificates of deposit (CDs) at very lucrative rates, usually around 4 to 5 percent. With a CD account, you earn far more interest than you do with a regular old savings account.

But there are two downsides to opening a CD account. First, most CDs require a minimum deposit. That means that in order to take advantage of the high interest rates CDs offer, you must first have at least $500 to $1000 in cash on hand to open an account.

The other disadvantage of a CD is that once you pay in, you can't touch your money until the bank says you can. The period during which you are separated from your money is predetermined and can last anywhere from three months to thirty years after you open your account. You're in effect making a deal with the bank: The bank promises you great interest, as long as you give it some room and keep your hands off the money for awhile. It's a bit like sending your kid away to sleepaway camp: a great experience, but only if you can deal with the separation anxiety.

There are, of course, more lucrative places to put your money, but they all come at a price: risk. You could bet your bucks on the stock market, but if you're bad at picking stocks and don't own a crystal ball, you'll lose everything.

Mutual funds offer a slightly safer route. They take your money and invest it for you in a wide range of stocks, bonds and other financial instruments. They're easy to put money into, and the diversification principle prevents you from losing all your cash if any one company goes under. But the same reason that makes mutual funds safer also makes them less lucrative: the average rate of return is only around 10 percent — better than a CD, but not spectacular.

The risk to these kind of investments is that unlike bank deposits and CDs, stock portfolios and mutual funds are not insured. If the economy crashes, your money goes down with it. But consider this: Even taking into account the Great Depression and the stagflation of the '70s, the stock market has still returned a steady seven percent over the years to investors — and that's after adjusting for inflation.

Again, it's a situation where being young is a plus. Kash suggests that teens consider investing in the stock market, especially for the long haul. Though it's anybody's guess what the market will do today, tomorrow or next week, you can be pretty sure that over the course of many years, your stocks will only go up.

Tips

* If you don't plan on using your money in the next three to six months, consider a CD or another form of long-term savings.
* On the other hand, don't keep all your money locked up in CDs or stocks. Keep a small emergency fund in your savings account.
* Remember that while the stock market offers great investment opportunities, there isn't any insurance.

Check out the Vault
At the Vault, the in-school branch of the nonprofit Montgomery County Teachers' Federal Credit Union (MCT-FU), you can find better interest rates than at your local bank. One unique service the Vault offers is the "accumulator" account, a saving tool geared towards teens. The account is similar to a CD, except it only requires $100 to open an account, and you can withdraw money at any time. To find out more about the Vault, visit the booth next to the attendance office on Tuesdays and Wednesdays during lunch.