“Where do I even start?” .. “I have no idea what I’m doing.”
I hear these statements, verbatim, on a weekly basis. Personal finance is rarely taught in schools, yet we are expected to know everything from how much to save to picking out a proper insurance plan the day we enter the “real world” after college.
I remember it like it was yesterday. I graduated from Iowa State University on a Friday and the following Tuesday I was back in my hometown of Sioux Falls, SD wearing a suit and sitting in my very own cubicle, needing to sift through my benefits options.
Wait..what just happened? Young professionals I speak with can often relate to this exact scenario.
Getting on track to properly manage your finances can feel a little overwhelming, but you can master a few basic principles to get on the right track.
Here are a few steps to get you started:
As a young professional, you have the greatest advantage of all - time. Think about it, when you start out investing in your 20s and 30s, you easily have an investing time horizon of 60-70 years! This is quite literally, a lifetime. Yes, you will keep investing during retirement.
By starting out early, you can use compound interest to your advantage. It only takes a small sum of money saved and invested each month to add up to great amounts in the future.
If you invest just $100 per month for 60 years, this can add up to $1,778,852 (assuming an 8% rate of return)! I know most people spend more than $100 per month on the cable television bill, so this is no place for excuses.
By thinking long-term and starting today, you will be ahead of the game in no time.
Live Within Your Means
Spend less than you make, and invest the rest. Pretty simple right? Unfortunately not for a lot of folks that carry around considerable amounts of credit card debt.
Living within your means is important for a few reasons. First, as may be obvious, you are being a responsible adult by using the resources available to you to live your life. Second, spending less than you make creates freedom without the burden of bad debt.
We live in a society dominated by consumers and that is all we seem to hear about (buying things). Every day of the week brings us a new reason to spend our hard earned money - going out with friends, buying the latest fashion trend, and going on lavish vacations we can’t actually afford.
By taking a step back and being intentional about how you spend your money, you will realize it is quite easy to spend less than you make. Only spending money on things that bring true value to your life will not only help your budget, but your emotional health too.
Create A Budget And Monitor Regularly
Do you have a budget you monitor on a regular basis? If you do, then good job! If not, then trust me when I say, it’s not as difficult as you may think.
You can easily sit down at your computer for a few minutes and download all of your bank and credit card transactions for the past few months. Go through and categorize these individual transactions into broad categories (like Mortgage/Rent, Utilities, Insurance, Groceries, Entertainment, etc.).
Once you have your spending categorized, take a look and see if any of it surprises you. This is a great time to reevaluate your spending to become more intentional, like I mentioned above.
To finalize the budget, add in all of your income sources and subtract out the expenses. Be sure to monitor your spending on a monthly basis, so you are always aware of your spending, good or bad.
Pay Off Consumer Debt
Consumer debt - things like credit cards and payday loans - carry higher interest rates than other debts, like a mortgage. By not paying off your outstanding debts on time, you not only will be paying a large sum of money in interest, but it can also wreck your credit score (which can cost you more money in the future when applying for a mortgage).
Paying off debts, much like keeping a balanced budget, takes discipline. It is far too convenient these days to swipe your credit card aimlessly, or click “Add To Cart” when shopping online.
Companies have done an amazing job over the years to reduce the “pain” or friction associated with making a purchase. By making the purchase process quicker and easier, retailers and everyone in between is able to profit off of your lack of spending discipline.
Paying off your consumer debts and paying off your credit card in full every month going forward will bring a great deal of relief to your money worries.
Set Financial Goals
Setting financial goals will help keep you focused on improving yourself and your finances. Are you a goal setter and have everything you want to achieve in 2017 all laid out? Hopefully this includes financial goals as well.
One of your top financial goals should be to increase your savings. By increasing your savings, regardless of how much you currently save, you will be able to improve your finances for years to come. I can honestly tell you I’ve never had a client tell me they were upset that they saved too much. But I have heard the disappointment when realizing they didn’t save enough.
Whatever your goals are, be sure to lay out a few action steps to take soon. Today, take some time to think about your goals (buy a home, start a business, financial independence) and write down the necessary steps to achieve those goals, or reach out to your financial planner.
Do you need to make more money, or find ways to tighten up your budget? Be intentional with how you approach your financial goals.
Save For Retirement
Saving for retirement should be a top priority for most all young professionals. I know it is a long ways away, and some folks believe they will never actually retire. However, starting to save for retirement now will have a lasting impact on your financial well-being in the future.
Having a retirement savings account (like a 401(k) and IRA) is a great way to get started on your journey to financial independence. These accounts have great tax benefits, as the money you put in are pre-tax (you do not pay income taxes on these contributions), and the accounts grow tax-deferred (you do not pay taxes until you take the money out in retirement).
At a minimum, I suggest you contribute enough in your 401(k) to receive your company’s matching contribution (often around 3-5% of your gross income).
Your ultimate goal should be to contribute the maximum allowable into these accounts - $18,000 for your 401(k) + $5,500 for your IRA - each year.
Surround Yourself With Like-Minded People
I’m a big believer in this one. When you surround yourself with like-minded people, you naturally become just like them. Are your friends/colleagues constantly complaining about life and work? Or are your friends go-getters, always looking at the brightside, and finding ways to create a great life?
You can surround yourself with great people in a few different ways. Find friends that are also interested in ways to improve their finances and willing to take action to improve their current situation. You can set a time each week or month to help each other and learn new ways to save money, make more money, and increase your savings.
Don’t forget about surrounding yourself with great people in your professional life. By having mentors or reaching out to influencers in your space, you will naturally want to push yourself to their level. These mentors will also be more than willing to share their knowledge if you are willing to reach out and offer something of value in return.
When is the best time to start improving your finances? Yesterday. The next best time is right now.
This isn’t a get rich quick plan or some magical potion. It is a commitment to improving just a little bit every day. If you commit to incremental improvement every day, you will be seeing results greater than you ever dreamed of.
Nobody was born a master of personal finance. It is a skill, just like the skills you learn to live your daily life. You must learn this skill and continue to work on it day after day.
Once you get started and learn bit by bit, you can then start to see the fruits of your commitment and live the life of your dreams.
It won’t be easy, but it will be worth it - I promise.