As a young person entering the workforce during a recession, navigating your finances can be difficult. Where do you start? What accounts do you open? How much should you be saving towards retirement? These are all factors that come into play when crafting your first financial budget. In order to be financially successful in the future, regardless of the state of the economy, you have to start good habits with money now.
Identify Goals
The first step to creating your successful financial budget is identifying your goals. These goals, short and long-term, are solely determined by your wishes, habits, and balance of income and expenses.
Often there are multiple goals that you have when you start collecting paychecks every month. There are “competing goals when you’re first starting off – paying off debt, paying for that home, wanting to enjoy your life, and also saving for retirement,” said Lauren Wybar, CFP®, senior financial advisor, Vanguard Personal Advisor Services of Malvern, PA.
It’s crucial in the beginning to categorize and prioritize which goals you want to achieve now versus later and develop your plan to achieve them from there.
“I think the most common challenge that individuals and families come to us with is they have a goal in mind, but they don’t have a plan and they don’t know where to start, they don’t know how to start,” said Jenn Sirois, vice president and branch leader for Fidelity Investments of Boston, MA. “We’re focused on helping them understand their goals, and from there, start to map out a plan and ways to measure the progress they’re making, so that they can feel really good about the goals they’ve set for themselves and the plan they have in front of them,” she said.
Trying to save up for a car? Waiting to put a down payment on a house? Saving extra each month for winter vacation? These are examples of some potential short-term goals. Where do you want to be 10, 25, or 40 years from now? What do you want to own? How much do you want to have saved for retirement? These, on the other hand, are examples of long-term goals. Although some goals will take decades to come to fruition, it’s crucial to put those plans and habits in place as soon as possible.
Income Awareness
The second step to building your budget is being aware of your income. While you only have so much control over how your income is determined, you have full capability of paying extra attention to what you do with it. This is a crucial step at the beginning of your finance journey which serves as the foundation for how much you can spend versus save on necessities and wants.
“You may come out making $50,000, but you may only see $35,000 of that. So I think it’s really important to know the difference, recognize the difference between the gross amount and the net amount – the amount you can actually spend,” said Michael Simmons, CFP®, director of financial planning, Transitionis Wealth Management of Denver, CO. “That’s the number the budgeting is going to be taken from.”
Necessities can look like paying for rent, transportation, food, clothing, and early savings like emergency funds; while wants can range from vacations, owning real estate, quickly paying off debt, and long-term investments like retirement funds.
It’s important to note that it’s not how much money you make, but what you do with it that directly aligns with how financially stable you will be down the line. Although you can change your job to one with a higher income, if your bad habits, like spending too much and saving too little, remain, you won’t make the progress you’re looking for.
“They’ll put something on the credit card, because they have enough credit limit, and then with their coming paychecks, they’re paying down the credit card. And that’s the wrong way to do it,” said Alec Quaid, CFP®, American Portfolios Denver of Denver, CO. “Retraining and reframing people to think, ‘Okay, you want to buy something for $2000? Let’s save $500/month for the next 4 months. And then let’s have that cash ready. Buy it on the credit card for points or whatever, but then we have the cash to actually pay off that purchase right away.’”
This step correlates with step one because how you choose to allocate your dollars will determine the rate at which you’ll reach your goals. Being aware of your income and your goals can look like changing your job, getting […]
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