For many first-time full-time employees, getting that first real paycheck may be the most money you’ve held in your hands at one time. It can be overwhelming and exciting to think of all the things you can acquire now. Financial stability is more about managing the money you have rather than making more, and for the last segment on Financial Literacy, we’ll explore how to budget, save and make your money work for you!
It can be tempting to rush out and spend your whole paycheck on things you want, but you’d be stranded without money for 2 weeks waiting for your next paycheck! The first thing you should do every month is make sure your needs are met. Don’t get caught in a situation where you can’t pay rent or buy food! Spend sometime calculating how much money you need to survive for a month: rent/mortgage, food, bills, gas or transportation costs. This is the amount that cannot be spent on other things.
If after doing the math, you realize that you’re not making enough to meet your needs or have very little left over, you may need to reassess what you need or find ways to cut your living expenses. Is your rent too high? You might look into moving to a less expensive area. Spending too much on food? Cook more meals at home rather than eating out. Bills piling up? Be conscious of your utility usage and drop to lower cost plans if you can.
Savings and rainy day funds
After budgeting and spending money on your needs, you’ll have some money left over. What you do with that extra cash can make a big difference in your financial stability. You could go blow your extra cash on things you want every month, but what if you’re invited to a wedding across the country, or want to go on a nice vacation, or want to hot new phone? What if your car breaks down, or your pet gets sick, or your kid breaks her glasses?
Spending all your extra money means you wont be prepared for unexpected expenses that need to be resolved immediately, or for big purchases you’d like to make. Set up a savings account that’s connected to your checking account, and automatically funnel some money every paycheck into savings. This is your rainy day fund, and is meant for sudden and unexpected expenses. This way, you can take the financial hit without impacting your ability to pay for your necessities, and can easily absorb the expense.
Once you’ve paid for your needs and set aside money for emergencies, the rest of your money can be set aside for fun. Save up for a big purchase, a nice vacation, or just go to the movies and have a nice dinner once a month. Effective budgeting and saving allows you to absorb unexpected expenses, maintain a level of living within your means and still have money for fun!
Retirement funds and 401k
The biggest thing you can save for is your retirement. The core idea is you put away a little money every paycheck, which accumulates and grows so that by the time you’re in your mid 60’s, you’ve accumulated enough wealth to support yourself without having to work in your old age.
Many young professionals starting out have a hard time thinking about retirement or preparing for it so far out. The problem is the earlier you start saving for retirement, the easier it will be! An employee is his early 20s can put away less from each paycheck than an employee in her 30s, and still be in a better situation by the time he hits 30. 10 years of savings, dividends and interest make a huge difference! Don’t delay preparing for retirement – every year your put it off is a year of interest and growth you missed out on!
There are a few different kinds of retirement accounts, and you can mix and match depending on your needs:
- 401k – This is usually provided through your employer, and is a good first option especially if your employer is matching your contributions. You essentially contribute to an investment portfolio (either managed for you or you can do it yourself) which grows with the stock market. This follows you from employer to employer. Talk to your HR manager about 401k or other retirement plans they offer.
- IRA Account – an Individual Retirement Account acts like a savings account. You can contribute up to $5,000 each year and the money grows tax-free. Talk to your bank about setting up an IRA.
- Roth IRA – Almost the same as a regular IRA except uses post-tax dollars, meaning you can withdraw money later on without paying income tax on it. Talk to your bank about setting up a Roth IRA
- Pensions – Harder to find from private employers. Your employer basically saves a fund for you and continues to pay you (or your family) once you have left work. They have largely fallen out of fashion with people moving from job to job more frequently and living much, much longer.
A little planning and saving early in your professional career can make a big difference for your standard of living now and in the future. Do not neglect the power of Financial Literacy, and best of luck!