Throughout college, every student has a different level of financial independence. Whether you are supported by family, a part-time job, student loans, or any combination of the three, after graduation and becoming a young professional, the safety net tends to disappear. Even if you have a couple of years in the workforce, new questions such as home ownership versus renting can begin to cloud the picture. As your paychecks begin to come in, it can seem like a nearly impossible task to balance rent, utilities, student loan payments, and your new goal of saving for retirement.
The first step of managing your finances as a young professional is to determine your long term financial goals. Whether you want to be a young homeowner, retire early, or pay off your student loan debt ahead of schedule, they all require proper planning. Some expenses are unavoidable, but knowing what is most important to you will help guide you in making some tough decisions down the line when it comes to your discretionary income.
Once you understand your personal goals, you can begin to take control of your finances with a budget. You may not be able to immediately control how much money comes in, but you certainly have control over how much you spend. Budgeting is a tool that helps give a big picture view of what your financial future will look like, so you don’t have to stress. There are many ways to go about setting a budget, which we outline in detail here.
After you know what is coming in, expenses can be prioritized. If you operate under a tight budget as a young professional – as many do – this step is even more crucial. Credit cards, car payments and student loan debt all deserve attention, but there are many considerations to take into account when deciding what to pay off first. We go into great detail about how to prioritize these expenses here. Generally you want to pay down the highest interest rate bills first, which means credit card payments are probably your top priority.
Now that you have your budget all laid out and you know which bills you need to prioritize, we can begin to think about saving for your financial goals. Slow and steady wins the race when it comes to saving for longer term goals, along with realistic expectations. You probably can’t expect to save enough to afford an early mortgage down payment and also fully fund your 401(k) and IRA to be on track to retire early. Sometimes there is no way around these difficult trade-offs, which is where your personal financial goals come in. If you know what you ultimately want and understand the trade-offs you can make the decision that best matches your goals.
Overall, managing your personal finances comes down to balance. Living expenses are unavoidable, but discretionary income can allow for more flexibility in how you allocate. With more flexibility comes more difficult decisions where your long-term financial goals come into play to help guide you. For more on this topic, join Jared Bilodeau, MSFP, Associate Wealth Advisor & Greg Phillips, 401(k) Operations at Twelve Points for our May Webinar. View the recording here.