Are you new to financial independence? Did you just land your first job? Are you wondering where to start with managing your finances? Here are three critical first steps.
Create your spending plan.
This step can send people into panic, but it doesn’t have to. The concept is simple. Creating a spending plan means you know how much money you have coming in each month and how much you are spending and saving. It can be done with a simple spreadsheet, with an electronic app, such as Mint or You Need a Budget, or simply by writing it down on paper. We offer a worksheet on our website that clients have found very help. Building a spending plan requires some upfront work, but the reward is that you gain control over your financial life.
First, list all your “must pay” items, such as rent, utilities, car payment or transit card, student loan, food, etc. These are your non-discretionary expenses, the have to pay expenses each month. Then make a list of how much you are spending on discretionary expenses, i.e., those expenses you don’t have to pay, but they make life a lot nicer if you can afford them. That could be a gym membership, eating out, going to movies, etc. Then list how much you are saving each month, whether it is into your savings account or retirement account. Voila! You have a budget. Now that you know where your money is going, you can make some decisions about how to tweak your current budget to fit your goals for the future. Maybe you want to start saving more money, so you decide to cut down on some discretionary expenses, or you find a roommate to help lower your monthly rent payment. Knowing your budget allows you to make conscious choices about spending and saving.
Build your emergency fund.
Having 3-6 months of your gross monthly income in an emergency fund helps you navigate the inevitable financial curveballs in life. Without this fund, you will need to rely on other potentially costly options – such as expensive credit cards, or early withdrawals from retirement accounts, or taking a personal loan – when the unexpected happens and the car breaks down or you suddenly have an emergency in the family and need to travel. Having an emergency fund keeps you from falling into an expensive debt hole at the same time that you’re trying to deal with the inevitable bumps on the road of life.
Take advantage of free money from your employer.
If you work for an employer who offers a retirement plan with an employer match, such as a 401(k) or 403(b), be sure you fund your retirement plan with enough money to get the match. For example, if your employer matches your contribution up to 50 percent of the first 6 percent you save, try to save at least 6 percent of your gross income. If you save 6 percent of a $40,000 salary, you are saving $2,400 a year ($200 / month) and your employer is contributing another $1,200 to your account for free (50 percent of your $2400 contribution). That’s money you can’t turn down!
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.