If you are a few years out of college (or your son or daughter is) and have a job, you’re finally in a position to start making a lot of financial decisions.
Once you have celebrated your independence, it’s time to get down to business for your future. And the time is now when it comes to making smart financial decisions. First up…
Track your spending
We prepare a lot of financial plans every year and the top “ah-ha” moment is when we present the total of every expense to a client. Most people have no idea how much they spend on certain categories. Think: dining out, Venmo payments, ATM withdrawals, and concert tickets/entertainment, and travel to name a few.
Granted this is one of the hardest financial tasks because it forces you to look up payment histories and account statements to add up the numbers—tasks that few (except financial planners) find as exciting as fun night out on the town. Suddenly, you’ll realize that you are spending way more in certain areas when you really want to be spending less or saving more for other things you want to do. Yet, the mere act of tracking where the money goes causes most people to change their spending patterns.
Why budgeting is not the answer
Everyone says you need a budget. For most people it’s wrong. Here’s why: Budgeting, by design, involves looking at what you’ve spent over the last few months. After taking out a few one-time expenses, you then use those numbers to build your budget. After a month or two, you encounter an unexpected expense and suddenly you’ve blown your budget. You have failed. This budget thing makes you feel bad. You stop tracking your expenses and go back to your old ways. This is why traditional budgeting is not the answer. We think tracking your expenses and reviewing them every month is a better habit.
Make saving like paying bills
Everyone knows that they should save, but when it comes to actually doing it, it is hard. You may have heard that you should “pay yourself first” and that is one of the best (and most successful) ways to save. Do it on the day that you get paid. That means having a set amount automatically direct-deposited into your checking account for regular monthly expenses and another amount automatically deposited to savings.
In fact, see if you can have more than one direct deposit going to multiple savings/investment accounts. If your employer can’t do that, set up automatic transfers from your checking into multiple “savings” accounts in different places, for example: money market savings (for emergencies); IRA contribution (every working person can contribute to an IRA); a separate travel account, use a “round up” or “loose change” service offered by many banks to put a little bit of every transaction into a savings account; if you have kids, an automatic deposit to a college savings account.
With all of these, start small and slowly increase the amounts from there. Being too aggressive can lead to just transferring the money back into your checking so that you can pay your bills.
Want more proven financial strategies for young adults? Give us a call. We’re here to help.
Lyman H. Jackson
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.