When you finally get that paycheck from your first real job, it can be tempting to blow it all on a luxury weekend getaway, a new phone or even putting a downpayment on a car. There’s nothing inherently wrong with doing any of these things, but young professionals have a tendency of getting into spending habits that don’t promote their long-term financial well-being.
What generally happens is that despite making money, people fall into a habit of overspending and debt that evolves into a vicious cycle. So before that happens to you (and even if it already has) be sure to follow these essential financial planning tips that will ensure you not only stay out of debt but are well-prepared for any surprises that may come your way.
1) Understand How Much Money You Actually Make
You may have just landed a great new job with a salary that sounds incredible— especially in comparison to jobs you may have held in high school or college. Many people don’t realize though there is a huge difference between what their salary is and what will actually be deposited in their bank account.
First, you have federal and state taxes and if you are now making more money, you have to pay more of them. Then you have additional cuts that include things like Social Security, insurance, 401K plans and more. For example, if you earn $55,000 per year in California, you’re not going to be taking home $4,583 per month, but $3,616. You can use this income tax calculator to see how much your net pay actually is.
2) Time to Set Your Budget
Now that you know how much money you are really making, you can prepare your budget. Don’t worry, this doesn’t mean you have to stop eating out, give up your unlimited data package or not go on vacation. The whole point of a budget is so you have money to do the things you want to do.
A good guideline is the 50/30/20 budget. You use 50% of your money on essentials like housing, basic utilities, and food. Then 20% should go to debt repayment, savings and an emergency fund. Finally, the remaining 30% can go to your wants from gym memberships to vacations to even that bedazzled iPhone cover.
3) Track Your Spending
Even after you’ve set a budget and adhere to it, it’s important to know where your money goes. You’d be surprised, but sometimes significant amounts of money can be going to places you wouldn’t expect. These days apps like Mint and Tiller can help you see exactly where your money is going.
Best of all, you can simply link them to your bank account so they track all debit and credit spending to help you make more informed financial expenses and visualizes how small costs can really add up. There are even apps like Acornswhich help you automatically save money just in case you can’t trust yourself to squirrel it away.
Essential Financial Planning Tips
The whole point of financial planning is that it helps you prepare for the future. For some reason, you may get off track from overspending, receiving an unexpected expense or some other reason. Think of financial planning like a diet. If you fall off the horse, you don’t just give up, but you get back on to ensure you have a healthy and secure financial present and future.