The transition from college student to young professional can be one of the most fun times in your life, but it can also be a time of stress. The increasing inflow can be extremely exciting, but only if it exceeds the increasing outflow. The bills that mom and dad used to cover (without your knowledge) are now directed to your mailbox.
You can either:
- Pay them as they come
- Ignore them and pretend they aren’t real
- Have a plan ahead of time
Of the three, which do you think is the best? If you chose the last, please continue reading. If you chose 1 or 2, God help you.
Major Advice: How to Win with Money
Succeeding financially isn’t difficult. Here’s all it takes:
- Work hard and make money.
- Spend less than you earn.
- Save for things you want rather than relying on credit.
- Invest what’s leftover.
- Choose an appropriate asset allocation.
Don’t over-complicate things. Just follow the steps above.
The best place to start? A budget.
Types of Budgets
There are two different types of budgets.
One is where you ensure your income (money coming in) is greater than your expenses (money going out). The other is where you watch every single dollar you spend and give it a purpose.
I, personally, prefer the former and highly recommend Personal Capital.
- It’s free.
- You can manage your cash flow, see where your money is going, view your spending in categories and track your net worth. You can also review your investment portfolio and it will tell you how much you’re paying in fees. It’s amazing.
Everybody’s financial situation is different. Expenses of one 24 year old can look nothing like the expenses of another 24 year old. Brian may have a starting salary of $40,000 and have $100,000 in student loan debt, while Bill may make $80,000 and be debt-free. Because of this discrepancy, I will have to make some major assumptions. If what I say doesn’t match up with your life, then adjust accordingly. This should be used as an outline rather than a replica.
Age: 24 (0-2 years removed from college)
Tip: Just because you “make” $60,000/yr doesn’t mean you have $60,000/yr to spend. This is probably the biggest budgeting mistake I see. People that make $60,000 think they can budget around $5,000/month. Thanks to taxes, health insurance and several deductions – you probably make 70% of this number. So, your $60,000 is now $45,000 or your $40,000 is now $30,000. Frustrating, I know.
The Ideal Budget for a Single Guy
Paychecks can come once a month, twice a month (bi-monthly) or every 2 weeks (bi-weekly). Most people at most companies receive paychecks every 2 weeks. This means, more than likely, you will receive 26 paychecks in a year. On average, you’ll receive 2 paychecks each month. But, there will be 2 months out of every year that you receive a 3rd paycheck. If you get into the habit of budgeting around 2 paychecks, then this 3rd paycheck will be a windfall – and should be an easy way to save.
Continuing with our example:
$60,000/24 = $2500 x 2 =$5000
$60,000/26 = $2307 x 2 = $4614
This simple budgeting tip just saved you $4632 in one year.
Monthly Income: $4614 (Remember we are budgeting around 26 pay periods)
- Health and Dental Insurance: $120
- 401(k) Contribution: $200 (Assuming your company matches up to 4%)
- Taxes: $1170
After-Tax & Deductions Income: $3124
- Rent: $1100 (includes cable/internet/utilities)
- Food & Drinks: $700
- Gas: $100
- Car Insurance: $90
- Cell Phone: $100
- Student Loan: $150
Perhaps these numbers look similar to your situation or perhaps they’re far off, but I assume most guys have these 6 expenses. Maybe you have a horrible driving record and your car insurance is double what I have listed. Maybe you aren’t making $60,000 and your rent is much lower. Regardless of your situation, the goal should always be to have your income be as high as possible and your expenses as low as possible.
Here’s where things start to look differently between each guy. And here’s where you can really have a positive impact on your future. Unfortunately, here’s where most people mess up. They see the $884 leftover each month and think that this means they can now afford a car payment of $300.
Honestly, you can probably “afford” anything if you break-down the payment into monthly installments. Instead of asking if you can afford $300, ask if you can afford $20,000. If you don’t have $20,000 sitting in your savings account, then the answer is no.
Something To Keep In Mind
In just a few short years (maybe sooner than you think), you will have to make some major purchases.
- An engagement ring
- A wedding
- Travel expenses for friend’s weddings
- A down payment for your first home
I would recommend using this leftover $884 as savings. Combine this monthly savings with the built-in bi-weekly savings and you have saved $15240 in one year. This will come in handy when making the above purchases.
The sooner you begin saving, the better off you will be. Young professionals usually have the mindset of “I’ll save later,” but it never happens. Something else always comes up. It doesn’t matter how much you make, you can find savings somewhere. So, stop delaying things. Start saving now.