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In last week’s post of our ‘Financial Planning for a better life’ series of blogs, we examined the importance of good financial planning for students, and how budgeting and being mindful about debt and spending habits can pave the way for a financially stable future. This week’s post will look at how proper financial planning for your first real job can help build a solid financial base and begin the lifelong process of assuring financial security.
Entering into a first job is an exciting time for most people and is usually the first time for many to enjoy the experience of real economic freedom. A regular income puts money into the pockets of young people who, at the same time, do not have the responsibility for dependants or financing a mortgage and therefore have disposable income. The initial temptation is to enjoy this new found wealth and spend, spend, spend. However, it is at this point in their lives that young people starting a career can lay the foundations for a lifetime of financial security. By investing a proportion of their disposable income into their future, young people will reap the positive benefits long into the future.
Sensible financial planning at the start of a working life can place current finances on a sound footing and lay the foundations for a successful future. These steps will help guide you through the process:
Determine your net worth
Without knowing where you currently stand, it is impossible to make effective plans for the future. Therefore, an accurate summary of your net financial position is the first step in the financial planning process. To determine your net worth, first determine your assets such as savings, property, shares and so on. In all likelihood someone starting their first job is unlikely to have built substantial, if any, assets. On the other hand you may have accumulated significant liabilities such as student loans, overdrafts, bank loans and credit cards. Subtracting liabilities from assets determines your net worth.
Most people in their 20s are likely to find they are in a negative position. This is not unusual and by taking financial planning seriously, you are taking the first steps to addressing the problem.
Personal cash flow
The next step is to examine personal cash flow and make a budget accordingly. Cash from income needs to be set alongside expenditure. It is important to distinguish between necessary and discretional spending. Necessary expenditure includes housing, utilities, food and essential transport. Once these expenses are taken into account, the amount left over is what you have for discretional spending. Some of this money should be set aside to meet your financial planning goals.
Your goals set out what you want to achieve though your financial planning. They can include everything from a holiday savings fund to putting money away for retirement. Goals should be organised into the short, medium and long term. Buying a car is an example of a short term goal. Saving for a house and retirement are examples of medium term and long term goals respectively. Although retirement may seem a long way off, it is always advisable to put some of your discretional spending aside for your pension. Money saved in your 20s can multiply many times by the time you finish your working life.
Dealing with debts
Examining debts and organising a system for paying them off is a must. The first debts that must be attended to are those with high interest rates, such as credit cards. There is no point in saving money with a 6% return while you are paying 19% on an outstanding credit card balance. Longer term debts, such as hefty student loans, can be incorporated into long term financial planning and paid off over a longer time. However, in this case it is important for people to work out a repayment schedule and stick to it diligently.
Considering insurance cover
The next step in financial planning is considering whether you need insurance. Most people in their twenties are healthy, living life to its fullest and often without the responsibility of a family. Life insurance may not be required but illness and accidents can occur at any time of life and therefore medical cover should be given some consideration
Make it happen
With all of these steps in place, it is now time to go ahead and allocate certain funds to set goals. No two people are the same and everyone’s needs are different. However, as a rule of thumb, people in their 20s can consider allocating 50% of financial planning money to short term goals, 30% to medium term goals and 20% to long term goals. It is up to the individual to decide their priorities, but it is important to not neglect the long term. Deciding to invest in a pension from the earliest stage possible will be of immeasurable benefit in later life.
Everyone appreciates their new found independence when they start their first job. However, everyone’s requirements and desires are different. This post is just a guide with general advice to help you get your finances on track right at the start of your working life. Young people that make the conscious effort to take an active role in financial planning for the future will open the door to more opportunity, more choice and financial security.
This post was part of our ‘Financial planning for a better life’ blog series.
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