Living Within Your Means
Creating good saving habits as a young professional is an essential yet often overlooked step towards attaining long-term financial security. For most, budgeting as a post-graduate in the early stages of a career is neither top of mind nor easy. Balancing our wants and needs on a modest after-tax income is tough enough without having to worry about setting aside money for a far-off retirement. However, those willing to closely examine their monthly inflows and outflows to get a better understanding of where they stand financially, and budget accordingly, will be thankful they did.
Creating a budget is relatively simple. For most young adults, the primary inflow comes from our paycheck. Outflows, or expenses, can be broken down into two different categories, fixed and variable. Examples of fixed expenses include rent or mortgage payments, student loans, car payments, insurance premiums, cell phone bills, and other expenses that generally don’t fluctuate month to month. These expenses are easiest to account for because you know what to expect each month, and they should be the starting point for creating a budget. Variable expenses are often discretionary and are comprised of costs that change depending on usage. Some examples include dining out, entertainment expenses, groceries, gas, personal care items, and hobbies. Even utilities might be considered a variable expense. After all, you can always turn down the heat in the winter to save a few dollars. Combining these two types of expenses provides you with a good idea of what you are spending on a monthly basis. The discretionary nature of variable expenses make it an important lever to pull for those who want to live within their means and save for the future.
By keeping track of what you are spending each month, you’ll be able to determine whether you have a monthly surplus or deficit. If you have a monthly surplus, you’re on the right track. If you find yourself coming up short each month, perhaps carrying credit card balances, then it’s time to make changes. The first place to look should be those variable expenses. Consider scaling back on the entertainment expenses and skipping the daily Starbucks trip. Setting savings goals to keep you incentivized can be a helpful tool to keep you motivated to save. Consider saving to be one of your fixed expenses and set up an automatic payment to a mutual fund as a way to stay disciplined in your saving. Some common things young adults save for are a down payment on a car or a home. In addition, those who start saving for retirement in their twenties will be rewarded in their later years.
It is important to note that budgets are not static and can shift over time. Whether from a move, career change, or other life changes, it is important to keep an up-to-date budget that reflects your current financial situation. Creating good savings habits takes time, effort, and discipline. Starting with the basics—that is, living within your means—is a great way to start and will go a long way towards securing your financial future.