Financial Planning in the Early Stage of Your Career
John Harmatuk, CFP?
Investment Advisor Representative at Voya Financial Advisors, Inc.
Getting to the point in your career where you're making “good money” is a reason for celebration. Whether from getting the job you went to school all those years for, working your way up to more responsibility, or getting a significant annual bonus, having more income is a great feeling.
Other than more income for the day-to-day, what you've accomplished is finally putting yourself firmly on the first stage of a financial journey that could result in long-term wealth. Retiring early, taking time out from a career, accomplishing goals like buying a house, buying into a practice, or starting your own business, all of these are now could be within reach. But how you handle the first stage of higher income makes a huge difference in how soon your goals become a reality.
It's a lot to take in, but there are some easy steps you can take to keep more of the income you're making, relieve your debt burden more quickly, and get your new assets working for you.?
Maximize Your Employee Benefits
?Your salary isn’t the only source of income from your work. Your employee benefits are worth real money if you deploy them thoughtfully. These can include employer-paid health insurance, additional forms of insurance coverage, pre-tax contributions to flexible spending accounts for health and commuter expenses, paid time off, health and wellness perks, and more. Time spent reviewing your employee handbook and signing up for benefits can keep more money in your pocket and lower your taxable income.
?The most valuable benefit is usually an employer-sponsored retirement plan, either a 401(k) or IRA. Pre-tax contributions to traditional retirement plans are tax-deductible, so it's generally recommended to contribute as much as possible (up to the annual contribution limits) to maximize tax savings. A rule of thumb is that 15% of your salary should be earmarked for your 401(k) contributions.?If 15% isn’t realistic based on your circumstances, and your employer makes a matching contribution, make sure to try to contribute at least enough to get the full employer match. Not taking advantage of this benefit is leaving money on the table. Instead of getting a raise, it’s like volunteering to take a pay cut.?
It’s Called “Cash Flow Planning” Because You’re Meant to Do it in Advance
?The ability to make purchases and know you can cover them at the end of the month is a great feeling. But it can quickly get out of control and sabotage your long-term goals. If you're using credit cards and then covering expenses with the next paycheck – guess what? You're still living paycheck to paycheck; it's just that the paychecks got bigger.
?With increasing income often comes “lifestyle inflation." The temptation to increase your expenses along with a rising income is understandable, and you should reward yourself, but excess spending can leave you in a tough spot.
?You can avoid it by having a cash flow plan. Your cash flow is simply the money coming in and going out each month. But don’t confuse it with your budget. Budgets are about regulating spending. Cash flow planning is about tying your income to goals to see where you need to make changes. These can include limiting spending but may also minimize debt costs or increase investment risk. Cash flow planning helps with big-picture planning across your financial picture.?
Start With Your Income
After taxes, this means monthly net income across all sources, including salary and bonus, side hustles, everything.?
Identify Your Expenses
These usually break down as follows:
By knowing where you’re at, you can begin planning for what’s possible. This means identifying short-term and long-term goals.
·??????Buying your first home
·??????Buying into a practice or starting a business
·??????Saving for children’s college
·??????A vacation/trip
·??????A new car or other big consumer purchase
?Creating a timeline for when you want to accomplish your goals and then tying it to your cash flow planning can help you identify areas where you want to make changes to hit your goals.
Setting aside money creates flexibility so that even if your goals change, you can reallocate those dollars towards whatever the new plans are.
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?Knowing your goals and values allows you to begin making the right financial decisions for your situation and makes it easier to say “no” to things that distract from your primary purpose. As life unfolds, your goals will evolve, so it's essential to revisit and evaluate your current cash flow plan to ensure it aligns with your priorities.
Creating a Cash Reserve
Also known as an emergency fund, your cash reserve should consist of 3-6 months of your living expenses (or more if you have variable income). Having a cash reserve is an essential piece of your financial foundation. It could help you avoid high-interest credit card debt in the event of a large, unexpected expense.
?Getting Out from Under Debt
?Even when interest rates are relatively low, debt can get expensive, but even more so as we start to see interest rates rise. Your level of debt and your ability to service that debt are the factors that affect your credit score. ?Your credit score is an important figure to monitor and is important most notably when you want to buy a house or car.??
How can you go about minimizing debt?
1.?The refinancing decision is first up. If you can refinance your existing debt to a lower interest rate and/or shorter term, consider it.?If you are eligible for the federal student loan forgiveness program, you shouldn’t refinance.
2.?Set up auto-pay. Very often, you'll get a tiny discount for having autopay in place, but mostly you don't ever want to miss a payment, and autopay avoids that.
3.?Bump up your payments. Adding extra money every month to your original payment schedule can help you pay down debt faster. You’ll need to contact your servicer to ensure they put extra money toward your balance and not your next monthly payment.?
If you have credit card debt, you’ll want to pay that off as quickly as possible, so prioritize that in your cash flow planning.?
Enjoy Your Money
What's the point of a financial plan if you never get to enjoy your money? Building a solid foundation around the basics and creating good habits is essential, but it's just as important to make flexibility and fun part of your plan. This portion of your money should be for things that bring you joy, whether travel, nice dinners, shopping, etc. Your overall situation will determine how much you can spend in this area, but don't forget to build it into your cash flow plan.
The Takeaway
The goal of financial planning is two-fold: to help you enjoy your money now and to ensure that you are setting yourself up to achieve your life goals in the future. By thinking through your financial goals and values, you can then begin using tactics and strategies to align your money with those defined goals.
?Money is nothing more than a tool to get you where you want to be, and a financial planner can help you think through your options and ultimately help you make the best decisions for yourself, your family, and your money.
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Security and advisory services offered through Pinnacle Investments, LLC member FINRA/SIPC.
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?The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA.