Is it true that many young professionals don’t know how to save money?
I recently had dinner with an old college friend. I was expecting to catch up on friends, family and our careers, but it was clear he wanted some basic financial information.
Knowing I advise young professionals on their finances, he zeroed in on the following questions: “How much should I save, and how do I know if my savings plan is on track?”
Many highly talented and bright young individuals – often earning six figures, receiving an annual bonus and holding stock options – often struggle with how to spend and save their money. My advice is to develop a process that focuses on three fundamental ideas that anyone can use.
Control Savings and Spending by Paying Yourself First
Putting together a budget and tracking spending are useful tools – but they can be tedious and hard to sustain. Instead of starting with expenses, I begin by allocating the desired amounts of money to various savings and investment accounts.
I set up automated contributions to my 401(k) retirement account, Roth Individual Retirement Account (IRA) and after-tax brokerage accounts. Once that money is set aside, I have total peace of mind knowing I can afford to spend what’s left and still be on track to hit my financial goals.
If, like me, you make the majority of day-to-day purchases on your credit card, another easy way to spot-check spending is making sure you can pay your credit card bill in full each month without tapping your savings.
Don’t get me wrong – developing a detailed budget is a valuable exercise when done periodically. And it’s particularly helpful if you are planning to buy a house or make another large purchase.
Tracking spending also helps you discover any unnecessary spending and unearth the cost of some of those expenses we often forget, such as subscription services or dining out more often than we think. If you find money tight month after month, be sure to review your online checking account to find ways to reduce costs before cutting back on your savings.
How Much Should I Save?
This answer differs for each person – a 29-year-old still making their mark in their career will have less money than a 40-year-old managing a team of professionals. In addition to cash flow, everyone will have different levels of expenses and goals. Some will have student loans, others will have young children, and some will want to retire by age 50.
A general rule of thumb I like is to try to save and invest at least 20%-25% of your …….