Financial Planning for the Early Stage of Your Career
Getting to that point in your career where you’re finally making real 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.
Whether you are 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 within reach. But how you handle the first stage of higher income makes a massive 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. Remember, "It's a slow ride, take it easy!" -
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, Mega back-door Roth, HSAs, additional forms of insurance coverage, pre-tax contributions to flexible spending accounts, paid time off, health and wellness perks, and more. 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. Contributions to traditional retirement plans are tax-deductible. However, there may be a consideration for instituting a Roth 401(k) (after-tax). Not all savers fall under the rule of thumb that 15% of your salary should be earmarked for your 401(k) contributions. It is depended on your near-term and long-term goals.
However, if your employer matches your contribution, make sure you contribute enough to get the employer matching funds. 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. So empowering yourself to make informed purchasing decisions based on your cash flow is essential.
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, minimizing debt costs, or increasing 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 gigs, everything.
Identify Your Expenses
These usually break down as follows:
Debt including credit cards, leases, and loans (personal, education, etc.)
Taxes except for salary taxes, which is covered in net income
Basic monthly expenses: Rent, food, gas, cable, phone, etc.
Discretionary expenses: Dinners, trips, purchases
Savings: Cash reserve, retirement, big purchase
Insurance costs: Homeowners, health, professional liability, auto
Extraordinary expenses: Vet bill, car repair, etc. To get a realistic annual figure, average the last three years
By knowing where you’re at, you can begin planning for what’s possible. This means identifying short-term and long-term goals.
A vacation trip
A new luxury car or other big consumer purchase
Buying your first home
Buying into a practice or starting a business
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. Keep in mind if you need your savings within 8-12 months, it likely should not be invested in our markets.
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 current way of life.
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 or a low tolerance for risk). Having a cash reserve is an essential piece of your financial foundation. It could help you avoid high-interest credit card debt if an unexpected expense were to come up. In addition, it could prevent you from borrowing from a 401(k) or selling in a down market. It’s generally recommended to keep your emergency fund in a high-yield savings account so that it can earn slightly higher interest than it would at a traditional bank, but fixed income could serve as a portion of your emergency fund.
Getting Out from Under Debt
Even with relatively low-interest rates, debt can get expensive. And the less debt ($ amount) you have, the higher your credit rating will be. However, the more versions of debt you have the better your credit will be. This matters when you want to move forward with goals like buying a house, but even lease rates on cars or credit cards are sensitive to your credit rating.
How can you go about minimizing debt?
1. The refinancing decision is first up. If your credit score is good and your debt-to-income ratio is below 50%, you may want to explore options, such as a lower interest rate or a shorter loan. However, if you are eligible for the federal student loan repayment program, you shouldn’t refinance. The reason is arbitrage! The ability to earn more elsewhere, like the market.
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 if it is a higher interest risk. 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. Of course, 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. At Hampton Park Financial Planning, we are here to help you with a holistic approach to your planning.
Money is nothing more than a tool to get you where you want to be, and a financial advisor 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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