Your guide to saving, investing and spending your fortune!
Congratulations on landing your first job!
That first paycheck is a gateway to your financial independence and a stepping stone towards a secure future.
Your hard work is paying off, you got your first paycheck, and you noticed a lot is taken away for taxes, social security, benefits, etc. That can be disappointing at first, but look at the benefit of earning your first paycheck!
Welcome to your first step to financial independence. Now, I want you to go and spend your hard earned cash because you deserve to enjoy yourself. And before you go, I want you to be smart with how you spend your money, so when you’re older you can do more of whatever you want.
Deal?
If you’re still reading, then you’re curious. I’ll take it.
Most people don’t like talking about money, because many of us grew up hearing the adage, “Don’t talk about money, religion, or politics… in public”. Times have changed, and we now know it’s important to have open discussions about finances with people we trust. It helps us better manage our debt and investment, it helps us understand our financial health (yes, there’s healthy and unhealthy finances), and makes us money smart.
You may be picturing yourself with wads of cash, or scrooge counting every penny. No, that’s not helpful, here are a few sections to help you as you on your journey towards financial freedom and independence.
Understanding Your Paycheck
Let’s break down what goes into your paycheck – we have gross income and net pay.
Gross income is the salary you negotiated during your interview (I hope you negotiated your salary). It’s all your earning before deductions – it doesn’t include taxes, insurance, contributions, or other benefits you might have elected.
Net pay is your take home – it’s what’s left over once your deductions are subtracted from your gross income.
Take a moment to review your pay stub, make sure all the numbers are accurate. Accounting isn’t fool proof, but it’s important to identify mistakes as early as possible. If everything looks accurate, then you can randomly check your pay slip to verify things are being deducted accurately.
Knowing what’s going to your retirement, taxes, insurance, empowers you financially.
Creating a Budget
I need to mention, don’t make a budget with your gross income, budget with your net income.
We’ll discuss quickly because people hate to hear “budget”.
There’s a notion if you have a budget then you have a boring life and you can’t do as much – but that’s actually false – if people budget then they can do more and enjoy life a lot more without having to worry about financial pains and struggles.
- Calculate Your Net Income: Know exactly what you’re working with after deductions.
- Track Your Expenses: For a week or two, jot down every penny you spend. You’ll be surprised how quickly small purchases add up.
- Categorize Your Expenses: Split them into fixed (like rent and utilities) and variable (like food and entertainment) expenses.
- Allocate Your Funds: Try the 50/30/20 rule—50% for needs, 30% for wants, and 20% for savings and debt repayment.* (more on this later)
- Review and Adjust: Your budget is a living document. Check it regularly and tweak as needed.
* Personally, I don’t like the 50/30/20 rule, because if you can increase your saving early in your life the easier and better your financial health.
I prefer the 40/40/20 rule – 40% on Needs (rent, groceries, utilities, etc.); 40% savings (debt repayment, investing, etc.); and 20% on fun leisure activities. The more you save (invest) today, the better your outlook as you age, the more risk and reward you’ll get when people struggle. We’ll discuss more in the investment section.
The inclination after you get your first paycheck and salary, it so go on a shopping spree – and I encourage it as long as you stay within your budget.
Saving Strategies
No matter what you take away from this post, please save.
There’s three reasons to save: Emergency, Investment, and High Ticket Purchase (car, house, vacation). Saving is your safety net and your stepping stone, the more you have saved the greater enjoyment you get out of life as you age.
How can you make saving a habit?
- “Pay Yourself First”: Automate transfers on payday to a different bank. The goal is to forget you’re transferring funds to this account. (Bonus: if you set up a money market or high yield savings account)
- Emergency Fund: Aim for 3-6 months’ worth of living expenses tucked away – you don’t have to this immedately, but it should be accomplished within your 1st year of earning.
- High-Yield Savings Account (HYSA): These accounts can offer you more bang for your buck with higher interest rates.
- Set Savings Goals: Want a new car or planning a vacation? SMART goals can motivate you to save.
Managing Debt and Spending Wisely
Debt is a friend of the impulsive and enemy of the future.
As much as you can, try to avoid falling for the debt trap – where you’re spending more money than your budget allotment. Unhealthy debt is self-sabotage, where healthy debt can be empowering.
No matter where you are on your debt, start by doing the following:
- Create a debt repayment plan: List all your debts and tackle those with the highest interest rates first (the avalanche method).
- Avoid taking on new debt: Be mindful of your spending and avoid unnecessary borrowing.
- Recognize healthy debt vs unhealthy debt: Healthy debt adds to your asset, unhealthy takes away from your asset.
If you have debt over 10% interest rate, pay them off before investing. If you’re paying the minimum on 20-30% interest for your debt, that will destroy your ability to save and invest funds.
Spending Wisely
Spending wisely doesn’t mean living in deprivation. It’s about making conscious choices. Ask yourself: Is this a need or a want?
Needs are essentials like food and shelter, while wants are those extra treats.
- Avoid impulse purchases: Give yourself a cooling-off period (ideally at least two days) before buying non-essentials.
- Look for discounts and deals: Who doesn’t love a good bargain? Use coupons, shop sales, and compare prices.
- Track your spending: Use a budgeting app or a simple spreadsheet to see where your money goes.
Investing Basics
If you’re still reading this, that means you’re interested and invested in building your financial freedom. Fantastic!!
Let’s go back to the 50/30/20 rule, if that’s what you’re capable of doing, then do that, but if you can reduce your living and lifestyle costs early, the better your future. That means more lavish vacations, nice cars, homes, friend’s trips, etc.
This is why, I suggest the 40/40/20 divide: 40% on needs (rent, food, utilities), 40% on saving (save and invest), and 20% on wants. The more you save now, the earlier you get to retire and with more money. Lets be honest, right now is the lowest cost of living for you – as you age – you’ll be wanting a bigger place, will have more time obligations, might have a partner, pets, kids, etc. The value of your time and funds will become more scarce. So, save and invest as much as possible now, so your future is easier.
There’s two concepts of investment you need to know: the Rule of 72 and Compound interest.
The Rule of 72 states when you invest at a 10% annual return the amount invested doubles every 7.2 years. Historically, the S&P500 has a return rate of 8% over the past few decades. In the Rule of 72, that means what is invested will double every nine years.
Compound interest accounts for the initial investment and regular contribution, to give a more accurate description of what might happen.
For example, lets say you will invest $10k in your first year in the S&P 500 (at 8% annual return). With the Rule of 72, in 9 years it’ll be nearly $20k, and $40k in 18 years. And, lets say after you’ve made the initial $10k investment your first year, you contributed $100 per month to the S&P 500, at 9 years it’ll be worth $35K, and in 18 years $85k. Use this compound interest calculator to get a better understand of what you could do with your continued contributions.
The power of compounding interest will help you bulid your wealth and financial independence the earlier you start investing. Plus, more funds in your savings/investments means the less lifestyle creep, which will make you wealthy.
Save, and invest. Saving makes you safe, investing gives your freedom.
Investing is about letting your money work for you. The earlier you start, the better.
- Start Early: Compounding is your friend, giving your money time to grow.
- Diversify: Spread your investments to manage risk—think stocks, bonds, real estate.
- Retirement Accounts: Look into employer-sponsored 401(k)s or an Individual Retirement Account (IRA).
- Consider Low-Cost Index Funds or ETFs: They usually offer diversification with lower fees.
- Seek Professional Advice: A financial advisor can guide you if you’re feeling unsure.
Setting Financial Goals
Your financial goals don’t need to be overly complicated. Focus on:
- Short-Term Goals (1-3 years): Pay off a credit card or save for a car.
- Medium-Term Goals (3-10 years): Purchase a home or start a family. This is where lifestyle changes, so you’ll likely save and invest less.
- Long-Term Goals (10+ years): Retirement or funding education. The earlier you start the more financial freedom.
Using the SMART goal setting method can help you plan for your future.
No matter where you start, researching this topic now will help you become more financially conscious and help you improve your financial literacy. If you’d like to dive deeper into the topic, please feel free to email or schedule a time to talk.
