How you handle your money begins before you even receive your first paycheck. When you receive your offer letter with your agreed salary, you will more than likely begin calculating how much money you will have to spend. For many of you, the amount you will receive is more than what you have received up to this point. It is imperative that you do not make any large purchases prior to receiving your first paycheck. Actually, if you have the ability to work for a few months prior to making any large purchases, it will benefit you immensely.
Although your salary amount may seem like a large sum of money, there are several things you must consider. Of course, the most obvious salary deduction is taxes. Uncle Sam will receive his cut before you even receive any of your hard-earned money. To understand how much money he will receive, you can review the income tax table at www.irs.gov. Depending on your situation, the amount you will pay in taxes will differ based on whether you are single or married or if you have any kids. You should adjust your allowances according to your situation so that the correct amount of money is deducted from your paycheck throughout the year. The W-4 form that you will complete with your employer provides instructions. You will have the option to deduct more or less money throughout the year. How much money you deduct throughout the year will determine how much money you will owe or receive at the end of the year during tax season. There are different perspectives on which is better: some people believe that paying less throughout the year allows you the opportunity to gain interest on the money owed. Others, opposed to this perspective, would prefer to pay more throughout the year and receive a check or not owe any money during tax season. Choose the best option for you. If you decide to pay less throughout the year, be prepared to owe money during tax season.
Other than income taxes, you will also see deductions for Medicare and Social Security. These deductions are automatic and cannot be adjusted. The next deductions are adjustable and optional but are very important: health insurance and retirement savings. If your company offers a benefits package that includes health insurance and a retirement savings plan, unless you have other options, you should definitely consider taking both. Your personal health situation will determine what type of health plan you should acquire. Health insurance can be very difficult to evaluate; it is best to review all information then consult your human resource department for additional details. Typically, there will be a range of options from minimal out-of-pocket payments to higher out-of-pocket payments. If you are likely to visit the hospital multiple times throughout the year, it is wise to choose a plan that will offer the greatest coverage with minimal out-of-pocket payments. Fortunately, health plans are not permanent and can be changed annually or with qualifying events such as marriage.
Although you are just beginning your career, you will eventually be looking to retire. Unfortunately, most companies these days are not offering a pension plan. It is your responsibility to prepare for your retirement years. If your company offers a 401(k) or an IRA, be sure to contribute at least as much as the company matches. If the company matches up to 6 percent, you should contribute 6 percent so that you receive the full benefit. Your retirement savings are also deducted from your paycheck. Depending on your savings plan, your deductions may be pre-tax dollars which also benefit you by decreasing your taxable income.
Hopefully you do not have a large amount of debt. But for many of you who were students, you may at least have student loans. Depending on the amount of debt you owe, it may seem impossible to ever see the light at the end of the tunnel, but paying off your debt can happen. A meek lifestyle may be necessary until this debt is paid. But it’s easiest to continue a meek lifestyle out of college, because you were living with less in college. You will be making corporate money, but you should maintain your college lifestyle at least until you can diminish your debt.
Not only should you aim at diminishing your debt, but you should also strive to start a nice savings account for yourself. The best nugget of advice I received on the topic of savings was: “Pay yourself first.” Your budget should account for paying yourself—and tithes to your church—prior to paying your debtors. If you can commit to at least paying yourself ten dollars per week, you will at least be saving five hundred twenty dollars per year. Most employer payroll systems allow you to set up a direct deposit into multiple accounts; you can deposit your savings directly before you are tempted to spend the money. When you make this commitment, you should not withdraw any money from this account unless it is an absolute emergency. Remember: shopping for shoes or clothes is not an emergency!
Once reality sets in and you understand how much money you will actually be bringing home, you may decide you need to cut your expenses. As a general rule, calculate a cost at least on a monthly basis. For instance, if you have a daily coffee habit that may cost you three dollars per day, if you only drink it during the week this is at least sixty dollars per month. When you think on a daily level, three dollars seems minimal, but when you think on a monthly level, sixty dollars starts to seem a bit more expensive. We all deserve our guilty pleasures, but during the meek period, some things can be curbed or at least minimized. Instead of visiting your favorite coffee shop every day, find a roast you can make at home. Then, if necessary, treat yourself to the three-dollar cup a few times a month.
Just as the cost of your favorite cup of coffee adds up, so does eating out. If you failed the cooking portion of home economics, now is the time to learn how to cook. If you missed the basics—like boiling water—recruit a friend to help you. Once you learn the basics you can scour the web for recipes. Cooking at home will help your pockets. When cooking at home, you will have to visit the grocery store; if you aren’t careful, you could spend too much money. There are a few things you can keep in mind to avoid having a huge grocery bill: (1) never grocery shop on an empty stomach; (2) being a coupon mom is not necessary, but it will help your budget; (3) make a menu of what you will be eating and use this menu to create a grocery list; and (4) buy the store brand for the items that will not compromise your recipe.
To prevent yourself from wastefully spending, there is a principle you should keep in the back of your mind: like versus love; need versus want. When you have the urge to make an impulse purchase, try to consider this principle. Those things that you just like and want could probably be left on the shelf. To ensure you know the difference, don’t make purchases on the spot; sleep on it. This will be difficult for those who need to keep up with the latest trend, but remember that the meek lifestyle is only difficult for a short period of time. Instead of keeping up with the Joneses, you will be the Joneses.
Planning Your Budget
So, you are not an accountant. A budget seems like too much effort but is well worth the return on investment of your time. At the least, planning your budget will allow you to understand your monthly expenses. It will also allow you to determine where you can make cuts to save additional money. Putting your budget on paper can highlight areas where you did not realize you were spending so much money.
To begin creating your budget, write down all of your debt: such as rent/mortgage, utility bills, car payment, insurance, etc. Capture expenses like gym memberships, salon/barber, phone bill, gas, groceries, and any other items you must pay each month. Also capture the amount of money you deposit into your savings account. Subtract these expenses from your take-home pay (the amount of money you bring home after taxes and benefits are deducted). Hopefully, you will have a positive balance; otherwise, you must evaluate your budget to reduce your expenses until you arrive at a positive balance. If you do have a positive balance, there is still room to increase the balance by reducing unnecessary expenses. Once you have trimmed your budget as much as possible, you can now apply your leftover money to your debt or to your savings account.
If you are thinking that your budget can’t be trimmed, think of things like your cell phone bill. Monitor the minutes you use per month. You may be surprised to find that you do not use all of your minutes and can lower your plan. If you are using all of your minutes, think of using free services like Skype, Google Voice, or other VoIP (Voice over IP) services you can use instead of using your mobile minutes. If you have a cable bill with all the premium channels, think of changing your service to minimize to a basic cable plan. There are many networks that stream your favorite shows online at a later time. You can be creative with your budget. Remember the principle I discussed before: “like versus love; want versus need.”
This budget plan covers your living expenditures. You also need to budget for recreational expenses such as when you do treat yourself or events you know you’ll need money for like birthdays or Christmas. When considering these expenditures, create a “bucket” for yourself. For instance, if you decide your Christmas limit is five hundred dollars, you can start saving in January. By saving at least ten dollars per week, you will accumulate five hundred dollars before Christmas. By having this money saved in advance, when Christmas comes around, you will not be inconvenienced. You should also determine your recreational spending for the week and account for this in your budget. The goal is to commit to this budget—at least until your debt is paid.
How should you tackle your debt payments? There is a debt payment plan referred to as the debt-snowball method. This plan is applicable if you have multiple accounts that need to be paid. Basically, you begin paying larger payments on the account with the smallest balance and the minimum payment on the accounts with the largest balances. Once you have completely paid off a small account, you can now apply the amount you were paying to the smaller account to the larger account. Remember: by trimming your budget, you should have a positive balance that can be applied to your debt.
For example, if you have a credit card with a five-hundred-dollar balance and you have student loans with a twenty-thousand-dollar balance, your goal would be to pay the minimum payment on your student loan and apply all of your remaining money from your budget to the credit card payment. If you apply two hundred dollars to your credit card per month, once you have completely paid the credit card, you can now apply the two hundred dollars to your student-loan payment. Whenever you have additional money, apply this to your debt.
There are mixed opinions regarding paying off your debt prior to saving money. Doing both is probably in your best interest. By having a savings account, you can avoid creating additional debt if an emergency arises.
Once you have reached your goal and completely paid your debt, you are now able to save more money. All the money you were once paying to your debt can now be added to your savings account. The money that you save should be in a high-yield savings account which will accrue interest at a higher rate. There are different high-yield savings accounts that will offer more than most banking institutions. When you are ready, you can research which institution offers the highest interest.
Unfortunately, debt establishes your credit history, but it is not necessary to have a high-balance credit card or an outrageous car payment to establish good credit. When you have paid off all your consumer debt, it is important to maintain at least one credit card. You can charge something small —such as gas. Be sure to carry no more than half the balance into the next month.
It is very important to monitor your credit history. Your credit score will determine the interest rates you receive on future purchases and can determine your insurance rate and whether you are hired by certain companies. In the event you have a high interest rate, this will cause your monthly payments to be higher than necessary. By monitoring your credit report, you can also prevent identity theft: if someone opens a new account, it will display on your credit report.