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Developing a Budget Mentality as a Young Professional

Posted on: June 5, 2019

As a young professional, your financial management priority can be narrowed down to one primary objective: budgeting. Your first financial priority is getting yourself to a strong enough financial position to be able to tackle the larger financial life decisions, like retirement planning, evaluating your insurance needs and determining effective asset allocation strategies for your portfolio. Budgeting will serve as the foundation from which you can begin to construct your financial life.
The first, and most basic aspect of personal budgeting, is striking a balance between spending and saving. The simple mantra of ‘spend less, save more’ is sound – however, it oversimplifies this essential, hard-to-do task. The task of budgeting requires more context and a comprehensive, thoughtful plan that adheres to your personal financial situation. For example, if you have student loans with high interest rates, you may prioritize paying those down before you start to think about making significant contributions to an investment portfolio. In this article, I will outline four important rules of thumb for short-term and long-term budgeting as a young professional.
Be realistic. It is a lot easier to say you that will not spend beyond your routine necessities than it is to actually follow through with this intention. As a general rule of thumb, try to distinguish between your planned and unplanned expenses. Planned expenses are expenses that you allocate from your monthly income that enable you to enjoy yourself responsibly, in the present. These may include attending weddings, concert events, and dinners out with friends and family. Your planned expenses should not require you to rebalance your budget after each purchase. However, unplanned spending are those expenses that typically result in feelings of post-purchase buyer’s remorse. Buying an unnecessarily expensive watch or impulsively planning a trip to Italy, may feel great in the moment but will set you back in achieving your long-term and short-term financial goals. Can you plan for unplanned expenses? Yes, but it requires some time and thoughtful consideration of what is important to you. A trip to Italy can enter the realm of your planned expenses, but will simply require a re-evaluation of your other areas of spending in order to allocate your money appropriately.
Do not deviate from your plan. This is the most important priority you can make once you have planned your expense allocation. Let’s continue with the above example of planning a trip to Italy. Your first option is to expense the entire trip on credit. However, you will spend months rearranging your personal finances to pay down your credit card balance and subsequent interest payments. Alternatively, you should allocate a fixed amount of your monthly income to put towards travel spending. Even if you haven’t properly calculated the trip cost, this will allow you to get a head start on your travel funding and ultimately maximize your experience. Every month that you plan to allocate a portion of your income to a short-term travel savings plan, you will encounter opportunities to deviate from this plan. While this is undoubtedly part of life, continually remind yourself why you are setting the money aside in efforts to avoid these temptations. It takes a little will but eventually you will enter a responsible routine and won’t be tempted by short-term inclinations. If this attitude towards budgeting and expense allocation is developed when you are young, it will prove to be incredibly helpful in other facets of personal financial planning later in life.
Adopt a ‘pay yourself first’ mentality. This is an important mindset to maintain throughout your life. Planning for financial goals does not require you to eliminate all non-essential spending habits, nor is that anyway to live your life. You should be able to enjoy the present but adhering to a ‘pay yourself first’ mentality will consciously shift how you value money; instead of viewing money as just a means of spending, you will grow to view it as a means of fulfilling those larger ambitions that are ultimately most important to you. A structured approach to spending will protect you from inevitable social pressures and impulsivities that lead to overspending. Always try to privilege the long-term over your own short-sightedness. You probably won’t remember a couple months of cutting back on frivolous spending in exchange for a properly expensed vacation.
Let your money work for you. Once you have gotten in the swing of responsibly saving and allocating your money, you can segment your assets across different accounts that correspond with your short-term or long-term goals. The aggregation of your accounts will begin to reflect your identity, in that each account will grow to provide you with the funds that help you accomplish your goals. In this sense, your money will work for you, rather than the other way around. Through careful organization of your spending with specific personal goals in mind, each dollar you earn goes toward an aspect of your life that is important. At the same time, the emotional burden of constantly guessing whether or not you can afford a specific experience or product will start to diminish because you will have successfully covered all expense bases.
While this article has focused largely on allocating for a travel fund, this is by no means the extent to which you should prioritize your goals. Everyone will have different savings and expense abilities based on their income and current assets. It is common for young professionals to worry that their personal financial situation is not sufficient to accomplish their goals, but remember that you are in an incredibly opportune time in your life. You have the profound opportunity to form these foundational financial habits that will allow you to navigate a path towards building wealth and deviate away from common faults that undermine your financial footing. It is easy to get caught up in investment trends, or a ‘live life while you’re young’ mentality. While you should live your life, there are very few people who are able to build lasting wealth sporadically or quickly. Budgeting your money responsibly will grant you privilege to pursue passion projects, enjoy what matters most to you and meet your long-term financial goals.
Contact a member of Bongard Wealth Advisory and let us get your started on budgeting your personal financial needs.