Set Spending/Saving Habits Early

A hallmark sign of smart young adults is to look ahead towards the future once they graduate from college and get their career in motion. This usually entails setting financial objectives and goals. The first big challenge they face is either embracing financial wisdom or departing from it. The next step is paying close attention to where their dollars are going so that they can establish good financial habits. A common rule of thumb that still holds merit as a starting point for setting spending thresholds is the 50/30/20 rule. Under this rule one allots 50% of their take-home pay to “must haves”, 30% to “wants” and 20% towards “savings”. “Must haves” include all housing and utilities related costs, all transportation costs, food for the house, condo fees, all insurance, and after-school/child care costs. “Wants” would include cell phones, TV, internet, clothing, entertainment, eating out, travel, recurring credit card debt or equity lines of credit, and pastime toys. Keeping this amount to 30% manages binge spending and quick Buy-Now clicks. If any financial crisis situation occurs, this should be the first category facing cutbacks. All spending budgets should properly address both short-term financial security objectives and longer-term financial goals. A financial objective is building an ample emergency reserve (covering 8 to 10 months of all expenses), while at the same time saving 15% of earnings to build towards a retirement goal. It is always best to start out at 15% when young so that the habit is built quick and becomes painless and natural over the years. While most should aim for/be able to live very close to this rule of thumb, it is a guideline and there are situations that necessitate bending the rules, if only for a season, later returning to a financially healthier lifestyle when feasible. Situations that would warrant this choice may be to pay off old credit card debt, student loans or facing legal obligations such as child support. If you live in a high-cost area, spending more than 50% of your take home earnings may be unavoidable, given the cost of housing. Avoid at all costs reducing “savings” to increase your ‘wants”. Here is an example of a healthy compromise: 60/25/15. Recognizing the value of an emergency reserve (to keep one afloat) helps to justify trimming back what an employee defers in compensation for retirement. If salary contributions are to be curtailed, never reduce the percentage to less than what is required to snag the employer match. A serious mistake is when someone intentionally cuts back on salary deferrals during the ages of thirty-five and fifty so that they can live excessively large. People who make this choice are losing the benefit of compounding returns over time that prove invaluable when approaching retirement age. A nice gift to ourselves can arise when one is able manage their “must haves” to below 50%. If “savings” are in check, that leaves extra disposable income for pleasures. One should be responsibly saving no less than 15% from ages thirty-five up, 20% by age fifty and 30%+ by mid-fifties. Lastly, never, ever, buy into the deceptive enticement from a real estate agent or lender that you can easily afford a mortgage amount of 3 ½ to 6 times your gross salary. It is not uncommon for a lender to tell one who earns $120k with no debt that they can afford a $600,000 house at 4% interest with a 20% down payment. Instantly one becomes a slave to the house, barely able to maintain it, unable to afford any pleasures at all, much less children or financing a car or building up an ample emergency reserve. Instead they are regulated to being one paycheck away from financial ruin.

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