Financial Planning 101
Joining Bloom Institute of Technology (formerly known as Lambda School) is the start of a major career change for most of our students. Some may have experience working in tech or another corporate field, while others are completely new to the workforce. Regardless, this change likely represents a significant shift in your personal financial situation. Understanding your finances and how to manage your money now will serve the trajectory of your career, your personal life, and your future.
Here are several tips to improve your financial literacy and create a realistic and sustainable financial plan.
Understand the impact
Money doesn’t grow on trees, so as you look realistically into the future, consider that planning and preparation are crucial to meeting your financial goals. Here are three financial considerations that may be impacting your finances.
- Your career goals will impact your earning potential. Most individuals are not born with a silver spoon and must earn money by working. Consider the impact of your career trajectory on your overall financial picture, including retirement. Does your career pay well enough to cover your current and future expenses? Will your professional roles provide opportunities for upward mobility? Will you be buried in student loan debt? Your career interests and goals will have bearing on your finances, so make sure you are making career choices that will move you toward your financial goals.
- Your family and upbringing may influence your financial choices. Family and relationship needs, including financially supporting a spouse or caring for children or elderly parents, may suddenly and dramatically shift your financial plans. Also consider how your upbringing or socioeconomic status may influence your views about money and how you use it. Though wealth and poverty can be generational, your economic background does not need to dictate your financial future. Bring awareness to how you learned to view money growing up in order to shape what it means to you now.
- Your lifestyle may be critical to your earning and spending. A recent Financial Capabilities survey of 25,000 American adults showed 55% of respondents live paycheck-to-paycheck and would struggle to pay for unexpected circumstances. Having a financial plan in place can help lessen the impact of some of these scenarios. Consider that expensive hobbies, pricey large purchases, and sudden illness and emergencies can create a huge financial burden. Evaluate how your spending and saving habits may positively or negatively impact your life when these inevitabilities occur. How can frugality and budgeting now impact these outcomes later? Try out a budget that works for you now and considers your needs later. With a plan in place, you will be more likely to stick to your financial goals.
Maintain financial targets
Having goals or a budget to work toward can help keep you accountable. Without it, your money may be more vulnerable. If budgeting is new to you and you are not yet financially comfortable, consider what you want your life to look like and use this vision to help you start setting financial goals. After all, your money is hard earned and should serve you the way you want it to.
Consider these six tips as you plan your budget:
- Evaluate expenditures. Recognize that small purchases add up, so find out where you can or need to cut back. To do this, spend two weeks tracking every purchase you make (don’t change your habits, just observe them). You may be surprised with how much unnecessary items such as take-out coffee, eating out, and subscription services impact your finances.
- Plan expenses and budget accordingly. Be strategic and don’t indulge when you can’t afford it. If you need help to stay on track, utilize app- or web-based budgeting tools and have family members hold you accountable. Ideally, 50% of your income should go toward necessary expenses like housing, transportation, groceries, and utilities, and at least 20% should go toward retirement and savings. This may feel unattainable now, but making a financial target like this will help keep you on track. Finally, when you do get to the point where you have extra money, resist spending it. Be deliberate about when and how you treat yourself. By delaying the instant gratification of frivolous spending now, you will be investing in your future self.
- Consider lifestyle inflation. As we make more, we tend to spend more, so try to keep spending habits consistent. As a rule of thumb, don’t spend money on things you weren’t buying before.
- Say no. Decline expensive social invitations and set boundaries with individuals wanting to borrow money. After all, you can’t be responsible for others’ financial needs and wants. This may be particularly challenging if you are a people-pleaser, so practice politely saying no and get clear about the “why” behind it. Remember, these requests may deter you from your financial goals.
- Pay down debt. Eliminate debt as quickly as possible and avoid accruing new debt, especially credit card or other high-interest debt. Don’t use credit to purchase something that you couldn’t pay for out-of-pocket unless it’s an absolute necessity. If not, you may be paying thousands of extra dollars in interest payments. One method to debt repayment is called the debt avalanche. In this method, you pay off debt in the order of interest rate (highest to lowest) while still making minimum payments on lower rate debts. Another method is called the debt snowball where you pay debts in order of balance. The avalanche method will save you more money in the long run, but if you struggle with money management, the snowball method may feel more gratifying and help you stick with it.
- Pay yourself first. Establish a savings rate, even if it’s only 1% of every paycheck. Use your first paycheck to pay necessary bills like housing and insurance, then take a fixed amount of what’s left and put it into savings. Look into a high-interest savings account so even your rainy day funds will accrue some interest. Once you feel more financially stable (ideally when all debts are paid and you have a 3-6 month emergency fund), establish a retirement or future oriented fund, or learn to invest with beginner-friendly investing guides such as The Little Book of Common Sense Investing by John C. Bogle and Set for Life by Scott Trench. Your future self will thank you.
Remember your motivations to save
As you begin to dig deeper into your financial plan, frugality may feel both motivating and limiting. Be sure to focus on the bigger picture. After all, your money will serve you better in a savings account doing nothing than going toward unnecessary expenses.
Consider these four important reasons to save to keep you on track.
- Saving prepares you for a “rainy day”. This includes financial and health emergencies, as well as exciting opportunities like a trip abroad.
- Money will be secondary in your decision-making. A financial cushion will allow you to make decisions based on what you truly want instead of what your bank account allows. Just make sure your decisions align with your financial priorities.
- Saving prevents debt. Having cash on hand to pay for what you can actually afford will keep you far from interest payments and may allow for larger down payments toward a home mortgage or other large purchase. Remember, while most purchases can be made on credit, certain things will always require cash.
- Cash helps negotiation. Cash is “king” when it comes to financial transactions. Negotiate better deals on big-ticket items like cars or repair services that have flexible pricing.
Remember that taking baby steps toward your financial goals is better than leaving your financial future to chance. You have the power to change your life one transaction (or lack thereof) at a time. Choose wisely, and you will not only find wealth in the bank, but abundance in life.