So you’ve earned your first real paycheck… Now what?
“Make sure you are living within your means.”
“Get to a point where you don’t have to worry about money.”
“How much can you afford?”
These are just some of the clichés thrown around that are often difficult to figure out when that first “real” paycheck arrives. This is meant to help you figure out how to answer these questions by putting your money into separate piles for different purposes. Here are the piles that you should be thinking about.
1. Checking account
This account is used to pay for all of your expenses such as rent, food, gas, car payments, utilities, etc. Try to keep these expenses under half of your total income. Although this may not be realistic at the beginning of your career, it is something to work towards. If you can do this, you know you are living within your means. Your expenses need to get taken care of before funding the below accounts.
2. Emergency fund
This is how people are able to “not worry about money”. This financial safety net can be used for anything from needing new tires, a health emergency, unplanned travel, or even if you were to lose your job and still need to pay to keep the lights on while you find a new job. It’s important to accumulate 3-6 months expenses in this account. As daunting as this sounds, this doesn’t need to happen over night. Just putting a percentage of your income into this fund each month will add up before you know it.
3. General savings and investments
This is the account where you pay your future self. It’s important not to neglect your 60-year-old self that is going to want to retire or at least work at your leisure down the road. This can be used as a supplement to your long term spending fund for larger purchases such as buying a home or it could be used as the start of a retirement fund. Invest this money in something, probably a qualified retirement plan, like a 401(k). Since you most likely have something close to forty years until retirement, that is a lot of time for money to grow and enjoy compound interest and possibly investment accumulation. The compounding effect can be powerful. Keep in mind that investments fluctuate and may be worth more or less than originally purchased.
4. Vacation fund
Putting some money towards a vacation fund each month is an easy way to budget and plan for some time away. By saving money strictly for this purpose, you can budget for awesome vacations completely guilt-free since you know exactly how much you can afford. Let this money grow and then plan vacations based off of this budget. The world is your oyster from there. Spending money on experiences such as vacations is incredibly important especially while you’re young since they generate much more happiness than buying material goods. You not only have fun and enjoy your time while actually on vacation, but you also experience happiness in anticipation of the vacation as well as long after the vacation while reminiscing with friends.
5. Long term spending money
This is your account for large upcoming purchases that are on the three to five year horizon. This can be buying your first house, a new car, or even an engagement ring. Putting a portion of your income into this fund can help you slowly accumulate money to put towards these goals. Figure out how much those future purchases will be and then you can figure out exactly when you can afford it.
6. Play money
Guilt. Free. Spending. Everyone has got to have some play money. It’s sometimes hard to know how much you can blow and so we end up just spending all that is in our checking account and then we have to eat ramen noodles or actually go to the grocery store more often just to make ends meet. By stocking away a specific amount of your income into this account every month, you know exactly how much you can spend on whatever your heart desires.
Where to keep these accounts?
Depending on your bank, it is possible to open up several different online only checking accounts. Make sure that there are no fees for transfers and there are no required minimums on the accounts. If it is not possible to open up several different accounts without getting slammed with fees, start an excel sheet with each of these categories and just keep track of it there. As far as the Long Term Spending and the Emergency Fund Account, consider storing those accounts in a high yielding savings account.
Suggested Percentages of Income:
Checking Account: 50%
Emergency Fund: 10%
General Savings and Investments: 15%
Vacation Fund: 10%
Long Term Spending: 10%
Play Money: 5%
For any other questions about this article or other financial related questions, don’t hesitate to give me a call. Michael Foley: Cell- 480-993-9491