There are many points and achievements in a person's life that makes them very proud of themselves. One particular achievement is getting your first job. The independence. The thought of finally being able to make your own money. The idea of having cash in your bank account and being free to buy what you want. Getting your first job is a real cause for joy.
As great as getting your first job is, it may not be a bed of roses. Remember how you were always taught as a child that you have to work to put food on your table and a roof on your head? That is where it dawns on you that oh, bills have to be paid and you finally realize that this independence comes at a cost.
What will you do with your first job’s salary? How can you make the most of your income? What do you need to learn and know in order to increase your financial know-how? Is it possible to avoid preventable money mistakes and ensure that you’re on track to achieving your financial goals?
You can set yourself up for lifelong financial comfort if you learn the basics of finances and establish good habits on your first job. With careful planning and sufficient information, you will avoid common traps that can derail your financial goals.
Read on to find out...
Cash flow is the money that is recorded flowing in and out of your account - that is the money you earn and the money you spend. It is mostly tracked on a monthly basis as most employers pay salaries monthly but you can choose different intervals depending on your income intervals. When more money is going out than what is coming in, then you are at risk of getting into debt.
Keep up with how much you are earning, what you are spending and how you're spending it. This can be done daily, weekly or monthly. You have to know that wallets can go empty and bank accounts can also run dry. Decide on being strategic and you will be able to tell whether or not you are working towards your personal goals.
When doing this, watch out for irregular expenses. Scrutinize your monthly bank and mobile money statements so that you can spot where you are overspending and need to cut down or where you are underspending and need to boost. Then work on improving.
Before receiving your pay, decide how you will spend your money and purpose to live within your means. Create a plan for where your money goes so that it will be easy for you to stay on track.
Many people try to manage their money by creating a budget, but they soon realize that they are out of their budget, and they can’t tell exactly where their money has gone. As important as making a budget is, knowing how exactly your money is spent is a great way to stay on track.
Tracking involves taking inventory of your accounts, grouping your expenses, budgeting - allocating a certain amount of spendable income on specific needs each month depending on what you’re taking in and what you’re paying out and being ready to make adjustments when you identify room for change.
If you simply buy whatever you feel like whenever you want, you are likely to overspend and end up sacrificing key areas of your future financial stability.
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Having some extra funds available for emergencies is an essential component of your overall financial well-being. When you set up a dedicated savings or emergency fund, you will protect yourself financially and it is also one of the first steps you can take to start saving.
Building an emergency fund should be one of your highest savings priorities once you start earning an income. By putting money aside, no matter how little the amount is, it can bail you out in the case of important unplanned expenses. An emergency fund can also help with unforeseeable but irregular expenses such as medical bills.
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months’ worth of expenses. This amount can seem intimidating at first, but the idea is to put a small amount away each week or two to build up to that goal.
You may also want to consider adjusting the amount based on your bill obligations, family needs, job stability, or other factors. In order to do so, you have to first calculate an approximation of your three-month living expenses. You can then divert a portion of your salary accordingly.
Once you’ve reached your target amount, your additional savings can then be allocated for other financial goals such as investing.
Lifestyle inflation is what happens when you allow your spending to increase gradually as you desire a more luxurious lifestyle. With that, as your income grows, the amount of money you get to save never increases significantly.
There is nothing wrong with wanting to have a better lifestyle. However, if you’re not careful enough, a simple upgrade may quickly spiral into a very expensive lifestyle that you cannot afford.
Examples of lifestyle inflation are; buying a brand-new car the moment you get a raise in your income and starting to eat out more often just because you got a salary increment or a better job.
If not carefully managed, this can make you live from paycheck to paycheck, and lack cash to fall back on when an unforeseen setback occurs.
Saundra Davis,a distinguished professor of financial planning, gives this advice to anyone who wants to avoid lifestyle inflation. “The trick is to set short, intermediate, and long-term financial goals and hold yourself to them. Create a policy for yourself about what you will do with increased income. Make sure your goals are specific and measurable.”
Do not succumb to lifestyle inflation.
Investing is important if you want to make your money work for you. After you have worked hard for your money, isn’t it okay to also let it work for you?
Investing ensures that you have a present and future financial security. It allows you to grow your wealth and at the same time generate inflation-beating returns.
Furthermore, investments have the potential to meet your financial goals, such as purchasing a house, and building an emergency fund, among others.
Investing instils in you a sense of financial discipline as you develop a habit of setting aside a particular amount every month or every year towards your investments.
Regardless of the strategy you choose, it’s important to note that all investing involves taking risks which are very beneficial in the long run.
Getting on the right path to managing your money early will set you up for life. The goal is for money to become a source of security and freedom for you and not a source of ongoing stress.
Remember, you’re on your own personal finance journey and you got to make it count.
There is no better place to start building life-changing financial habits than when you start earning your first pay, whether as a salaried employee or running a young business.
By the time you are earning the big buck, you will already have been practising prudent personal finance management meaning that increased income will be put to even better use.