Stability: How to Budget and Save A Lot Early In Your Career

If you're struggling to save money early in your career, it can feel like the deck is stacked against you. Takeout, Netflix subscriptions, daily coffee orders and the never-ending search for the perfect apartment all conspire to eat away at your savings — but they don't have to. 

The earlier you start saving, the easier it will be. Saving a huge percentage of your salary and enrolling in a pension scheme early are effective ways to build up a robust financial cushion. Let’s look at these tips in detail.

1. Save a Huge Percentage of Your Salary

How can you save a big percentage of your salary during these harsh economic times? The first thing that you need to do is to live on essentials. Your essentials include food,  medical care, rent and other indispensable needs. 

It could mean not going  out for coffee or going into debt for unnecessary debt, such as:

• A flashy car
• Unnecessary leisurely travel expenses
• Fancy clothes 

However, saving a big percentage of your salary is not a walk in the park. Don’t worry, though. Here are some tips to help you.

In your 20s or 30s, save at least 30% of your income. Although this may seem tough, it’s a huge advantage if you remain consistent throughout your working life.  After taking care of your future, it’s time to save for your other needs. These include:

Emergency Fund: Make sure your rainy-day fund can cover up to 6 months' worth of non-discriminatory expenses. You can keep this money in unit trust funds such as money market funds, equity funds, and balanced funds. This way, your savings will earn interest. Besides, most money market funds allow you to access your money 24-48hrs after requesting.

Child Education Fund: Every young parent struggles with planning for children’s education. You thus need to prepare for your child’s education early by investing in an education fund.

Also Read: What is the best way to invest in your child’s education?

Down payment on a house: If you’re looking to own your own home to reduce expenses on rent, this is a viable option. However, you need to consider the different interest rates offered before investing in the mortgage.

Other Goals: If you have other financial goals, such as starting a business or going on vacation with your partner, you should also set up a savings account.

However,  try not to go over budget—the point isn't just about saving as much as possible but also about saving within reasonable limits so that you can use the money for its intended purpose.

If you are within your first five years of employment and do not have dependents such as a child and spouse, one of the best financial decisions you can make is to save the biggest percentage of your monthly income possible. 

If on your first job you decide to save even 50% of your income, you can arrange your life around the other half and set yourself up for really great success when responsibilities start piling up.

By committing a reasonably huge percentage of your income early, you automatically rid yourself of some of the biggest financial mistakes young people make such as overspending. 

Remember, you have to arrive at a reasonable percentage that still allows you to live a decent life. You are just trying to postone the gratification of luxury and the much desirable ‘soft life’.

Ever heard of minimalism? If you are keen on saving a significantly huge amount of your monthly income to fuel your most cherished financial goals early, then minimalism could be the right path to take.

Learn More: How Embracing Minimalism Can Make You Money

2. Track Your Expenses

To save a lot early in your career, you need to find out where all of your money is going to decide how much money you want to save and how much money you want to spend on fun things like food and music festivals.

When you clearly understand how much you’ve spent on things like food, clothes, groceries or entertainment, you’re more likely to know what you're spending your money on and why it's important to avoid frivolous purchases in the future.

Secondly, tracking your expenses can help you save more. People who track their expenses are spending less than those who don't. Lastly, tracking your expenses can help you better understand the cost of living in your city or town.. You may be surprised at just how much living somewhere else truly costs. For instance,  the cost of groceries alone will vary widely depending on where you live.

Also read: 8 Amazing Benefits of Tracking Your Spending.

How to track your expenses

Start by tracking your spending for two weeks and figure out how much money you spend on average each month. You might be surprised at what kind of expenses are draining your funds! 

Once you know where most of your money goes, create a budget that fits within those limits but still allows room for fun stuff like concerts or movies with friends. Make sure it's realistic - if it's too high or low for what works for your lifestyle, then the chances are good that it won't stick! 

Here’s how to track your expenses:

• List your income and expenses
• Categorize your expenses to avoid impulse buys.
• Check your account statements
• Use budgeting and expenses monitoring apps such as  Mint
• Use a budgeting spreadsheet to record your expenses
• Use the envelope system.

3. Postponing Big-ticket Purchases 

Early in your career, a significant chunk of your savings goes towards housing appliances such as fridges, cookers, washing machines, etc. However, convenience costs a lot - possibly one month’s paycheck or so- and can derail savings. 

But if you postpone big-ticket purchases, you can put the money away and invest in, say, treasury bonds or treasury bills. By the time you decide to buy, you can use the interest to purchase your favorite household item, or you would be able to afford to buy without being left broke.

One important thing to consider is the high likelihood of purchasing a low-quality item based on the typically lower income you are earning early in your career. 

This becomes more expensive when you inevitably have to replace them in the long run. For example, you will typically require a bigger fridge, better cooker, a heavy duty mattress etc. once you get a partner - which will typically be within five or so years after starting your first job, for most people. 

Also read: How to save up for a big purchase painlessly.

3. Pay Yourself First

It's important to pay yourself first to save a lot early in your career. Paying yourself first means setting aside a portion of your income for savings before you ever see it. This way, the money isn't in your current account, where there is a chance that you'll spend it on something else.

The best way to do this is by opening up an automatic savings account at your bank or Sacco and having them automatically transfer money from each paycheck into the account. You can also set up an automatic transfer once a month or quarter (or whatever frequency works best for you).

This will ensure that as soon as money comes in every month, a percentage goes out immediately toward paying down debt or building wealth through investments rather than going toward bills or lifestyle expenses like eating out too much!

4. Tame Recurring Expenses

It’s important to establish how much money you want to save. As stated earlier, start by tracking your spending, then look for ways to reduce recurring expenses. For example: If you have to pay for a premium Netflix subscription, consider canceling it and getting the free version instead. 

The first step is figuring out how much money you can put away every month without feeling deprived or struggling with basic needs like food or shelter—and then committing yourself to meet this goal no matter what happens in life!

5. Enroll in a Pension Scheme Immediately 

Pensions is not something a young person will typically be thinking about on their first job, but it’s a good idea to start thinking about them now. You might be wondering why you need to invest in a pension scheme early in your career- especially when there are so many other things to worry about.

But here’s the thing: Pensions are for everyone, no matter how old or young you are. And if you want to retire comfortably one day, then making investments now can help ensure that’s possible.

The earlier in your career that you start investing in a pension scheme, the more benefits you’ll get out of it. That’s because of compound interest. Compound interest is when your money earns interest on itself as it grows. It makes what you save grow even faster. 

Take this example; Anne and Brian are saving $100 a month at a 5% annual compound interest, but Anne begins doing so at 25, while Brian starts at 35. 

The 10-year head-start gives Anne $162,000 at the chosen retirement age of 65 while Brian only gets $89,000 at the same age of 65. She gets almost twice as much at retirement despite Anne only contributing $12,000 more than Brian.

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Now that is the beauty of compound interest. And the very reason why you have to save for retirement as early as you can. 

The only way for Brian to match up to Anne’s retirement package is to significantly increase his monthly retirement contributions. If we assume both are able to sequentially increase their savings, there is no guessing who would find those easier incremental contributions easier to make if we assume both are at the same income level.

Conclusion

It’s no secret that many young professionals have trouble saving. However,  you shouldn’t find this overwhelming. Start by not letting your money get wasted on unnecessary stuff. Think long term, keep your goals in sight, and find ways to make sacrifices now that will pay off later. So, Instead of buying things you want, focus on what you need.

You also need to understand that your savings are an investment in yourself and the future you want for yourself. Lastly, remember to use the power of compound interest to grow your savings over time.