Thursday 7 April 2016

How to budget your first income

It’s a big moment when you get your first salary in your first job. Finally earning your own money conjures images of freedom and being able to splash out on all kinds of goodies.

As exciting as it may be, you need to apply some discipline. It’s far wiser to use the first money you make to start setting yourself up for financial security and independence later in life.

Putting the first money you earn to good use can give you a great start in life. So how should you budget your first income?

Monitor your living expenses

You need to get a clear view of your immediate living expenses, because you should obviously take care of these first. The thing is that it’s so easy to overlook small expenses, which means that you don’t really know how much it costs you to live each month.

By itemising each thing that you have to pay for every month, you get a clear picture of your financial situation, and can budget more accurately. You will know exactly how much you need to spend each month to sustain the basics of your life (like rent, car payments and so on). You will then also know exactly how much money you have left over each month.

Start paying off debt first

One of the most important principles of personal financial management is to pay off debt at soon as you can. For a simple reason – debt is expensive: it continues to cost you more and more money. Interest charges mean that you end up paying more for whatever you have received, so it’s really important to minimise these additional charges. The best way to do this is to pay off your debt as soon as you can. This is also one of the first major steps towards financial security.

Set up an emergency fund

Life happens – and you can never know what direction it will take, so it’s best to be prepared for any additional urgent financial situation. Put aside some of your income each month in order to build up this emergency fund. That way if something goes wrong (like your laptop breaking down), you’ll have the money to sort out the problem.

Begin investing in your future

The earlier you start putting away money for your future, the more you will have later. Conventionally speaking, you have a limited number of working years, so you need to make sure that the money you make during these years works as hard as possible for you. You also want to prepare for the years when you won’t be able – or won’t want - to work anymore.

One of the best ways of doing this is to take out a few retirement annuities. You can have as many as you want, so as you start earning more and more, invest in additional RAs. This will stand you in good stead later in life.

The 50/20/30 principle

Many financial advisers recommend using this method to budget and manage your money. It’s a simple model, using just three financial areas that you must look after.

The first 50% should be allocated to fixed living expenses, like rent, car payments, gym memberships and so forth. Ideally you should always try to keep these costs down to no more than 50% of what you earn.

The second 20% is allocated to your future financial goals – whether that is to have a hefty retirement fund, or to save money to start your own business later on. It includes anything that protects your financial future, like retirement annuities and insurance policies. This is also where you allocate your debt repayment. The idea being that you shouldn’t spend more than 20% of your monthly salary in these areas.

The last 30% is your liquid cash – your spending power. This flexible money is what you use for eating out, entertainment, and hobbies and interests. The important thing here is to make sure that you never spend more than 30% of your salary on these things.

Don’t forget to reward yourself

Let’s face it – managing your money is hard work. It’s especially difficult if you aren’t yet earning much money. No matter what you earn, however, following the advice we’ve given above will help you to be more financially stable. It just takes discipline.

At the same time, there’s nothing wrong with giving yourself occasional treats as a reward for being so responsible with your money. So don’t forget that while financial responsibility is a serious matter, you also need to make sure that you enjoy your life. It’s fine to spoil yourself once in a while.

Let’s start a conversation. Let me know what you think here or connect with me on EduloanSA

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