To make the most of your money, it is important to start financial planning as soon as you can. When you start your first “real” job and start earning a salary, you are likely to find many ways to spend your money.
One of the most important things to consider is taking advantage of the power of compound interest. When you have money in savings, each month or other period depending on the type of account you have, the interest is added to your balance. The next month your interest income is based on the former balance plus the added interest. The earlier you start saving on a regular basis, the less money you will actually need to put away. This is also helpful for your retirement savings, the younger you start saving, the more time your money will have to grow.
Set up a monthly budget each month. In order to know how much money you have to spend, it is important to know how much money you will have coming in that month and what expenses you need to pay. After the necessary expenses are subtracted from your income, then you will see how much you have left for savings or spending on other things. One way to budget your money is to use the envelope system. Once you determine how much to allocate to certain categories such as groceries, dining out, entertainment, clothing and others, get that amount in cash and put in an envelope labeled for the category. Only spend money out of the correct envelope for each category. Once the money is gone, you are done spending in that category until the next payday or whatever day you usually refill your envelopes.
Many people think they will pay their bills and put money into savings with any money that is left. One suggestion is to pay yourself first. Determine an amount that you want to put into savings each month. Treat that amount as a bill and subtract it along with you other expenses from your income. One way to make this easier is to make it automatic, either directly from your paycheck or automatically withdrawn from your bank account. By making the withdrawal automatic, it will make it less tempting to skip a month or two. Once you start skipping withdrawals, you may get out of the habit of putting money into savings.
It is important to have an emergency fund of at least eight months of living expenses in the case of a job loss, medical expenses or other unexpected costs that may arise. This money should be in an account that easy to get to without penalties.
We are constantly bombarded by marketing and advertising for purchasing cars, electronics, clothing and other items. It is important to keep your spending within or below your means. If you get into the habit of charging extra expenses to your credit card and are not able to pay the balance in full each month, you will likely get into deeper debt quite quickly.
Many people know financial planning is important but are not sure where to start.