You see articles all the time talking about creative ways to cut spending and telling you that you need to give up your morning Starbucks to become financially independent. Yes, you could save a significant amount of money over the course of a year by making your own coffee and working out at home instead of paying for a gym membership, but that’s probably not going to be life changing savings. There are 3 areas that young professionals should focus on to ensure that they set themselves up to live a financially successful life that will allow them to reach their goals.
Keep The Big 3 In Check
The Big 3 are the 3 biggest expenses that most people have: housing, transportation, and food. Keeping these 3 costs in check will have a much more significant impact on your cash flow than skipping your morning coffee from a shop. Not only will being intentional about keeping these expenses low allow you more flexibility with your cash flow, but it will also allow you to maintain a higher savings rate (the next key we’ll speak about).
A rule of thumb that’s thrown around is that your monthly mortgage payment (including principal, interest, property taxes, and homeowner’s insurance) should be a maximum of 28% of gross income. However, many people fail to recognize this is a maximum. You’re probably already having a third of your income taken for various income taxes when considering FICA, Federal, state, and local taxes. If you’re spending nearly another third on your mortgage payment, then where are you going to get money to save, pay bills, or accomplish your goals?
Stretching your cash flow just to buy the house of your dreams probably isn’t a good idea. Adjusting your mindset and being willing to live in cheaper housing will provide much more financial flexibility in the long run. Once you’ve made a mortgage payment you can’t get it back unless you pay to take out the equity in your home.
Yes, we all want to drive a nice, brand new car, but is it worth sacrificing other goals over? New vehicles are expensive and transportation costs count towards a large part of many people’s cash flow. The point of having a car is to get from point A to point B and a cheaper, but still reliable car, does the exact same job as an expensive one – just not in as much style.
If cars are your thing and you’re willing to make significant sacrifices in other areas of your life to make sure that you’re able to reach your goals, then that’s fine. However, since experiences provide more happiness than things, I prefer to spend part of the money that I would on an expensive car on experiences that I’ll value for much longer and save part of it to help me reach financial independence. Cheap transportation still gets you to where you need to go and provides financial flexibility while doing so.
Cooking at home can be very time consuming, but it can also save a lot of money. The convenience of eating out is relatively expensive compared to buying groceries and cooking at home and can be much more calorically dense. Just consider the amount of meals that you can prepare with the $50 you might spend at a decent restaurant on a date night. Eating out doesn’t need to be cut out of young professionals’ budgets completely, especially if trying new foods and restaurants is something that really makes you happy, but it shouldn’t happen as often as you preparing your own meals. Cutting back on eating out can provide significant savings if it’s something that you do often.
Maintain A High Savings Rate
Starting out with a high savings rate is extremely beneficial to young professionals because of the significant amount of time that we have to invest the money. Additionally, saving a large percentage of your income can help to mitigate too much lifestyle creep and it can provide flexibility in the future when life happens and you’re not able to save as much as you need to.
Maintaining a high savings rate doesn’t mean that you have to save as much as possible or even have a high savings rate every single paycheck, month, or year. There will likely be periods of higher savings and lower savings – what’s important is that your savings rate remains high over time. Most young professionals won’t have pensions available to them and the future of Social Security for younger generations isn’t certain; it’s up to us to be responsible and create successful financial futures for ourselves by saving now.
Develop Good Financial Decision-Making Skills
Keeping The Big 3 in check and maintaining a proper savings rate are great financial habits, but what happens when something pops up that you weren’t necessarily ready for? It could be a financial emergency or a financial opportunity, but either way you need to be prepared to make the right decision for any situation. Having goals clearly stated for what you want your money to do for you can help with this.
How will you react when your car breaks down and can’t be fixed? Will you buy a brand new one that you’ll need to move on from in a few years because it isn’t practical long-term, buy a new car that you know you’ll be able to drive (and enjoy) for the next 10 years, or will you buy a cheaper, used vehicle that still has significant life left in it?
What about if you’re presented with a financial opportunity to help start a business or purchase a home for below market value? It’s important to revisit your goals and see if these decisions fit into them. Even if you’re able to buy it below market value, you probably wouldn’t buy a home if your goal is to find a job in a different city in the next 6 months.
Keeping The Big 3 in check, maintaining a high savings rate, and developing good financial decision making skills can all be invaluable to young professionals in the long run. These skills will not only allow you to develop a solid financial foundation now, but will likely carry with you throughout your life to help you to be financially successful. Money is a tool that we can use wisely to help us reach our goals or something that we can waste away without being intentional with it – I think that making sure it helps us reach our goals is a much better option.
