If you search the internet for advice on effective personal financial management, you are confronted with an extensive list of topics that require your attention. Young professionals can often shrink that list down to one.
To see what advice was out there, I conducted my own Google search and read through several personal finance strategy articles. While all of them were insightful, it was clear that a majority of their advice was aimed at people relatively far along in their careers. I began to reflect on the advice that I offer to professionals my own age and what I typically emphasize to help them examine their overall approach to personal finance.
This is not to say the topics outlined in these lists, such as planning for retirement, evaluating your insurance needs and deciding on an asset allocation for your portfolio, are not vital. They are. But financial advice is most useful when tailored to an individual’s distinct circumstances. This means that the suggestions you read online may not be applicable to your situation, even when the advice is objectively sensible. For example, if your primary goal is to pay down student loan debt, especially if it carries a high interest rate, then prioritizing contributions to an investment portfolio may not make sense.
For young professionals, the first financial question is how to put yourself in a strong enough financial position to be able to seriously contemplate the various topics these articles mention. The answer: budgeting. While this topic may not seem especially exciting, it is a skill that serves as a foundation for young professionals to use in the construction of their financial lives.
A basic aspect of personal finance is the balance between spending and saving. Financial professionals often recommend people should generally spend less and save more. The principles underlying this simple mantra are sound, and many people have successfully used it as a guide to managing their finances. However, I would argue that it’s an unrealistic instruction to institute without more context. It sounds simple, but spending less and saving more requires a comprehensive and thoughtful plan. This approach centers on managing a monthly budget that includes saving for short- and long-term goals.
Attempting to convince yourself that you are not going to spend at all except for your routine necessities is impractical. Spending outside of that is OK, but it is important to distinguish between planned and unplanned spending. Planned spending allows you to enjoy the events you attend or the products you buy without adjusting your budget after every purchase. It also enables you to determine an amount from your monthly income that you can allocate to specific goals while still enjoying yourself responsibly in the present. Unplanned spending often leaves you justifying to yourself why you bought a new watch or why you traveled to Italy on a whim. In order to plan your nonessential spending, you should take the time to consider what is important to you, so you can prioritize effectively.
To illustrate the benefits of planned spending, let’s use a simplified example. Alexa recently started working full-time. Alexa has always wanted to travel and hopes to do so with her friend at some point during the year, though she doesn’t know where or when the trip will be. If Alexa funds the trip with credit, she is likely to spend months afterward rearranging her finances in order to pay down her credit card balance. If, instead, Alexa sets aside a fixed amount of her monthly wage to put toward travel spending, she will have a head start on funding her travels, even if she does not have a precise idea in advance of how much the trip will cost.
Each month, Alexa will encounter many opportunities to deviate from her plan. But if traveling is what she enjoys most, she can remind herself why she is setting the money aside and avoid temptation. If she wants the fullest experience on her trip, Alexa should not let short-term inclinations blind her to her long-term goal, an attitude necessary for success in the other facets of personal finance too.
Alexa does not need to completely eliminate other nonessential spending habits, but if she funds her travel aspirations with a small portion of each paycheck – what some planners call “paying herself first” – she will consciously be putting money towards her goal. This process can help shift her mindset, allowing her to view money primarily as a means of fulfilling her most important ambitions. Structuring spending and saving in advance also protects Alexa from social pressures and other impulses that can lead to her overspending.
Once Alexa has the hang of saving toward a goal, she can segment her assets into different accounts that correspond with her various desires. Eventually, the aggregation of these accounts will reflect her identity, which means her money will be working for Alexa, rather than the other way around. By organizing her spending with specific goals in mind, Alexa can ensure that each dollar she earns is going towards important aspects of her life. At the same time, she will no longer have to guess whether she can afford an experience or item that she wants.
I have not said anything about Alexa’s income or assets, or about any of her goals beyond travel, which means I cannot suggest how many goals she should pursue or how much of her income she should devote to each. But I can confidently say that Alexa, or anyone in her demographic, should premeditate spending so that it aligns with that person’s interests and objectives.
It is common for young professionals to worry that they won’t have enough money to accomplish their goals. But at this stage, you have the opportunity to form the foundational habits that will navigate you away from common faults that can undermine your financial footing. Few people build lasting wealth sporadically or quickly, but rather through small, consistent actions over time. Budgeting wisely can steer your behavior in ways that allow you to pursue your personal passions while building wealth to meet your long-term goals.