Mastering Your Finances
In the coach compartment on a flight from YYZ to JFK I found myself sitting next to a well-clad individual that was busy scribbling away in his journal. Through small talk I managed to size him up as a wealthy individual that ran multiple successful businesses. As the conversation progressed I casually asked why he didn’t buy a business-class ticket in spite of him being able to afford one. His response to that simple question changed the way I thought about money and income.
Once you’ve survived the wrath of university, it’s time to start your journey in the field you’ve chosen. A job with a stable income lends us the luxury of having a clear idea of how much income we can expect on a bi-monthly basis, which makes planning for expenses easier. My goal through this article is to provide some tips & suggestions on habits that one can start to develop in order to master your finances and hopefully achieve financial freedom, a concept often confused with riches. One achieves financial freedom when passive income generated successfully pays all the bills & fixed expenses; the income earned from the full-time job/business is freed up to be utilized at the owner’s discretion. Developing good habits at a young age will help in achieving your financial goals sooner.
I believe that individuals in their early to mid twenties should have a rough idea about their inflows & outflows over the next year or so. Every dollar you earn doesn’t need to be budgeted for but setting limits should help create a guideline to reduce impulsive purchases and aid in developed a disciplined spending schedule. Using a monthly spreadsheet or mobile applications that make this process more interactive is a great place to start.
Most young professionals wish to rent their own place right after they land their first full-time job. While there are benefits to living on your own, it can amount to a significant percentage of your paycheck. Evidence suggests that an average person spends about 33% of their income on housing which seems high if you put that money into perspective. On average $800 a month amounts to $9,600 a year and close to $29,000 in three years without considering your investment returns. Starting out, $29,000 amounts to about a 6 month paid vacation. Stretching out the time between starting work and living by yourself by exploring options such as living with your family or with a roommate can help you run into that small fortune in your mid twenties. For the others that do not have the option of having family close to work, finding a middle ground between saving and living luxuriously makes for a sound financial decision.
Warren Buffet, the world’s most successful investor, advocates passive investing as the smartest way for novice investors to start growing wealth at a young age. Historically, investing in benchmarks such as the S&P 500 has proven to be more fruitful than most mutual funds because of the fee structure. Therefore disciplined investing in benchmarks is advised. The best way for you to set it up is to budget it as an expense and setup systems where a certain percentage of your income is automatically transferred into your investing account. Disciplined investing, even in times of financial crises’ has outperformed most mutual funds and other managed funds over the long-term because of the high performance and incentive fees. This will help you discover the benefits of compound interest, which is often referred to as the 8th wonder of the world. Setting aside 8-12% of your after-tax income for this purpose and investing it every month/quarter would help you realize significant return over the long term.
As a young professional in today’s world, it is essential to start growing your network. Investing in attending conferences and hosting strategic meet-ups can go a long way. It’s the harder option as opposed to hanging out with your close friends every weekend after a long and exhausting workweek. This sacrifice will prove to be beneficial as you progress in your profession and have your network contribute to a significant percent of your net worth. Today most of the jobs aren’t posted and following traditional wisdom in ‘paying your dues and climbing the corporate ladder’ doesn’t necessarily hold true. One has to exploit every possible opportunity at their disposal and the best way to improve your chances at discovering them is to meet the people that create them!
You will earn the highest rate of return by investing in yourself especially at a younger age when your grasping power is high. Spending your time & efforts learning and upgrading yourself by taking external exams or attending seminars on topics that interest you will help expand your horizons and serve as another way to grow your network and meet like-minded people. What you can do today is find courses on ways you can improve your existing skillset and schedule time in your day to work on improving them.
Millennials thrive in the world of instant gratification; therefore delaying prospective purchases and focusing on building wealth will give you a competitive edge when compared to individuals that earn similar salaries. Maybe that $2000 suit or that Louis Vuitton bag you’ve been eyeing for a while can wait a few years up until you are closer to reaching your financial goals! After all giving up on consumption at a younger age is only so that you can enjoy it in the future when it makes up an even smaller percentage of your net income.
“If you buy things you don’t need, soon you will have to sell things you need”. If there is one thing you should take away from this article & Warren Buffet’s quote on spending is that upgrading your lifestyle is extremely easy but downgrading it in tough times will pose for a great challenge especially if you plan on having people dependent on your income in the near future.
For those of you that are curious about the well-clad individual’s response, he simply told me that his luxuries were only financed through passive income and he hadn’t reached that stage in his financial journey!
Writer: Umang Bengali
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