Your priorities affect your lifestyle and net worth

When it comes to making money and living well, we all have different priorities. Some people choose to spend a great deal of money on their family while others choose to live a fancier lifestyle as a single person or invest for their future. Since you can’t rely a huge raise at your job or a large influx of cash overnight, you have to prioritize spending money on the things that are most important to you. The choices you make have a huge impact on your lifestyle and net worth. For example:

If you prioritize living by yourself in the city… realize that this simple desire is considered a luxury. Many people want to live in the city close to various entertainment options and nice restaurants. They value having their own personal space and want the freedom to come and go as they please. Since this desire is so common, the demand for one-bedroom apartments in the city is high. Because demand is high, the prices are high. In my current city of Atlanta, a modern one-bedroom apartment in the city can cost around $1500 a month, if not more. Paying $1500 a month in rent may require a big sacrifice. It likely means that you cannot save or invest as much money as you otherwise would each month.

If you prioritize investing money for retirement… realize that doing so means the paycheck deposited into your account each month will be lower than it otherwise would. For a person making around $60,000 per year, who plans to allocate at least 10% of their income for retirement and building wealth, their monthly take-home pay will decrease by about $500 per month.  For people who are already on a tight budget, getting $500 less each month may be a little too much to handle. For other people, the $500 per month is doable and they like knowing they are building their net worth and will be able to retire with enough money in the bank when they please. Investing money in retirement accounts is vital since it allows you to build wealth in a tax-efficient way but doing so may require you to live below your means. You may have to decrease monthly bills by opting to live with a roommate, travel less, or drive a more affordable care.

If you prioritize living a nice lifestyle (with fancy cars, good food, and lots of spare cash to spend) … realize this costs a lot of money. Choosing to live in a nice apartment or home will increase your monthly mortgage (or rent) each month. Choosing to lease or purchase a luxury vehicle may cause you to have a car payment that is well over $500 per month. Having spare cash to spend on concert tickets, frequent restaurant outings, and weekend bars can cost you hundreds of extra dollars per month as well. Although you have the freedom to live that lifestyle, understand that doing so may prevent you from being able to invest money for retirement. It may also preclude you from saving money in an emergency fund or being able to go on vacations without getting into debt.

If you prioritize giving money away… realize this may require you to make a sacrifice in another area of your life. As a Christian, I tithe. This means I give away 10% of my income each month. Because I give away 10%, I have 10% less money to invest, spend on housing, or use to save for a future vacation or wedding. To make up for this “loss,” I lived way below my means and shared an apartment with a roommate for 2 years until I was able to increase my income. Giving away money may be an important religious tenant for you as well. If so, think about how you can fit this financial priority into your current lifestyle. 

If you prioritize saving money (for a nice vacation, future wedding, or house down payment) … realize this may require you to live in a cheaper apartment, invest a little less towards retirement, or be more frugal in your disposable spending. Perhaps you have a goal of saving $5,000 a year to finance a large international vacation and build up your emergency fund? This may require you to save an extra $400 a month. This may require you to turn down a few happy hour invites or forgo a few music concerts. If that doesn’t work and you can’t figure out where to get the extra $400, you may have to get a side hustle or part-time job that can net you the extra money you need. 

If you prioritize having a family (with children) … realize that although having a family with children can bring you joy, it may also add to your monthly expenses. With more people, you may need more space which means getting a larger apartment or house. Because there are more people, you will also have to spend more money on food. If you have small children, you may have to allot a certain amount to daycare. All of these added expenses can amount to thousands of dollars per month causing you live a more frugal lifestyle and decreasing the amount of money you can allot to other things like travel, entertainment, and investing.

My point? You may have to pick and choose what to spend money on. Until you increase your income, you won’t be able to do it all. Part of being a fiscally responsible young professional means that you have to prioritize your desires and figure out what’s most important to you.

• Would you rather build wealth as quickly as possible by investing a large chunk of money for retirement or do you want your own personal space via a luxury one-bedroom apartment?

• Would you rather avoid going into debt by saving up for a fancy vacation and unexpected expenses ahead of time or do you want to spend your disposable income right now by consuming expensive food, nice cars, and city entertainment?

Part of being an adult means you have the freedom to make your own decisions and spend money how you see fit. However, you can’t have it all, and neither can I. What are your priorities? What will you choose?

5 Financial Mistakes To Avoid As A Young Professional

As working professionals we must be exemplary at our jobs and diligent with our finances. Unfortunately, the later goal is easier said than done. Although we may work hard at our jobs, managing our money in the most prudent way can take extra work and have negative effects if we fail to handle it properly, especially during times of an economic recession like we have today. Here are 5 financial mistakes to avoid as a young professional:

1. Overspending. As young professionals with a decent salary, we can be very tempted to overspend. Many of us may not have children or family members who rely on our incomes, so we may purchase numerous things we may not need with our discretionary (left over) income. Whether it’s new clothes, take-out food, weekly happy hours, or frequent travel, we may find ourselves spending a lot more than we anticipated at the end of each month. Although it’s acceptable to “treat ourselves” every now and then, we must make sure that we have set a budget on how much we want to spend each month and have a reliable way to track our expenses. The less we overspend the more money we have for other priorities like saving and investing.

2. Not saving enough money. If this pandemic has taught us anything, it’s that we should all have some money saved up. We never know when something unexpected will happen and it behooves us to have money available just in case our income drops or a large expense comes our way. Although we may be tempted to simply save whatever we don’t spend from each pay period, we should instead take a more proactive approach. Consider writing down how much money you’d like to save each month, then have that money automatically deducted from your checking account into a savings account. Saving money this way will ensure you meet your savings goal.  

3. Under-estimating our expenses. When I was younger and more financially immature, I seemed to always run low on funds at the end of each month. There were several times that I would hope and pray I had enough money in my checking account to cover my monthly bills. Don’t be like be, have a monthly budget and be as precise as you can when it comes to your monthly expenses. Oftentimes, we may know how much we spend on rent or electricity but we may underestimate or forget to save money for other expenses like car repairs, grocery bills, and transportation costs. Underestimating these items can give us a false sense of security and cause us to think we have more money to spend in our accounts than we actually do. Being more precise with our monthly expenses allows us to better account for how much money we can spend each month and ensures that all of our necessary expenses are covered, especially during this current pandemic where our disposable income may be different from normal.

4. Taking on too much debt. With today’s age it can be relatively easy to get access to a credit card, qualify for a car loan, or receive a student loan. Although there are many good uses of these items, we must not forget that they are still forms of debt. One of the biggest mistakes many young professionals make is taking on too much debt. We may graduate from college with tens of thousands of dollars in student loan debt. We may move to a new city and pay for expenses with a credit card. We may decide our current car is too old and opt for a lease or finance a newer ride altogether. We may even get married and decide to purchase home. All of these decisions may bring us joy but may also cause us to incur a lot of debt, which may make us financially vulnerable to changes in our income. If some unfortunate event happens and we are furloughed from our job or experience a decrease in our pay, it may be difficult for us to cover all of these debt payments. We are better protected financially when we refrain from incurring too much debt at once by vowing to pay off or pay down some of our debt before incurring more.

5. Having too much confidence in our investment abilities. As we start to mature and hang around other professionals in our work or social life, we may desire to build our net worth and start investing. Many of the advice we hear about investing requires us to pick which companies we want to invest in and purchase stock. Although there is nothing wrong with buying stocks, we must do so in a way that minimizes our risk. Unless you have a crystal ball to predict the future, it can be virtually impossible to predict  which stocks will increase in value over time (which make us money) and which may decrease over time (which may lose us money). Although we can try to speculate based on news events,  most of the “insider information” is known by wall street investors and active portfolio managers long before is it known by members of the public. Since we can’t guarantee that we’ll make accurate predictions regarding a stock’s future value its best to not have to choose. Many financially savvy people purchase index funds (a collection of many or all of the stocks available) since it spares us the burden of having to pick which investments will do well and which ones wont. Plus, if one company’s value goes down, we have so many other companies that can help cushion the blow and prevent us from losing too much money. Data from the past few decades show that index funds tend to outperform the majority of actively-managed funds, which virtually guarantees us a good profit on our money when we buy index funds. Try to avoid overestimating your own investment ability and consider purchasing index funds to minimize your risk.  

As a young professional, which financial mistakes have you avoided and which ones have been more difficult to bypass?

5 ways to ensure you’re financially protected against the unexpected

As we continue to advance in our careers, we must ensure that we have protected ourselves financially. If unexpected expenses, life events, or pandemics, come our way, we must make sure we have the financial means to cover our bills and take care of our families without worry. Here are 5 ways to protect yourself financially:

1. Keep your fixed expenses low. One of the first things you can do as you are getting your finances in order is keep your fixed expenses low. Fixed expenses are regular expenses (like your monthly rent or mortgage payment) that don’t vary much in price and occur each week or each month. Keeping these expenses low allows you to save and invest more money towards your future goals. It also gives you a cushion financially in case something unexpected arises. If you have the unfortunate luck of losing your job, undergoing financial hardship, or simply living through this current pandemic that has wrecked the economy and lowered your salary, it is much easier to adjust to the changes and make any necessary spending cuts if your fixed expenses are low. If your fixed expenses are high it is much harder to weather the storm and cover your bills during times of hardship. Keep your fixed expenses low.

2. Reduce (and eliminate) your debt. Along with decreasing your fixed expenses, you should also work to eliminate your debt. The sooner you pay off your credit card bills, car loans, and student loans the sooner you’ll be debt free and have less money from your paycheck going to these expenses. It’s much easier to adjust to a reduction in income or a financial hardship when you have fewer bills and expenses to cover. Plus, paying off your debt leaves more money in your pocket each month that you can use to save or invest for the future.

3. Insure yourself against catastrophe. As we’ve all seen during this pandemic, you can’t always predict when financial hardship will occur or how long it will last. Aside from keeping your expenses low and paying off your debts so that you are better able to handle any income changes or unexpected expenses, you should also make sure you’re insured. We can’t always predict when large expenses will occur and may need some assistance if they do occur. Just like all people need health insurance, all working people should also have disability insurance. You need disability insurance so that if you are injured, sick, or unable to work at your full capacity for a prolonged period of time, you can get money each month to cover your bills. People with a spouse, kids, or family members who depend on their income should also have life insurance so that if they pass away unexpectedly, their family members are covered.

4. Save money for unexpected emergencies. Although you can’t always predict when unexpected things will occur, you should prepare for this possibility so that you are ready if it does occur. Part of protecting yourself financially means having an emergency fund with enough cash to cover 3-6 months of expenses. It may take some time to save up this amount of money, but putting a certain percentage of each paycheck into a separate bank account for emergencies will ensure that you are protected financially. Many people who had emergency funds before the Coronavirus pandemic found themselves in a much better position to handle the economic impacts than those who did not have an emergency fund.

5. Make sure your retirement is funded and diversified. Another thing you can do to protect yourself financially is make sure that you have invested money for retirement in a way that increases your profits and decreases your risk. Many people who were not investing money toward retirement when they were young have fewer years to let compound interest work in their favor and may have to work even longer and save even more money to be able to retire after several decades in the workforce. Others have invested a great deal of money towards retirement but have done so in a way that makes them extremely vulnerable to changes in the real estate market or stock market. Both groups of people may be even more impacted than others during this current pandemic. The goal is to have your money invested in many different companies across a variety of industries (ideally through index mutual funds) so that you are in a good position to gain interest on your money overtime but better protected in an economic downturn.

My point? While none of us have a crystal ball to predict when unexpected things will occur, we can do the things above to protect ourselves if and when hardship arises.