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So college is behind you and the excitement of your new career is calling you to that ideal first job. It’s time to get paid and you get your first paycheck and wonder, where exactly to start. Then the daunting task of wondering which of the bills to pay first hits you. You question . . .“should I enroll in this 401(k) thing, should I put some in my savings, do I pay down my student loans as much as possible?” which leaves you staring at your paycheck with nothing more than questions. The answer is, “yes” to many of those questions. Starting down the road of having a well-rounded financial plan requires balance in many areas and by following these simple steps and mastering your monthly cash flow you will be on your way to a independent financial future.

How much to save:
If you are wondering exactly how much a person should keep in a ‘liquid emergency’ reserve fund a good rule of thumb is to take your monthly take home and multiply that number by 3 to 6 times. I would say that having 6 times is excessive, but for some people this is most appropriate. So after analyzing your monthly expenses you realize that this is going to take quite a bit of time to build up, but if you continue to exercise financial restraint and steer clear of the newest line of Louis Vuitton handbags (or at least initially) it will become second nature to you. Don’t worry about how much is needed as long as you are making a substantial effort on a monthly basis to build up your reserves, it will happen soon enough.

Of course, you don’t want to stop paying on your other obligations so this is where the balance comes in. A well rounded financial plan functions just like a balanced diet. A few of each grouping will go a long way over time to your continued overall financial health.

Student Loan Payments
If you are saddled with a decent amount of student loans I find people asking, ‘which of the student loan repayment plans should I take out?’ I often explain that there are only a few ‘good’ types of debt and having student loans is one of them, and depending on your income the interest may be deductible. (Please consult your tax advisor as the deductibility depends on your current tax scenario) Now, I am not saying you should opt for the 30 year loan repayment plan, but lock in the repayment plan that gives you flexibility and a good set repayment schedule especially if the rate is FIXED and LOW. If you have a variable rate you are going to want to ATTACK these hardest, but don’t lock in a high required payment. It’s got to work with your monthly budget, and we will build a discipline of savings and debt reduction at the same time by using my monthly Income/Outflow Analysis, which I am linking for your use.

Categorizing your expenses
Here is how this works; add up your monthly take home pay and put that on the top left line, then work down the right hand side looking at your TRUE monthly expenses, so for example . . . say I go out with the guys on Thursday or Friday Nights (or sometimes both) and we do dinner and drinks, which we all know gets to be way too expensive to do on a regular basis, but these are TWO SEPARATE categories as if we go to dinner that’s DINING OUT, but then we leave and go to another place to meet up with our lady friends and have a few adult beverages that is another category for GENERAL ENTERTAINMENT. This becomes very confusing and also an accounting nightmare to track UNLESS . . . you keep all of your receipts. Keeping your receipts does two things, it allows you to know what you spent, and reminds you of how much you spent when you blew the budget while having a few tee many martoonies. Even the best of us have done this in one way or another and if we exhibit moderation with whatever it is we spend our monies on we will be able to keep our finances in order and there will be plenty of money.

Savings first!
Remember the idea is to look at savings FIRST, not from what’s left over. So, after we added up all of the expenses we then subtract these from our monthly income and guess what we get our ‘total discretionary monthly income.’ Hopefully this amount is positive and if not . . . THIS IS THE REASON YOU HAVE CREDIT CARD DEBT! If negative, take some time and review the starred areas. These are the areas that you are overdoing it in, and the funny thing is you knew it before you even completed this form. I have heard that thousands of times in working with my clients and this seems to be the common thought here. So here is a bit of advice for those who have these out of control areas . . . figure out an amount each month that you feel allows you to both satisfy your needs in this area, but is not overindulgent and then make one envelope for each of the areas and label it. At the beginning of each month put the amount you have allowed yourself in these areas (again that doesn’t blow the budget) and when it’s gone . . . THAT’S IT! No more spending in this area. Try this technique and in about three months you will find yourself weaned down to a livable pace on spending here.

Now for those of us that have a big positive each month, do the following: go to the bank and open up a savings account. Have the bank take 75%-80% of this amount monthly and put it into this account. For example if my take home is $3,600.00 per month and my total expenses are $2,600.00 my discretionary income is $1,000.00. I will go to the bank, setup a savings account and have them transfer $800.00 per month from my checking over to my savings until I have accumulated roughly $10,800.00 (monthly take home X 3) in savings that I have not touched. Now, if I have credit card debts, or high rate student loans it is completely acceptable to keep going until this amount reaches $21,600.00, but once it hits this amount we are going to hit the ‘purge’ valve and cut a check each 6 months for $10,800.00 to the highest interest card or student loan holder and say goodbye to high interest loans.

I have successfully used this discipline effectively with many clients over the years. By coupling this with a disciplined systematic investment plan you can accumulate FIRST GENERATION wealth. Stay tuned and in my next series we will discuss building a solid financial foundation and how asset allocation works to your advantage.

Kenneth J. Wolfe, CRPS®
Financial Advisor
Raymond James Financial Services, Inc
Member FINRA/SIPC
500 Elm Grove Rd. Suite 108
Elm Grove, WI 53122
262-782-5900 X012