Budgeting
Creating a personal budget is the first step towards establishing financial security. Budgeting is a necessity for managing your income and spending, and isn't just an added bonus. A person's budget will vary throughout their lifetime and depend on their income, cost of living, dependents, and a myriad of other factors. However, there will always be portions of income designated to necessary costs of living, savings, and voluntary spending. Necessities include rent, groceries, gas, and other day-to-day essentials. Savings is income set aside for a later date, and Voluntary Spending is for anything you want but don't need, such as a new pair of headphones or a day at the mall.
There are many resources that can can help you establish the right proportions for all three, and a few of these are included below. Regardless of the size of your budget, make sure it is both on a short timescale and over a longer period of time. You should have an overall goal of how you want to budget over the next year to five years out in order to plan for bigger purchases, such as a car or a house. However, you should then develop a short term budget, whether by paycheck, month, or whatever fits your needs. That way you can regularly check your spending habits to make sure they are aligning with your budget. Once you have established your long and short-term budgets, make sure to check in on them regularly, and to adapt to changes in your income, job, or other life forces.
NerdWallet is an all-encompassing personal finance website that has lots of extremely pertinent information. Their information regarding budgeting on this page provides both an overview of beginner budgeting and a budget calculation tool that it will calculate when you add your monthly income.
It is important to note that most people do not maintain a regimented, mature personal budget. As a result, the powerful social pressure to spend more than is within your financial means can be the undoing of a well-intended, carefully crafted budget. If you are able to remain committed to your budget despite these social pressures to give in to frivolous spending, your work will pay dividends in the years to come.
There are many resources that can can help you establish the right proportions for all three, and a few of these are included below. Regardless of the size of your budget, make sure it is both on a short timescale and over a longer period of time. You should have an overall goal of how you want to budget over the next year to five years out in order to plan for bigger purchases, such as a car or a house. However, you should then develop a short term budget, whether by paycheck, month, or whatever fits your needs. That way you can regularly check your spending habits to make sure they are aligning with your budget. Once you have established your long and short-term budgets, make sure to check in on them regularly, and to adapt to changes in your income, job, or other life forces.
NerdWallet is an all-encompassing personal finance website that has lots of extremely pertinent information. Their information regarding budgeting on this page provides both an overview of beginner budgeting and a budget calculation tool that it will calculate when you add your monthly income.
It is important to note that most people do not maintain a regimented, mature personal budget. As a result, the powerful social pressure to spend more than is within your financial means can be the undoing of a well-intended, carefully crafted budget. If you are able to remain committed to your budget despite these social pressures to give in to frivolous spending, your work will pay dividends in the years to come.
Saving
One of the most important parts of a budget is the portion set aside to be saved for later. Just as a budget should be broken down into parts (necessities, wants, and savings), so should the Savings portion be further compartmentalized. The first of these sections is set aside for emergencies, and is often referred to as the 'rainy day fund'. When your car breaks down unexpectedly and costs $1500 to fix or you break your arm and receive a large medical bill, where will this money come from? The purpose of emergency cash savings is to be prepared for unexpected financial strains such as these so that you do not have to take on unnecessary debt, which can only be harmful.
Secondly, a portion of your Savings should also remain as cash, but you should consider 'untouchable'. This doesn't have to be an enormous fund, but is there in the back of your mind reassuring you that whatever happens, you will always have that money to fall back on. It may be helpful to open a separate bank savings account for this fund to ensure that it is not touched.
As time goes on you will begin to make larger purchases that cannot simply come out of one or two paychecks. You may want to buy a newer car, or work towards purchasing a home instead of renting. Therefore, the third portion of your Savings should be dedicated to preparing for these large purchases. Money should be set aside from each paycheck towards preparing to make a down payment on a house or for any other large purchase that is part of your long-term budget goal.
Secondly, a portion of your Savings should also remain as cash, but you should consider 'untouchable'. This doesn't have to be an enormous fund, but is there in the back of your mind reassuring you that whatever happens, you will always have that money to fall back on. It may be helpful to open a separate bank savings account for this fund to ensure that it is not touched.
As time goes on you will begin to make larger purchases that cannot simply come out of one or two paychecks. You may want to buy a newer car, or work towards purchasing a home instead of renting. Therefore, the third portion of your Savings should be dedicated to preparing for these large purchases. Money should be set aside from each paycheck towards preparing to make a down payment on a house or for any other large purchase that is part of your long-term budget goal.
Investing
The word investing on its own is a very loaded and charged term. It is intimidating, but it doesn't have to be. Most investing that most people do in their lives is for the purpose of retirement. The purpose of retirement investment accounts deserves a section unto itself, and so is included in the retirement section below. However, there is also the option to invest your income in the stock market outside of your retirement contributions. In recent years this has become increasingly more common to do as individual, online brokerage platforms have risen dramatically in popularity.
If you desire to pursue one of these personal brokerage account platforms, do your research beforehand. There is far too much information to include here. The money you decide to spend on individual stocks should come out of the Voluntary Spending portion of your budget - this can be risky spending and is therefore neither necessary spending or a part of savings.
Once you have accumulated some savings, however, you may decide that you want that money to grow on its own. Your savings can do this by being invested in the stock market so that they grow as the overall economy grows.
If you desire to pursue one of these personal brokerage account platforms, do your research beforehand. There is far too much information to include here. The money you decide to spend on individual stocks should come out of the Voluntary Spending portion of your budget - this can be risky spending and is therefore neither necessary spending or a part of savings.
Once you have accumulated some savings, however, you may decide that you want that money to grow on its own. Your savings can do this by being invested in the stock market so that they grow as the overall economy grows.
Retirement
Contrary to individual investing, it is never too early to start planning for retirement. There are multiple ways to begin saving for retirement besides simply accumulating cash in a savings account, and some of the most popular options are outlined below.
Individual Retirement Account (IRA)
The most accessible way to begin investing in your retirement is through an Individual Retirement Account, or IRA. Once 18, an individual can open an IRA at any time, in either the Traditional IRA format or as a Roth IRA. Both Traditional and Roth IRA options operate on the following basis. You add money into your IRA at whatever rate you can afford and this money can be invested through mutual funds, ETFs, stocks, and bonds. Once added to your account, your money is expected to remain there until you retire. More specifically, you will incur a penalty of around 10% if you withdraw any money before you turn 59.5 years old. While preserving your savings for your retirement, these accounts also posses tax benefits that make them even more appealing, and make them unique from each other.
Traditional IRA
Roth IRA
Here are Investopedia and Nerdwallet articles to explain more.
401k
The 401k account is the most popular employer-sponsored retirement account, so it is very likely you will encounter this as an option in your life at some point. Similar to the IRAs described above, these are accounts that you contribute to regularly (money is actually pre-deducted from your paycheck) and which grows through investment. Similar to other IRAs, early-withdraw fees apply here too. There are two main differences between the 401k and the IRAs above. Firstly, most 401k accounts allow for higher annual contributions, meaning you can choose to set aside a greater portion of your paycheck. Secondly and most appealing, often times your employer will match every contribution you make to your 401k, meaning you are able to double the benefit of the account.
If your employer doesn't offer you the option of a 401k, refer back to the IRAs above!
Here are Investopedia and Nerdwallet articles to explain more.
Pensions
Many government agencies and some other organizations offer pensions. Pensions are yet another retirement account that pays monthly sums to an individual upon their retirement. They differ from the options above because the full substance of the pension (meaning all of the money in the pension account) is provided by the employer. Furthermore, all of the decisions regarding the investment of a pension are also made solely by the employer, so there is very little that an employee has to consider when offered a pension. These are very sought after options!
Individual Retirement Account (IRA)
The most accessible way to begin investing in your retirement is through an Individual Retirement Account, or IRA. Once 18, an individual can open an IRA at any time, in either the Traditional IRA format or as a Roth IRA. Both Traditional and Roth IRA options operate on the following basis. You add money into your IRA at whatever rate you can afford and this money can be invested through mutual funds, ETFs, stocks, and bonds. Once added to your account, your money is expected to remain there until you retire. More specifically, you will incur a penalty of around 10% if you withdraw any money before you turn 59.5 years old. While preserving your savings for your retirement, these accounts also posses tax benefits that make them even more appealing, and make them unique from each other.
Traditional IRA
- The Traditional IRA has tax benefits at the time when you add funds to the account. Every dollar, up to a maximum annual amount, that you add to a Traditional IRA can be deducted from your taxable income that year. If you make $50,000 this year and put $3000 of it into your Traditional IRA, you will only be taxed on $47,000 of your $50,000. However, when you are retired and begin withdrawing money from your account, you will be taxed for doing so at that time.
Roth IRA
- A Roth IRA is in most ways the reverse of a Traditional IRA. Your investments to a Roth IRA are still taxed as part of your income that year, but the amount that your account grows as your money remains invested is not taxed. Neither are the withdraws you make once you are of retirement age.
Here are Investopedia and Nerdwallet articles to explain more.
401k
The 401k account is the most popular employer-sponsored retirement account, so it is very likely you will encounter this as an option in your life at some point. Similar to the IRAs described above, these are accounts that you contribute to regularly (money is actually pre-deducted from your paycheck) and which grows through investment. Similar to other IRAs, early-withdraw fees apply here too. There are two main differences between the 401k and the IRAs above. Firstly, most 401k accounts allow for higher annual contributions, meaning you can choose to set aside a greater portion of your paycheck. Secondly and most appealing, often times your employer will match every contribution you make to your 401k, meaning you are able to double the benefit of the account.
If your employer doesn't offer you the option of a 401k, refer back to the IRAs above!
Here are Investopedia and Nerdwallet articles to explain more.
Pensions
Many government agencies and some other organizations offer pensions. Pensions are yet another retirement account that pays monthly sums to an individual upon their retirement. They differ from the options above because the full substance of the pension (meaning all of the money in the pension account) is provided by the employer. Furthermore, all of the decisions regarding the investment of a pension are also made solely by the employer, so there is very little that an employee has to consider when offered a pension. These are very sought after options!