Starting a new career in any field comes with many responsibilities. You need to learn how to perform new job tasks and develop good interpersonal skills to be successful. As you start bringing home a paycheck, managing your personal finances is equally important. As you read in Part 1, overlooking the importance of personal finances early on in life is a costly mistake. Many young professionals do not fully grasp the challenge nor are they fully prepared to tackle money issues immediately.
Regardless, you can get your personal finances in order by setting goals and following actionable steps to build a solid foundation of financial health and sustainability for years to come.
Get Ready for Tax Season
Taxes are an inevitable part of life as a young professional. Each paycheck, a portion of your earnings are siphoned off from state and federal income taxes. Figuring out how much you will pay in taxes can be difficult at the beginning of your career. It all boils down to how much you earn and what tax-reducing strategies you put in place.
You don’t need to learn the entire tax code to understand your tax picture better, but it is helpful to know about tax withholding, tax deductions, tax credits, and tax return filing. The Internal Revenue Service (IRS) provides tax resources where you can read up on how taxes impact your financial life. You may also enlist the help of a financial advisor or different tax software to help breakdown the complexities of taxes for you.
Start Investing in a 401k or Other Retirement Fund
Another step toward financial health early in your working life relates to saving and investing for the long-term. For many people, retiring from the workforce is the ultimate goal. This is because retirement requires a significant amount of savings that ultimately replaces a paycheck. It’s meant to last for several years once you leave your job.
As a young professional, understanding the importance of saving toward retirement is crucial. The longer you have to save and invest, the more ability your money has to compound and grow over time. To get started, you may want to consider your employer-sponsored retirement plan options, like a 401(k) or 403(b).
If this type of plan is not offered to you, there are alternatives through individual retirement accounts, known as IRAs. Determining the type of account that works best for you isn’t easy, how much you should be saving is not always clear cut. Financial professionals exist to help you work through these questions and come up with a realistic plan.
Establish a Plan to Buy a Home
While purchasing a home isn’t a financial goal for everyone, it is a common one, especially among young professionals. Homeownership comes with a handful of benefits, including the ability to build wealth over time. However, if you have a desire to be a homeowner in the future, you have to come up with a plan to make it a reality. A home purchase often requires a down payment, ranging from 3.5% to 20% of the price of the house. Depending on where you plan to buy, that can be a hefty amount to save!
Creating a plan for a major purchase like a home requires a clear understanding of what’s coming in versus what’s going out each month. Take the time to evaluate your expenses and create a spending budget for yourself early in the process. Finding inexpensive housing for rent can help while you save for your home purchase, as can cutting out the extra costs like dining out or entertainment. Once you have a budget in place, you’ll know what you can afford to set aside for a future down payment on a home.
Following this checklist will set you up for financial success early in your career, and lay the groundwork for being able to achieve the financial goals you have for the future.
Andrew Rombach is a Content Associate for LendEDU – a website that helps consumers and small business owners with their finances. When he’s not working, you can find Andrew hiking, hanging with his cat Colby, or edge guarding in Super Smash Bros.