Kudos! After several years of extremely working hard to get that college degree, your labor has finally paid off.
You march on to that stage with your head held up high, feeling an enormous sense of pride and fulfillment. You can hear your family and friends in the audience cheering you on while receiving that diploma. These are exciting times for you. Enjoy every moment of it but don’t forget that after the partying, taking “selfies” with your crush and having a well-deserved time off from studying, your real life lessons begin. You are about to transition to adulthood and get to experience the joy and pain of being independent for the first time in your life.
Now that you are ready to embark on your quest for employment, it is also the perfect time for you to learn some important money principles that I wish somebody taught me right after graduation. You see, the way you manage your finances, especially in the next few years after school, will provide you the most crucial financial lessons for the rest of your life. Now is the time to develop the right money mindset because chances are, the way you’ll treat money when you’re starting out will help form your money habits in the future. And the discipline to develop good money habits will heavily dictate the outcome of your financial life.
Principle #1: It is not how much you make but how much you keep that counts.
Probably, most of you will be receiving an entry-level salary and might consider postponing saving until you get promoted. Don’t! Remember this; if you cannot save a penny from a little salary, chances are you cannot also save a thousand from a huge salary. You are likely to end up finding unlimited excuses not to save if you do not begin now. The size of your paycheck should not be the ultimate driving force to start saving. Begin saving consistently from your salary no matter how small the amount is and be surprised how it develops into a good habit. Do you know that if you save P50 a day and invest it at the end of each month for the next 19 years in an investment instrument that earns a compounding interest rate of 10 percent annually, you’ll end up about a million pesos richer before you reach your 40th birthday?
Principle #2: Financial success lies in the balance between your today and your tomorrow.
Soon you’ll face a decision on how to spend your hard-earned money. You will be in a state of euphoria as you hold your first paycheck. Money from your own labor, not from mommy and daddy – you’ll get excited and want to treat everyone in your household to celebrate. Go ahead and enjoy the fruits of your first crack at employment.
But after all the excitement and celebration, sit down and try preparing a realistic budget plan to which you can commit. I know budgeting sounds restrictive but it shouldn’t be. Think of it as a plan on where to spend your money.
Divide your income into three major categories: NECESSITIES FUND, FUTURE SELF FUND and PRESENT SELF FUND. “Necessities Fund” is the part of your income that you may spend for your living expenses, such as food, transportation, rent and others. Setting aside 60 percent of your income for necessities is a good number to start with, so you’ll have 40 percent of your income left for allocation between your future and present funds.
“Future Self Fund” is your income allocation to building a bright future for yourself. This will be your saving and investment account to build your emergency fund, retirement, business capital, etc. Lastly, a part of your income should go to “Present Self Fund,” this is your indulgence or feel-good fund. Spend it anyway you want to – be it on shopping, traveling, partying, etc.
See, budgeting is not about depriving yourself. It is all about taking care of your today and tomorrow in a way that you put your hard-earned money on things that really matter to you.
Principle #3: Debt is bondage.
Having a credit card might look cool and hip but reckless usage of it will instantly put your whole financial life at risk. Avoid consumer debts at this stage in your life, especially now that you’re just starting out to navigate your finances. Having one will have its own time and place in your life, but not today. It might encourage you to recklessly spend and go broke soon after.
Principle #4: “Now” is the best time to invest.
According to financial author Ed Slott, “Time is the greatest money-making asset an individual can possess.” When your folks say time is money, they are correct! Do not wait until you are in your 30s, 40s or 50s before you start investing. An advantage you have over us and your parents is time. That’s one luxury that you should not ignore and out of which you should make the most. Learn about stock investing, mutual fund and UITF. These are great investment instruments to use as you begin your investment journey.
Indeed, these are exciting times for you, young graduates. Embrace your next chapter with hope and enthusiasm. Never stop learning and be a positive change-maker for our nation.
Congratulations and the best of luck!
Jesi Bondoc is a registered financial planner of RFP Philippines. He is the director of My Wealth MD and Partners, Inc., specializing in investment advisory. You can send your money questions to firstname.lastname@example.org and they’ll be answered in his next article. For more info about Registered Financial Planner program, e-mail to email@example.com or text <name><e-mail> <RFP> at 0917-9689774.