Lowkey basic.

For anyone who is looking to get their finances in order, budgeting, or what we refer to as a cash flow analysis is the foundation upon which all of personal finance is built on. This may seem simple, yet many people don’t take the time to understand their monthly expenditures. For anyone who is just beginning their professional career, this aspect of personal finance can be crucial over the long term. Young professionals are seeing monumental change as they transition from their college lifestyle to starting their first jobs. This serves as the perfect time to begin monitoring their monthly cash flows.  

Young professionals can jumpstart their financial future by starting with the basics. For one, they have a great opportunity to avoid lifestyle creep. Lifestyle creep is a common term in the planning industry, essentially lifestyle creep is allowing for income increases to support increased consumption. Given young professionals are coming right out of college, their idea of what seems comfortable is likely at the lowest point it will be compared to their future idea of what comfortable means to them. This is a massive opportunity for young professionals to identify any free cash flow in their budgets. Once that amount has been identified, they can decide where it may serve them best.

By monitoring monthly cash flows and reconciling any free cash (money left over after spending), young professionals are now faced with what we refer to as their first ‘champagne problem.’ They are making more money than they need to cover their monthly expenses leaving them with extra cash. The question at this point is what to do with this cash! There is a hierarchy of where this money should be allocated. The first item on that checklist is a cash reserve. Some refer to it as an emergency fund, however, this term carries a negative connotation. In my opinion, it suggests that the funds cannot be used for opportunity. When opportunity arises, having a robust cash reserve allows young professionals to capitalize without having to create liquidity through other means, such as selling their investments.

Over the past 3 years, the only thing that has been a constant is instability. Whether that be in financial markets, job markets, or inflation. Having a comfortable amount saved as cash is a cornerstone of financial planning. This is the first of many examples in which personal finance reverts to the basics of a cash flow analysis. Understanding what your expenses look like gives young professionals a target for what they should maintain as their cash reserve. Usually, people should aim for between 3- and 9-months’ worth of expenses. Ultimately, this amount can vary depending on the variability of compensation, what line of work you’re in, or how stable you feel in your current employment.

From here, the champagne problems continue to grow, however, young professionals must understand the value of knowing their monthly expenses so they can identify what amount of money makes them feel comfortable. It is upon this foundation that young professionals will begin their financial journey. Starting your career on the right foot financially can have benefits as small as feeling financially secure and as great as achieving retirement at an earlier age.

PS: Life is not lived within the walls of an Excel sheet. I totally get it. No one wants to go take notes on each and every purchase they make. If you’re straight out of college, just moved to a new city, or are transitioning from one job to another, tracking your expenses is going to take some time. Humans are creatures of habit, and our habits take time to form when we are going through major changes. Give yourself some time and leniency when it comes to tracking these items. Once you have a good grasp on what you need to do the things you want, then you can focus on directing any excess cash flow toward other goals or opportunities.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!