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Financial Fitness For The Young Professional

Updated on September 6, 2015

As a representative of a prestigious firm, you need to look and act the part. Your salary really only stretches that far. What are your options?

· Rent Expenditure

Even though your new salary mean you can finally move into one of those classy high-rises, try keeping your rental expenditure to less than a third of your income. Once you’ve found a place that suits both your needs and budget, you may want to get someone responsible to share the rental expense, as you want to free up as much of your income as possible.

Taking on a rental expenditure of more than 30% of your income will put you under severe pressure as you will have a costly lifestyle to maintain. This will inevitably lead to incurring unnecessary debt, which should be avoided at all costs.

· Vehicle Instalments

Taking public transport may not always be viable, especially if you need to travel a lot to do consultations. Saving up for a vehicle is the best way to approach a purchase, however, if you need to have the car immediately to satisfy your job requirements, you may want to steer clear of brand new models. Rather opt for a good quality second-hand car as the depreciation in vehicles very rarely justify a new purchase. Once you’ve settled on the vehicle type you want, only purchase it from a reputable dealership.

A deposit really goes a long way in terms of lowering your instalments. If you are unable to afford the instalments over a 3-year period, you can’t afford the vehicle. Should you wish to increase the tenure of the loan, the interest that is charged just makes the purchase so much more expensive in the long run. Rather look for something that is a little more cost effective. The instalments shouldn’t be more than 25% of your income.

If you happen to be on the road a lot, purchasing a gas guzzler will end up costing you a fortune in fuel. Bear in mind that you will also need to service your vehicle regularly to ensure it remains safe to drive.

· Insurances

This is the time where you need to start thinking about getting the various types of insurances in place. Even though they may seem like grudge purchases, the moment a risk incident takes place and there is no insurance, you stand the chance of suffering significant financial loss. One of the most important relationships you will form during this phase in your life, will be with a financial adviser. They will guide you through the various options. It is important that they do a thorough needs analysis to ensure that all the various risk areas have been covered.

· Budgeting And Saving

Earning a fixed monthly income will make it a bit easier to set your budget. If you happen to work on commission, it is very important that you try to have as few monthly commitments as possible in case you happen to have a few bad months. Setting aside some money for a rainy day is very important. 10% is usually a good amount to set aside, with a further 10% for ad-hoc savings like a car deposit or a holiday.

If you happen to live right on the edge of your budget, housing will eat 30% of your income, a vehicle 25% and savings a further 20% should you wish to save for other items as well. This leaves you with 25% to clothe yourself, feed yourself and do all the other little odds and ends that you will need every month. This can cause quite a bit of financial pressure which will inevitably lead to loans and credit cards. The remaining 25% will in all likelihood go into loan and credit card instalments, making it difficult to ever get out of the debt cycle. Instead of getting better with time, responsibilities will start piling up and cost of living will increase. It is therefore very important to not view guidelines as targets, but rather as the absolute maximum before you starve.

When viewed this way, you will most likely want to cut that housing exposure down by at least 10% and halving your rent further by bringing on board a tenant, will make it a lot easier. Ensure that you are able to cover the rent should the other tenant abscond or move on, unless the agreement is directly with the landlord.

Saving up for that vehicle suddenly seems a whole lot more attractive than paying a monthly instalment. Bear in mind that with vehicles and properties, there are added costs that are often overlooked when setting up your first budget. This will include utilities, maintenance, fuel, insurances and taxes.

· Retirement

If you haven’t already started saving towards your retirement, this is something you will want to get started as soon as possible. The only thing people tend to regret when reaching retirement age is not saving enough. Even though you may have paid off your debts, there will still be expenses you need to take care of. Saving for your retirement is usually done through a savings vehicle like an IRA.

· Creating A Passive Income

Being able to earn an income outside of your work environment will give you a sense of freedom, boost your confidence and will also give you the opportunity to put more money away. By investing some of your money in an investment with a reputable firm, the opportunity to earn a good yield on your investment increases with the amount of time you invest it for. Remember to ensure that you know which risk portfolio you are in. High-risk portfolios are recommended for those with a risk appetite, but who also have a long period of time to save towards it.

A passive income will also serve you well as you age, as it will be a nice boost for your retirement. Paying off your debt and living in a positive balance is worth all the hard work initially required to do this.

As a young professional, the temptation will always be there to party it up and entertain away. By simply just applying caution and taking the time to make financial decisions, will save you a lot of hassle in future. The guarantee of generating may not always be there, therefore, preparation is key in ensuring financial freedom.

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