START SPENDING SMART
Going from school to work can be hard on your wallet. The advice of our business pro can help soften the blow.

I have a 24-year-old son and a 19-year-old daughter, neither of whom are quite independent. My son is in graduate school and my daughter recently started her junior year in college. So while this column is intended for a larger audience, in some respects it is also very personal — and, hopefully, exhibits the care and love that a parent gives to young adult children who are about to start the next phase of their lives.

Young adults leaving the structured comfort of university life and moving into the world of work are usually well prepared for many aspects of the transition. Many have had summer jobs, internships and an excellent education. However, there are some areas of young professional life — dealing with finances and professional relationships, for example — where they still may have much to learn.

In the area of finance, young professionals often suffer from a sort of reverse sticker shock. I know I was amazed at my first full-time job, where a university was willing to pay me $25,000 a year to teach three classes per semester for two semesters. Now, granted, that was in 1980, but my frame of reference at the time was a $350 monthly stipend that paid for all of my living expenses, including rent and food, as a full-time graduate student. Needless to say, I was living a monastic life.

To me, that $25,000 salary seemed like a fortune — and, like many who suddenly find themselves in a changed economic condition, I did not always spend the money wisely. What follows is some advice for young professionals who are just starting out.

Establish a budget

The first line item in the budget should be your savings account. Unless you have one half of a year’s salary stashed away already, do not worry about setting up an investment account just yet. Investment accounts should be built on top of savings accounts.

Without a solid “rainy day” fund, you cannot stand the risks of investments. If you can save just 5 percent of your take-home salary per month, it will take you about a year to accumulate the funds needed for your rainy day savings fund. The remaining 95 percent of your take-home pay is what you need to live on. That means the repayment of student loans, credit card bills, rent, food, clothes, entertainment, utilities, cell phone, Internet, car note, gasoline, repairs and other bills need to be paid from that 95 percent of your take-home pay. If there is anything left after paying these costs of living, then dump it into your savings and count yourself lucky — and successful.

If you can’t pay cash, you can’t afford it

Too often, younger professionals put themselves behind the proverbial eight ball by getting too deep in debt — particularly credit card debt — which can make it difficult to save money or pay for other essentials. Recent legislation passed by Congress and signed by President Barack Obama is designed to reduce the debt peonage too many young adults find themselves in because of their credit card use.

It is not unwise for young professionals to consider not using credit until they have accumulated six months of savings, a practice that goes back to the days of my father and grandfather, who never had a credit card. They adhered to a simple belief: If you cannot pay cash for it, you cannot afford it, so you should not buy it. Temporarily going without some of the accoutrements of modern life builds character, as well as much-needed discipline for future success.

I have had the luxury of observing friends, family and associates who played the game of conspicuous consumption, only to find themselves broke a few years later with very little to show for their troubles. Those who spent wisely, used credit sparingly and lived within their budgets, on the other hand, were able to accumulate wealth, assets and many of the toys that many of us find so attractive. But they were able to do it without the financial stress and strain that frequently results from living beyond their means.

It’s not about how much you make
— it’s about how much you keep

Young professionals and young workers often confuse income with wealth. Income is earned over a period of time. Wealth is what is the accumulated difference between what is earned and what is spent. Income is a flow, while wealth is more like a stock.

Economists often use the example of the bath tub to demonstrate this difference. The water flowing into the tub is the income. The water flowing down the drain is your expenses. The water level is your wealth. The earlier a young professional understands this simple concept, the better off they will be.

Don’t rush through life, and save your money — you will need it, and you will enjoy it a lot more!


Fred McKinney, Ph.D., is the president and CEO of the Greater New England Minority Supplier Development Council.