Budgeting 101: Back to basics

A conversation on the importance of embracing and implementing budgeting practices early on

For many young people, a summer internship or their first job out of college is their first time experiencing a regular stream of income. Without prior practice, how are they supposed to reasonably spend and effectively allocate their paychecks?

Learn about the importance of budgeting—and how to get started early—in the UBS On-Air Investment Strategy Podcast: Budgeting 101—Back to the basics,  featuring UBS Investment Strategist Americas Justin Waring and UBS Total Wealth Strategist Americas Ainsley Carbon, both of the UBS Chief Investment Office (CIO).

To learn more, Shannon O'Neill, Editor in Chief of CIO's Intern exclusive blog (PDF, 153 KB), spoke with Carbone about how the young workforce should begin to approach budgeting. See her expert insight below.

How do I allocate my paycheck?

A: One budgeting technique I encourage is the 50-30-20 rule. Aim to have 50% go towards ‘must-haves’ like groceries (not dining out!), rent, or car insurance. These are the expenses that you can’t/shouldn’t live without. 30% goes to discretionary spending like entertainment or shopping. 20% goes to savings. If you’re fortunate enough to need less than 50% of income for expenses, you can increase your saving or “fun” spending.

The most important thing is to have a guideline and try to stick with it – it’s unlikely you’ll be able to every month, but a plan will help you become more aware of your spending habits.

Another benefit of this budgeting rule is that it uses percentages (not fixed dollar amounts) which help to maintain contribution rates even when paychecks fluctuate and they get you in the healthy habit of setting money aside automatically.

How do I establish good spending and saving habits? Is it too soon to consider financial planning?

A: Even if you don’t have any clear long-term goals at the moment, you’ll need to have money saved eventually. For example, for those who will be renting apartments right out of college, some landlords will require an upfront payment equal to four months of rent just to secure the lease – this is a situation where it’s necessary to have some savings already set aside. Many associate the term “financial planning” with having a specific goal to plan for.

But, in the absence of specific goals, financial planning can also be associated with having a focus on setting healthy saving and spending habits. As goals become more clear, then you can formulate a specific plan of action as to how you’ll reach them.

When can I begin investing my money? How do I know what to invest in?

A: In terms of investing, the earlier you start the better off you’ll be because of compounding interest. Starting small is better than not saving or investing at all! But, you’ll still want to make sure you have enough set aside for near-term/emergency spending.

Money that is set in accounts that are difficult to access in the near-term (like a 401k), or volatile or aggressive investments (like stocks), should be looked at as money you’d be OK being without for now.

For example, one issue with investing in equities is that if the money is needed in the near term and the equities experience volatility, you risk the value not being there when it’s needed. Once short term spending is saved, excess cash can be invested more aggressively.

Keeping your time horizon in mind when investing will help you avoid a situation in which you need resources immediately but don’t have quick access to them. This is often when people turn to credit cards as a last resort, which can be especially problematic when there aren’t resources available to pay them off quickly.

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