Financial planning for early earners

Financial planning is not always top of mind for early earners. But establishing a clean structure to organising finances could drive discipline and a platform for future investments as needs arise.

Here are a few steps to organising finances when you start earning, whether in your teens, twenties or later.

a. Setting up a bank account

The first thing early earners will usually setup is a bank account. This is often asked for and facilitated by employers. If you are self employed or contracting, one often goes to the easiest high street bank, or these days a neo-bank (digital-only or mobile banks like Monzo, Revolut or N26).

But ask yourself these questions when you open one.

  • Is the bank safe? Most countries offer protection against bank failures, but even with these retrieving your hard earned cash once the bank goes belly-up is a headache. Ideally stick to bigger names, as these are often protected better by regulation, tech or processes.

  • What fees is the bank charging me? Most banks hide these in bundles of paperwork and legalese, and it’s easy to have a continuous drain of charges from your account without you knowing it. Use tools like the MoneyAdviseService or Uswitch.com (in the UK) to compare and find the best.

  • How easy it is to access? This factor is often overlooked, but there are banks which require you to turn up at a branch to transact certain services (even in this digital age!) or make it painful (e.g., to move money). Use online comparison services like Which to avoid painful experiences.

b. Building a discipline in spending

Once you receive money, spends start. Whether it is to gift something to family, or the beer out with friends or just plain daily living essentials.

In all the flows, it’s often hard to keep track of where you spend and on what items. And before you know you’ve spent all your income or have gone into overdraft before your next income. More common than you would think.

So, build some discipline.

  • Track your spends: Use automated services like Mint, MoneyDashboard or Yolt that can be used to periodically track spends across cards and banks, or even by yourself. Create buckets to group spends into (like ‘friends’ or ‘daily essentials’) so that you could look back and track.

  • Setup alerts to prevent overspend: Most tracking services have periodic alerts you can schedule. Use it to track if you are overspending on that impulsive purchase

  • Periodically review and rethink. Every weekend or month end, look back at your spends patterns. Some spend tools like Yolt have easy visuals to help you track. Then rethink if you are spending buckets. (Perhaps you aren’t spending any on health, and all on parties? That should be a wake-up. Or not.)

c. Repaying loans vs. Investing

For most folks starting to earn, it is likely you are due to repay loans for your education. However, one could as easily put away that extra cash or invest. How do you choose?

As they say, it all depends.

If you have an expensive (i.e. high interest rate) loan, it would benefit to start paying it off as much and as early as you can.

But there are some things to start off with.

You always need to build a minimum comfort buffer for a rainy day. Viewpoints in this space vary, but usually it’s best to save up 3 to 6 months of expenses. To handle medical and essential everyday expenses in case you were to lose your income.

Next, you should always protect yourself against the basic risks to health, safety, productivity and living. Speaking of which….

d. Insurances. Do you need them early?

Most early earners are rarely ever sold an insurance, except as a way to invest. But pure risk insurance may still be essential. Because you still have risks that you may not have realised and can’t avoid on your own.

Take health. Even if you are healthy, it’s hard in this day and age to argue that you will not fall ill. When you do, would you rather have to depend on a parent or friend to bail you out? Or declare personal bankruptcy? (did you know drugs for major diseases like cancer cost in excess of ￡10,000 a year!)

Besides that, any time you invest in an asset, like a car or a house or items for the house, you may have risks related to that item that you may want to cover. When you do, learn the basics of car, property and travel insurance (check out how insurance works)

e. Tools and learning more

Here are some more tools and services for early earners, and readings to get you smarter.