Young Feds and Financial Planning (Just One More Acronym)
Friday, October 16, 2009
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Our government seems to run on a dizzying array of acronyms. Among others, you're asked to decode terms like TSP, FEGLI and FEHB. For recently hired federal employees, the challenges of working for the nation's largest employer can prove daunting.
Besides an immersion into a new career and adapting to a new lifestyle, you want to know how you can make smart choices with your income and enjoy long-term financial success. It's simple. By adding just one more acronym to your federal vocabulary — PYF, or Pay Yourself First — you can begin to practice a proven common sense approach to financial planning.
Many agencies are hiring recent college graduates at GS-7 entry-level positions. In the D.C. metro area these jobs pay more than $41,000 and within two years these new hires can expect a promotion to GS-9 and a $9,000 annual raise. That's a nearly 20 percent jump!
An entry-level salary won't make you rich, but it can pay the bills. After all, it doesn't matter how much you earn, but rather how much you keep. That's the secret to the Pay Yourself First approach. Regardless of your income, putting money into the three financial cornerstones of savings, insurance and investments every pay period, before paying your other bills and living expenses, makes good business sense and is the formula for long-term financial success.
Here's how it works. Set up an automatic payroll deduction for your Thrift Savings Plan contribution and automatic bank drafts for savings and insurance policies. Only after you've paid yourself do you pay your bills and other living expenses. Sound too hard to do? Don't worry. By setting up automatic deductions, you'll miss the money less and your savings will accumulate without a lot of effort on your part.
Once you start paying yourself first, you'll have established the habit needed for long-term financial success. As a fed, you can expect pay raises throughout your career. They include COLAs, bonuses, step increases and pay increases as you are promoted. Each time you get an increase in pay, use half of the new money to improve your financial plan and have fun with the rest.
When you've decided to PYF, you'll then need to determine how much you should set aside every pay period for your financial future. Here's some more financial planning shorthand. Think 5-5-10. That's the formula you'll use for paying yourself first. Five percent of your paycheck goes into savings, to cover the emergencies and unexpected bills we all face from time to time, like unplanned car repairs. This same stash of cash can buy those big-tickets items that you want such as furniture or vacations. This helps you avoid relying on credit cards or going deeper into debt.
Another five percent of your paycheck goes toward insurance. OK, insurance isn't much fun or exciting, but it is essential. Insurance gives you the protection and peace of mind you need and helps you avoid financial disaster, by making sure you have adequate coverage on your car, home or apartment, for health care and on your life. After all, no one can predict the future.
The final ingredient of this formula, 10 percent, goes into long-term investments such as TSP for retirement income or mutual funds for other long-term goals. Uncle Sam is a generous partner, matching part of your TSP contribution. And who doesn't like free money?
Once you have committed to PYF, you'll be ready to sit down and create your monthly budget. The idea of budgeting may not sound too exciting, but a budget is critical to making PYF work. Sure, you have some bills that have to be paid every month. No one wants to do without food or electricity, but you may be pleasantly surprised to learn that you can live within your means and still enjoy life.
It can be difficult to commit 5-5-10 into the three cornerstones because of college loans or credit card debt. Those are common problems, but don't use them as excuses. Getting out of debt may be your first priority, but it doesn't mean you can't PYF. Even the longest journey begins with the first step. So get started with some amount and make 5-5-10 your long-term PYF goal.
Bob Hill is a Registered Principal and District Advisor at First Command Financial Services in Arlington, Va. First Command Financial Services, Inc. is the parent company of First Command Financial Planning, Inc. Investment products and services, including securities products are offered by First Command Financial Planning, Inc. (Member SIPC, FINRA). A financial plan, by itself, cannot assure that retirement or other financial goals will be met.
© 2009 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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