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As you begin your professional life, you face many challenges. One important new challenge is making financial decisions with a positive long-term impact. Applying some basic principles of financial management now will get you off to a good start and guide you in making sound decisions throughout your career. A good way to ensure that your financial decisions are sound is to construct and follow a personal budget. While the task of establishing a budget may seem overwhelming, it is not difficult if you follow some basic guidelines. First, write down the monthly income that you receive from all sources. Next, list all of your fixed expenses such as rent, food, commuting expenses, etc. Third, include an estimate of your variable monthly expenses such as entertainment, travel, savings, vacations, etc. Finally, compare your income with the expenses that you identified to determine if you have a positive or negative cash flow. Make corrections if necessary to make sure that you can handle all of your monthly obligations without borrowing. A variety of commercial software programs are available that can assist you in making a budget. A simple spreadsheet can also be an effective tool. Once you have prepared your budget, be sure to record all your financial transactions each month. Revisit the budget every six months to determine if an adjustment is needed, and revise your budget as your financial situation evolves. EMPLOYEE BENEFITS After compensation, your employee benefits probably have the most impact on your financial life. Accordingly, it’s very important to examine the firm’s benefits and take advantage of those that match your needs. If you have the flexibility to choose among a number of medical and/or dental plans, be sure to carefully consider all your options before choosing a provider. Remember, a comprehensive program that offers many benefits may be a smarter financial choice than a low-cost provider with few options. Group insurance plans normally offer lower rates than those available on an individual basis. Consider flexible spending accounts (if available) since they allow you to use pre-tax dollars to pay for expenses such as mass transit, parking, and dependent care. As a general rule, it’s best to begin to contribute to a 401(k) plan as soon as you are eligible. This is especially true if your firm offers an employee match feature. A 401(k) plan is a great way to begin a savings program and save on taxes at the same time. STUDENT LOANS If you used federally sponsored student loans to finance your education, consider taking advantage of your one-time benefit to consolidate those loans. The Federal Consolidation Loans Program allows refinancing, an attractive option when interest rates are low. If all of your student loans are with one lender, you are required to give that lender the first right of consolidation. If you consolidate your loans during the grace period (within six months of graduation), the new interest rate is the weighted average of your current loan rates rounded up one-eighth of 1 percent. If you are in the repayment period, the interest on a consolidated basis is currently 3.5 percent. The new loan may have a maturity of up to 30 years, depending on the amount of the consolidated loan. Because of the extended maturity date, the consolidated new payment is often lower than the previous payments combined. While the extended maturity could mean additional interest expense over the life of the loan, the program allows you to pay off the loan without a prepayment penalty. Consolidating private student loans may also be a good idea, given the current low-interest environment. CREDIT CARDS It is not uncommon for recent graduates to have large balances on their credit cards. Since most credit cards carry high interest rates, reducing this type of debt should be a priority. One way is to always pay more each month than the minimum required payment. Another way of reducing credit card debt is to take advantage of the low introductory rates offered when you consolidate or transfer existing balances to a new card. While the introductory rates offered on these promotions are very tempting, remember that they are good only for a limited time. It’s also important to match your spending habits with the terms of the credit card, rather than just focusing on the interest rate. If you are able to pay off your balance each month, a card with no annual fee is better than one with a low interest rate. If you carry a large balance from month to month, look for other features besides a low interest rate, such as the length of grace period (the amount of time between when a purchase is made and the interest is charged). Be sure you know how the credit card company charges for cash advances. While cash advances are a convenient way of borrowing, you will typically be charged a high fee, a high interest rate, or both. RENTING VS. BUYING Young professionals often ask if it’s better to rent an apartment or purchase a home. The answer to this important question is based on many factors that are unique to your personal situation. Do you expect to work in the area for at least four years? Do you have sufficient resources to make a down payment (usually 5 percent of the purchase price) and pay for settlement expenses (about 3 percent of the purchase price)? Can you handle the larger monthly payment associated with a mortgage? For a $200,000 condo, for example, with a 5 percent down payment, the monthly payment might be $1,140 for principal and interest, plus the condo fee. Do you expect real estate in your neighborhood to appreciate in value? Do you have friends or associates who would be interested in being your tenants, if you buy a larger home? It’s generally less expensive to rent than to own a home. Accordingly, most professionals decide to rent until they feel comfortable with their employment situation, have saved enough for a down payment, and want to make a lifestyle change. While the real estate market in the Washington area has historically provided positive returns, the market is also cyclical. The best returns come to those who have the staying power to weather economic turbulence. CHOOSING A BANK It’s important to choose a financial institution that can assist you with your present and future financial needs. Since associates work long hours and have little free time, convenience is usually a top priority. A financial institution located close to where you work or live can save you time and effort. Check the institution’s other branch locations and the number of ATMs that it offers in the metropolitan area. Determine if the bank offers a remote access delivery channel that allows you to perform many transactions from the convenience of your computer. Ask your human resources department if the bank that handles the firm’s business offers a special program for associates, to attract new customers. This can be an excellent way to receive valuable services at a significantly reduced price. Compare the menu of services offered by different institutions. Remember to choose a financial provider based on the services you need rather than the prices it charges for services you don’t need. Once you open an account, begin to establish a credit history as soon as practical to demonstrate and establish your creditworthiness. Bill Mundy is a director of the National Capital Area Chapter of the Financial Planning Association. He is managing director at Wachovia Wealth Management in Washington. Specific questions may be directed to him at (202) 637-7664 or at [email protected].

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