You did it! You graduated, searched high and low and landed your first job. It’s time to celebrate. Go out big this weekend with your friends or, maybe, buy that car you’ve had your eye on lately.
Hold up! Not so fast. Yes, you have your first “real” job. It’s likely, however, that you won’t make the money an NFL All-Star makes.
Let’s put your education to the test and create a firm financial foundation for the rest of your life. You won’t get a first start again. Often the financial mistakes made early in life have long-term consequences. Get this right.
Below are five tips to lay a firm financial foundation. There’s more you can do to manage your money, but start simple and add as you learn and your income grows.
Don’t spend more than you make.
You’ll be making more money than you likely have before, but you’ll also have expenses. Even before you receive your paycheck you’ll pay income, FICA and Social Security taxes. Then there are your elective expenses, such as phone, car insurance, rent and others. Deduct these expenses from your paycheck before you spend a dollar on anything else. Here’s how:
- Determine your take-home pay (the amount you’ll receive after all deductions)
- Note when your payday(s) occurs each month
- Total the amount due for each bill each month
- Note when each bill is due each month
- Determine which paycheck(s) will cover each bill
- Calculate how much money will be left over from your paycheck(s) after all bills are paid
If you won’t have money left over after receiving a particular paycheck(s), contact the companies to whom you owe and shuffle the due-dates to sync better with your payday(s) or cut expenses. If you’ll have money left over, you have more options to set your foundation.
Sign up for your employer’s retirement plan as soon as possible. If, after following the previous exercise you’ll have money left over, this allows you to contribute to a retirement account. If your employer does offer a retirement plan, it’s likely a 401(k). There are others, but this is the most common. Contributions to 401(k)s are made with pre-tax dollars and are automatically deducted from your paycheck. This reduces the amount of money you’ll pay in taxes and ensures regular and frequent contributions.
Both of these are important. Taxes will likely be/ one of your highest expenses. Reducing tax payments saves considerable money over a lifetime. Regular and frequent investing is important for growing your account.
If possible, start investing 10% of your income in your employer’s retirement plan. Increase this annually by 1% and by half of any raises you earn. This will allow you to make the maximum contribution to this account in no time. The current maximum contribution is $17,500 annually. If you can’t start with 10% of your income, try to contribute the minimum percentage to receive the full employer-match your employer provides. Most employers match employee contributions up to a certain percent. Don’t leave this money on the table. If you can’t do either of these, start with what you can.
If your employer doesn’t offer a retirement plan, open a Roth IRA with an online brokerage firm that charges no minimum balance fees. The maximum contribution to a Roth IRA is currently $5,500 annually. You may invest in stocks, mutual funds, ETFs and other investments in these accounts. The online brokerage firm where you open your account can provide you with investment guidance.
In either case, invest as much as you can. It’s easier to live without now than to live without later.
Start an emergency savings account.
An emergency savings account is a cash account with enough money to help you in case of an emergency. An emergency includes a car accident, a skiing accident, and the loss of a job or any other unexpected expense. You should eventually have enough cash in this account to cover three to six months worth of your living expenses. Start now by putting $20 a paycheck into this account. If you can afford more, do so.
Just as with your retirement plan, regular and frequent contributions to this account are important. If your employer offers direct deposit, you can have this automatically put into an account separate from your more active account. This saves you from having to remember to make this investment and reduces the risk that you’ll decide not to make this investment.
Don’t rely on credit cards.
Live below your means. If you’re living a lifestyle that you can’t support with your take-home pay and following the advice above, then adjust your lifestyle. Have a good time, but do so within your means.
Trust us; you don’t want to suffer a credit card hangover after a couple of years of overspending. Credit card balances can add up quickly, especially if you only add a little on here and there.
There is a time and place to use credit cards. You may want to use them to build up your credit score and credit history. If not managed properly they can easily tear down your credit score and history.
If you use a credit card, pay off the balance each month. Reducing or eliminating credit card interest payments, like taxes, saves considerable money over a lifetime.
As you start making and saving money, you’ll realize that it’s fun. There’s a lot to learn, especially if you want to invest in stocks. Read books about saving and investing. Read investment blogs and websites. Talk with friends and family members that are successful investors. There are courses you can take at community colleges and online.
Be money conscious and understand what’s going on in the world. Be familiar with how the stock market is doing. Know where the unemployment rate is and how our gross domestic product (GDP) is performing.
Not only will being money conscious help you with saving and investing, it will help with your career. It will let you know when the right time is to take certain professional risks or when your company should make a certain move. It will help you speak more intelligently with the leaders of your company.
This can seem like a lot. Do what you can as you can. If you can’t make maximum contributions to your 401(k) and start an emergency savings account, start with a smaller contribution to your 401(k) so you can start an emergency savings account. If you can start doing some of these exercises, you’ll start building the firm financial foundation that will set you up for success. This success isn’t just having a comfortable retirement. It’s having the ability to make a career move in several years if you wish. It’s, maybe, having an early retirement. The possibilities are endless, but you need the firm financial foundation first.