Landing your first career job is a huge accomplishment. Even if it is not your dream job, it is a step in the right direction. Celebrate a job well done by planning for your long-term financial success. If you take these steps to plan now, you will thank yourself later.
Financial Tips to Make the Most of Your new career
When you start your first career job, retirement is probably the last thing on your mind. In fact, you probably have a long list of ways to spend that money such as new work clothes, a new car, a new home, and maybe even some cash to splurge on brunch.
However, starting with the end in mind can help you get off to the right start. Here are the 5 most important actions to take when you start your professional career.
1. Sign Up For Your Employer’s Retirement Program
Most employers offer a retirement plan and many match contributions. This is definitely something that you want to take advantage of. If you are able to invest 10% of your income that is a great place to start. If you are unable to save that much just do as much as you can.
Things to consider for your new plan:
- Be sure to sign up for your new employer’s retirement plan as soon as possible and take advantage of any contribution match offered.
- Make sure that all current and future dollars are invested in a well-diversified mix between stocks and bonds that makes sense for your situation.
- As you receive pay raises you should consider increasing the amount you save from each paycheck.
Whether your employer sponsors a tax-advantaged deferred compensation plan or not, you can always open an individual retirement account (IRA) on your own. A great option for young workers is a Roth IRA. These accounts are not tax-deductible, but withdrawals generally aren’t subject to income tax. Be sure to make sure you are under the earnings limit ($129K for a single taxpayer in 2022) before making contributions. The premise behind a Roth IRA or Roth 401(k) is that you pay taxes now rather than later. Substantial savings can lead to this ideal situation, especially for younger investors.
2. Develop A Plan To Address Any High-Interest Debt
65% of college graduates graduate with student debt. Many of those same graduates also have high-interest credit card debt. Paying off these high-interest debts should be a priority.
How should you go about paying off your debts? Each of these options has its advantages:
- Debt Avalanche
Make the minimum payments on all your balances except the one with the highest interest rate, and put as much as you can afford each statement cycle toward this balance. Basically, this debt service should replace your savings rate; you’ll put whatever you would have saved toward your credit balance. Once your highest-rate debt is paid off, repeat the process with the next-highest-rate debt.
- Debt Snowball
Make the minimum payments on all your credit accounts except the one with the smallest balance, which gets the lion’s share of your financial firepower. Once it’s paid off, move on to the account with the next-lowest balance.
- Debt Snowflake
Make small, frequent payments – as many as you can muster per month, whenever you have extra funds to do so – on top of your required minimum payment or preset installment payment.
Paying off debts with lower interest rates is less urgent since the long-term carrying cost of such debts is closer to your expected long-term rate of return on investment. Ultimately, your household cash flow and fiscal philosophy will determine how you approach these obligations. If you’re generally averse to debt, you’ll probably want to accelerate your payoff as your cash flow allows.
3. Begin Building An Emergency Fund
Building an emergency fund should be your highest savings priority. Not having an adequate emergency reserve can derail you financially because when an unexpected expense or job loss happens you will be forced to take on more debt or dip into money set aside for another purpose.
A sufficient emergency fund should cover at least between three and six months’ expenses at your current spending levels. The exact amount will depend on your comfort level and the stability of your income. It may take time to build up this reserve, and that’s okay. Open a high yield savings account and start saving with a monthly transfer today.
4. Avoid Lifestyle Inflation
Lifestyle inflation refers to spending more money as you earn more money. When we get a pay raise many of us immediately imagine ways to splurge. This could be a nicer car, more expensive home, extra vacation, etc. While it is not wrong to treat yourself for getting a raise, this can quickly derail your long-term financial goals. One way to avoid this is to automatically adjust your savings each time you get a raise. This ‘pay yourself first’ method will help you avoid lifestyle inflation.
5. Consider Hiring A Financial Planner
This isn’t something you need to do in your first week on the job or even during the first quarter. However, once you’ve been earning a “real” paycheck for some time, and you’ve established predictable patterns of spending and saving, it may be time to call in a professional.
A financial planner can help you create a goals-based financial plan that goes beyond just retirement. For many people these are things such as a down payment on a home, a new car, a vacation, or a wedding. Each of these goals are unique and require a specific investment plan.
A financial advisor can be a great asset when it comes to getting personalized advice for your specific situation. Most importantly, they will ensure your plan is aligned with your long-and-short-term wealth goals.