Congratulations on the new job, and welcome to the workforce. As you meet your coworkers and find your way around the office, there are some things you should consider to put you on the right financial path. Here is your financial checklist:
- Sign up for the 401k plan. Your company probably doesn’t have a pension plan, where the company would agree to pay you a certain income when you retire if you contribute a certain amount of your paycheck to the pension plan. Instead it probably has a 401k plan where it allows you to put some money into a retirement account and then matches your contributions up to a certain limit. For example, with many companies if you contribute 5% of your paycheck, they’ll match it, meaning that 10% of your pay will go into your retirement account. While it may seem better to have a pension plan where you’re guaranteed a certain income, you can actually do much better with a 401k provided you follow two simple rules: 1)Get in early and 2) don’t touch it until retirement. So get in now, putting away at least enough to get the full company match – otherwise you’ll be leaving money on the table. Even better, put away 15% of your paycheck before you get used to having more spending money. It is harder to increase your contributions later than it is to start with less now. You can always cut back later if you wish.
- Open a bank account and save up $10,000. Before you go buy a new car and get the cable TV hooked up, concentrate on putting money away until you have at least $10,000 in cash. This is what is known as an emergency fund. this is the cash you’ll use for a few months to eat and pay your rent if you lose your job. It is also what you’ll use when the car breaks down and you need to make an emergency repair, or you get an appendicitis and need $5,000 to pay your deductible for the year. Once you have the money saved up, guard it religiously, only using it for emergencies (and a vacation is not an emergency) and replenishing it quickly if you ever need to dip into it.
- Get term life insurance. If you’re married or otherwise have someone depending on your income, sign up for term life insurance to protect them should something happen to you. If you are in your late twenties or early thirties, you can get a half million dollars in term insurance for 15-20 years for maybe $250 per year or less. Then, as long as you keep paying that premium each year, your family will be protected. Be sure to get at least ten times your yearly salary in term insurance – that will be enough to replace your income should something happen. If you have someone at home raising the children, get at least $500,000 in insurance to cover him or her as well since you’ll need to hire a nanny should something happen to them to allow you to continue to work. Note that you can often get term insurance through work as well, but get at least some on your own so you don’t lose your insurance if you lose your job.
- Get a plan to pay off those student loans. See if you can pay off those student loans within a few years after you start working full-time, before you buy a house. If you keep living like a student for a few more years, you should be able to pay off even tens of thousands of dollars in loans per year. If you make $60,000, live on $30,000 and put the rest towards your loans. If there are two of you, live on the income of one and then put the other’s income towards loans until they’re gone.
- Start saving up that house payment. Once you’ve paid off the loans, keep going for a couple of more years. If you can get $30,000 to $40,000 saved, you can put 20% down on a home and avoid paying for mortgage insurance. That is money in your pocket. You will also be able to pay off the home faster and pay less in interest if you make a big down-payment. The 100% down plan is best. If you can’t wait that long, at least put 20% down.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
