Set Priorities for Your First Paychecks
You’ve populated your cubicle with desk supplies, hung your recently earned college diploma and found your way to the break room without assistance. Now it’s time for that crucial reckoning with your financial conscience. By your right ear, a fluttering spirit whispers, “Save!” On the other side, a troll shouts, “Are you kidding? Spend!”
To be sure, in our consumer culture, it’s not easy for new careerists to do the right thing.
“It’s tempting to think, ‘Now I can finally afford that nice car or live in that fashionable area,’ but it’s better to take time to see what your income stream is going to be” before committing to high monthly expenses, says Dennis Hanno, dean of the undergraduate school at Babson College in Wellesley, Massachusetts, and a CPA.
In that spirit, we offer the following priorities for the fruits of your first months’ labor, starting with the most important.
Insure Your Health
Isn’t it obvious that new grads should use some of their earnings to buy health insurance? Apparently not, given the considerable number of young professionals who gamble with their current excellent health by forgoing coverage.
“You’re really taking a risk if you go without health insurance,” says Todd Romer, executive director of Young Money magazine. “For people just out of school, it’s the accidents that can happen.”
So whether you have to buy health insurance on your own or contribute to premiums through payroll deductions, maintaining coverage should be your top priority. Your health -- physical and fiscal -- depends on it.
Keep Up with Debt Payments
You’ll have a rough time of it with a bad credit rating, so be sure to make all your debt payments -- student loans, credit cards, car loan -- on time.
“Make the minimum required payments on all your debts,” says Sharon Kedar, coauthor of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance. If you don’t, when you’re ready to buy a condo or house, for example, you could end up paying hundreds of dollars more per month in higher interest rates that are charged to risky borrowers.
Invest for Retirement
Here’s an irony that never ceases to be relevant: Young people, who are in the best situation to position themselves for a comfortable and early retirement, are the least likely to save for this purpose. So, with decades of potential accumulation and compounding ahead of them, new careerists should transcend their human nature for one brilliant moment and instead sign up to have some of their earnings automatically invested in a tax-advantaged retirement account.
It’s a no-brainer to contribute at least up to the maximum that your employer will match. For a typical professional, “putting $100 of your own money in the 401k is only $65 out of your pocket,” due to the tax deduction, Hanno says. Assuming a 100 percent match by the employer, “add $100, and that’s an outstanding return.”
If your company doesn’t have a 401k, pretend it does by regularly investing in an IRA, Romer says. “Have it come out of your paycheck with an automatic investment plan,” he says.
Pay Off Credit Card Balances
Now it’s time to start paying off your credit card balances. When you do, you’ll accelerate your financial progress by avoiding those high-interest payments.
Prepare for the Inevitable Rainy Day
Accidents, fires and other losses happen, and you’ll sleep better if you’re prepared for life’s inevitable setbacks. “Save $2,000 for a starter emergency fund,” Kedar says. “It’s an unbelievable stress reliever.” Before too long, you should build up your liquid savings to three to six months’ pay, experts say. Also, renter’s insurance for your belongings is usually affordable and a good idea.
Now that you’ve taken care of the basics, should you start saving for a down payment on your first home? That’s the kind of question you should answer with the help of a professional financial advisor, who can help you establish and reach the money milestones that stretch from your first day on the job through retirement.