I may earn money or products from the companies mentioned in this post.
Okay, I'm gonna make this short and sweet since it's pretty self-explanatory once you read the 3 things. No need to fluff it up. When you get your first job, you have no clue what to do with your finances. You never heard of a 401k or an IRA, have no idea how taxes work, but you somehow managed to land a job.
Congrats. But now what? You never learned in school what you're supposed to do with your money once you weirdly start getting compensated for your work unlike the last 23 or so years of your life. And yea, learning how to walk is really damn hard but you're not paid for it so I'm counting those years too.
Your first paycheck comes in the mail, because you didn't set up direct deposit in time, and now you think “Oh sweet I'm gonna go to like 5 concerts now.” And before you know it, you'll be $5k in debt before you even knew what hit you.
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So, to avoid all that, here are the first 3 things you should do:
Set up your 401k plan
I was guilty of this in my first job. I had no idea what a 401k plan was, what its purpose was, literally no idea. Like I'm saying I never even checked it out because I never realized it existed.
Unlike me in my first job, what you want to do is immediately check out the details of it. You want to know if first of all, your job even offers one. Unfortunately, only 14% of small businesses offer a 401k plan. That does suck, but if you're lucky enough, do yourself a favor and check it out.
You want to know if there is a company matching plan. This means the company will match your contribution to your 401k up to a certain limit. For example in my case, I contribute 6% of my salary to my 401k plan. On top of that, my company automatically matches 4% and matches 50% of my contribution, so 3%. In total, my company contributes 7% of my total salary towards my 401k plan, for a total of 13%.
You never want to go below the matching limit. It's literally free money. There's literally no catch to it, except that maybe you won't be eligible for a year or something. It's free money. Take it.
Sometimes you may even be able to choose which funds your 401k money is being invested in. For example, my options include target-date funds based on the hypothetical year I may retire, mutual funds and an S&P 500 index fund. Given what I know, I chose the S&P 500 index fund.
And if you have a “financial service” like Financial Engines that your company pays to have as a feature, just ignore it. They have no idea what the hell they're talking about, it's terrible advice. One of the notifications I got was that I wasn't diversified enough and I was too aggressive in my investments. It's literally 500 stocks, all well established, mostly American companies. It recommended I invest in bonds. Bonds at 2%, or invest in an S&P index fund with an average 10% rate of return? What a joke.
Also, before I forget, check if you have a Roth 401k available.
Open a brokerage account and a Roth IRA/IRA account
Another place people forget they can put their money is in a brokerage account. Say you want to open an account with Charles Schwab. You can open what they call a Schwab One account and a Roth IRA/IRA account, depending on your salary.
You should open one for two reasons:
- Create an emergency fund
- Save for retirement
A lot of people don't think about using a brokerage account when it comes to building an emergency fund. But if you put the money in a money market fund, you can get over a 2% interest rate on your money these days. If you leave it in a savings account with a bank you'll get something like a .01% rate. Putting your money in a money market fund gives you a rate that's 200x better. It's literally that much better to use a money market fund for an emergency savings fund than if you left it in your savings account.
And saving for retirement is also obviously very important. Let's face it, we're on our own now, a pension is a thing of the past. My “pension” was taken away from me at my current job after 9 months of working there, so I didn't even get to qualify for one year. Not that it would've been anything, but still.
We all need to fend for ourselves. A 401k is great, but it's just a start. You can always do more. Take the bonus you got at the end of the year and put it in your IRA plan. You might not think it's worth it, but even if you put the maximum $6,000 away for one year only and let it grow for 40 years in an S&P 500 index fund, that turns into $271,555.
And if you have a $65,000 salary and in total with matching are able to contribute 13% (automatic 4% contribution along with 50% matching up to 6%) of your salary and never saw a single raise or bonus, over 40 years that would turn into $4,496,338 at a 10% rate.
You'd have a total of $4,767,893 after 40 years with minimal effort. And before you say that's impossible, well I'm on track for that and I didn't have a job for over 2 and a half years after I graduated college, so it's definitely possible.
Read books and listen to podcasts on investing and how businesses succeed
This more than anything helped me get to where I am today. If I didn't spend all my downtime commuting reading, if I didn't put my Xbox on mute and listen to podcasts instead of the sound effects, then there's zero percent chance I'd know as much as I do today.
Sure, starting from scratch not having any previous knowledge about this stuff was exhausting. I was burning myself out without realizing it, but whatever, I survived. I can't tell you how different I feel. Like I actually feel good about having enough money to retire, I never worry about it anymore. Sure I just started working, but for the first 4 years, I was constantly stressed because I didn't understand how to make sure I was on the right track.
Especially now that I read the Wall Street Journal on my phone every day, a book every day and listen to podcasts every day, it's crazy how over even just a month cumulatively you learn so much. I catch myself losing perspective thinking the stuff I learn is common knowledge because I assume everyone else is doing what I'm doing, but they aren't. Which is why I feel so relaxed and confident when I invest. I haven't even bought anything since January 4th.
And I really want to invest in a company, but the price keeps going up. Since the first time I wanted to buy, the company's stock has gone up over 60%. Before I read those books, I would've freaked out and bought shares. But now I don't even care. I know now that soon enough, as fast as the stock went up, it'll come down. And I just read last week hedge funds have been buying the stock by the millions over the past year so that explains that. When the market turns, they'll no doubt sell.
Is there anything else you'd add to the list?
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