I recently procured my first real job (score!), and have come up with a basic budget and blah blah blah. Beyond that though, I do not know what I should be doing to get started at Being A Real Adult Who Makes Good Money Decisions. I have a basic Wells Fargo checking account and a small savings account that was created for me by my parents or something at some point. I also have two credit cards with no rewards to speak of but also no debt. Thats it. That’s what I’m working with.
Should I take the money from my Wells Fargo savings and put it into a high yield savings account like Ally? Should I cancel my credit cards and get a new one with better rewards? Should I start an IRA, or do something else that sounds overwhelmingly confusing? Where should I put the money that I manage to save from my paycheck each month (hopefully about $300-400)? Also, I suppose it should be mentioned that in my particular case, my employer has a retirement option and will start matching (5% I think) after a year. Any advice would be a godsend. I just want to make sure that I make the best choices possible for my future! — S.C.
I’m always really glad when I hear someone who is coming out of college and getting their first job say they want to make the best choices for their future. I mean, you’re not getting grades anymore, but: A+ work! A thing that happens when people get their first jobs sometimes is that they’re suddenly earning income, and that income immediately goes to buying “things”. We all want things, of course, but it’s just so much more important to get a grip on your money before you start spending it.
Starting out with no debt will give you a great head start. Keep it that way. The first two things you should be doing is paying off your debt, and starting an emergency fund, which it sounds like you’re doing with your Wells Fargo savings account. Set a savings goal of $1,000 at first, and then once you hit that number, just keep saving to have a nice amount of cash to fall back on in case you ever lose your job, or experience any other kind of emergency. Don’t worry about the rules of thumb you hear about from financial advisors saying you need 3 months, or 6 months, or a year’s worth of savings to get you through hard times. That’s just a broad way of saying you need to have an emergency plan set in place. Everyone has a unique set of circumstances. If you have parents or siblings or really close friends who would let you crash with them during a long period of unemployment, that’s a significant amount of living expenses you won’t have to worry about paying while you’re looking for a way to earn money, and that’s really great. So: Have an emergency fund, but have an emergency plan too.
Once you have a plan in place, you can now figure out ways to make your money work for you. I just looked up the interest rate for Wells Fargo and it’s just terrible: 0.01 percent. Yes! Move that money to a higher yield savings account like Ally or ING Direct.
Don’t get too caught up on getting rewards credit cards. Although there are people out there who really know how to make them work for them (and you might be one of them!), it’s really easy to rack up a ton of debt on credit cards, so I only use them rarely. And remember that your credit score will get slightly affected if you cancel your cards, so if you’re doing that to get rewards cards, keep the one you’ve had the longest because it’s the one showing the longest period of time that you’ve been able to make regular payments and be a responsible adult, and that’s a great thing to be able to show to creditors if you’re going to be doing things like renting an apartment, buying a car or a home one day. I was one of six people who put in an application to rent my current apartment, and I’m sure my high credit score was one of the reasons my landlord chose me as the tenant he wanted to have.
Lastly, get started in your company’s retirement plan. You don’t have to contribute too much until your company starts matching your contributions, but it’s important to simply get started. Remember that the money you put into a 401(k) is tax deferred, so even if you don’t get a match this year, you’ll still benefit next year when you’re filing your taxes. And, yes, open an IRA—a Roth IRA if your income allows you to do that because you want to start making compound interest work some magic for you. It’s really easy to do, I promise. You can start one with one of the big three: Vanguard, Fidelity, and T. Rowe Price (I chose Vanguard). Call the one that sounds the best to you, and tell them you want to start a Roth IRA. They will take care of the rest for you and make the process as painless as possible. You are giving them your money to safeguard, so they are willing to do whatever it takes to make this as stress-free as possible. Welcome to adulthood.