I remember graduating from college and entering “the real world.” The college years often feel like the final flickers of childhood, so it can be daunting yet exciting to join the workforce.
Financially, you’ll be required to manage more than you ever have before.
1. Negotiate and understand your benefits
Your first major task will be to finalize the details of your employment compensation.
Negotiate your income
Dave Ramsey, one of the faces of the personal finance community, is known for his one-liners. When people with lower incomes call him and ask for his advice on getting out of debt, he’ll often reply that “You’re trying to dig out of a big hole with a small shovel!”
Your income is a powerful tool and, until you get promoted or find another job, the hiring process is your best opportunity to negotiate for a higher salary.
When I got my first job offer, I was disappointed by the initial salary. I was able to negotiate a $2,000 per year increase from the original offer. But, at the time, that was a meaningful increase. Two years later, I received another job offer and I was able to negotiate an additional $15,000!
One 2018 poll showed that only 39% of workers tried to negotiate a higher salary during their last job offer.
Don’t be like the other 61% who didn’t even attempt to negotiate. As my grandfather likes to tell me, “if you don’t ask, you don’t get.”
Remember, this is your chance to start digging with a bigger shovel.
Retirement plans and insurance coverage
Your company retirement plan and insurance benefits will end up being a significant part of your overall compensation.
If you are comparing multiple job opportunities, don’t forget to look at the value of the benefits you’ll be receiving.
Once you accept the job, ask HR for documentation on the retirement and insurance plans and don’t be afraid to ask questions.
Choosing an inappropriate insurance plan can be an expensive mistake.
Most large companies offer extremely under-utilized additional benefits.
For example, my current employer reimbursed 100% of the tuition for my master’s degree. This is a program that any employee at my company is eligible for, but few take advantage of.
If you’re moving to a new city, ask about a relocation package.
Other possible benefits to ask about are paid volunteer days, access to a gym, free or reduced-price transportation, and included tech gear like a phone or computer.
2. Earn the full employer match
If your company does offer an employer match, start your financial journey by at least earning the entire match portion. It’s free money and it’s part of your compensation for your work.
Here’s a simplified example. Let’s say you earn $40,000 per year for your whole career. Company A matches 100% of your contributions to your 401k account, up to 4% of your income. Company B has no match available.
To see the power of the matching program, let’s compare if you contributed 10% of your income at each company for 30 years at a 9% compounding annual growth rate.
The 4% match plus the 10% you’re contributing means your account is getting 40% more contributed each paycheck.
|Company A — 4% match||Company B — no match|
|Your contribution||10% of your income ($4,000)||10% of your income ($4,000)|
|The company’s contribution||$1,600||$0|
|Total annual contribution||$5,600||$4,000|
|Value after 30 years with 9% annual growth||$763,322||$545,230|
With the matching program, you’ll end up with about 40% more money after 30 years. Over time, that will be a significant amount of money.
If your company offers a matching benefit, do your future self a favor and take advantage of it.
3. Start an emergency fund
Next, start developing an emergency fund. Typically, you’ll just keep this money in an easily-accessible savings account.
Your emergency savings will be critically important to help you avoid new debt and manage unexpected expenses.
Living paycheck-to-paycheck is normal in America (about 78% of Americans do it), but it’s a scary place to be financially.
This savings account will also help protect your assets (like your car, home, or investments) since you won’t be forced to sell them to cover emergency expenses.
Long-term, you’ll want to save enough to cover multiple months of expenses in case you experience an unexpected job loss. But anything is better than nothing. Try to save at least $1,000 to $2,000 before you move to the next step.
Later, you can work on topping off your emergency fund to have around 6 months of expenses saved. This will be a great source of financial peace once you have it in the banks.
4. Pay off high-interest debt
After you have a starter emergency fund established, make it a priority to pay off high-interest debt.
Personally, if your interest rate on any debt is higher than 6 or 7%, I would consider it to be a high interest rate. This will likely include credit cards and possibly car or student loans.
The reason this should be such a priority is because of opportunity cost.
By paying off the debt early, you’re avoiding accruing additional interest at that high rate. And at 7% or more, that’s a higher rate than you’ll get in a savings account!
Avoiding the 7% interest on a loan is also similar to the growth you would see in the stock market, but without the uncertainty — it’s certain you saved that 7%. Paying off high-interest debt aggressively and early on in your career is almost always the best use of your money.
5. Avoid unnecessary budget black holes
Start a basic budget to help manage your cashflow. You don’t have to track every penny to see a real benefit from budgeting. Start with focusing on the big three — housing, food, and transportation.
Your housing is a fixed expense every month (either rent or a mortgage payment). Transportation and food tend to be fairly consistent, too.
Imagine if your rent is $800 per month, your car payment plus gas and insurance is $400 per month, and your food costs you $600 per month (including eating out at restaurants).
That would be a total of $1,800 each month. Is that reasonable? It depends on what your income is!
In that scenario, if your take home pay is $2,000 per month, you’ll be stuck living paycheck to paycheck with little flexibility. If your income is much higher, those expenses may be fine!
If you do find that you’re already struggling with the “big three,” your food budget is likely your best option for cutting back. You can always eat at home more often, cook in bulk, or choose lower-cost grocers like Walmart or Aldi if you need to create a little wiggle room.
If you can keep these three areas in check, you’ll gain a lot of flexibility in the other parts of your budget. If not, you may unintentionally lock yourself in to some impractically large payments that hinder you from reaching your savings goals.
6. Take steps towards your long-term financial goals
Speaking of long-term goals, identify those goals and start working towards them now.
Being young doesn’t put you at a disadvantage with preparing for the future. In fact, it’s just the opposite. If you’re in your 20s, you have decades until you retire and that time will help your investments grow rapidly.
If you’re already getting the employer match (from tip #1 above) and you have extra money in your budget available, increase your retirement contributions even further. Traditional advice is to save 10-15% but you’ll only be helping yourself if you contribute even more.
The more you save, the more options you’ll have in the future. With as little as 20% or more, you can likely leave full-time work before normal retirement age!
Outside of retirement, take time to identify other financial goals. Want to take a big trip abroad or pay cash for a car? Those goals can be intimidating now, but a diligent monthly savings plan can make those goals possible.
In all areas of financial planning, the key is to clearly identify your goals and start taking steps towards them. With consistency and time, you’ll get there. Just be intentional and get started!
Mr. SR writes about personal finance, decision-making, and early semi-retirement at Semi-Retire Plan. He has been featured on MSN, Yahoo Finance, and Databox and holds a master of science degree in business marketing.
Mr. SR is a fan of college football, Taylor guitars, and extra-large coffee mugs.