Early Stages of Your Career?

Take these 5 steps and you’ll thank yourself later

Just starting your career? Here are 5 steps to start you off on the right foot.

1.  Save 3 Months of Expenses into an Emergency Fund 

While your living expenses may be very low during this stage because you live at home or have not added a lot of responsibilities yet creating this habit of having cash that is readily available is a good habit to start and maintain throughout your career.  Car repair, medical expense, loss of employment are all examples of emergencies that might come up, all of which require cash that is easily excessible to avoid going into debt.

2. Contribute to your company retirement plan to get the full employer match

If you are fortunate enough to work for an employer that offers a company match please take advantage of it. This is free money, to you, that you should not leave on the table. No where else can you receive a 100% or sometimes 50% return on your money.  Two considerations when you are contributing to your company retirement plan are: 1. Pretax vs Roth contributions 2. Automatic Increase.  With Roth contributions you are paying tax on that money now, so that in the future you can take the money out tax free.

Early in your career, generally, your income is lower than it will be 10 or 15 years later.  Therefore, by taxes taxes on the money now you are paying them at a lower rate than you will be in the future. There are several other benefits of Roth contributions that are worth looking into. Automatic increase  is the ability to schedule a 1% increase in your contribution rate each year without you having to make the change.

While you are in your 20’s you have such an advantage over older employees because of the opportunity for compounded returns. This chart illustrates the power of starting early.  By starting at age 25 and saving $10,000/ year you can stop at age 40 and still have significantly more money than the person who started at age 35, saving $10,000/year and doing so for 30 years.

3. Pay Off Debt

The next step is to pay off debt that you may have. This includes credit card debt, car loans. and student loans.  Each of these loans comes with interest rates that will continue to compound, over time, in a negative way.  Before looking to buy a house or contribute more for retirement make sure you are taking away the guarantee of having to pay the interest of these loans. Start with the highest interest rate loans and work your way down the list from there.  You do not want to have the responsibility of paying a mortgage while you still have a large amount of other debt. This can also impact your ability to purchase a home.

4. Start Saving for Home Ownership or Rent

The next step is to start saving for a home or start saving up some money for rent. The general rule of thumb to consider when determining if you should rent or buy is how long you will live there. If you plan to live somewhere for longer than three years it is recommended that you purchase a home there.  When saving for a home, if this goal is less than 3.5 years away the money should be saved in cash or a money market and not in stocks. The reason being is that stocks average a 10% correction each year and the average time to make your money back after a recession is 3.5 years.  You do not want to be relying on your money to be there only to see the amount drop by 10% or potentially more.

Saving money even if you plan to rent can be a good way to get used to living on a lower amount before you actually start renting. This can also help prepare you for added costs that may come with renting such as: furniture, silverware, moving expenses, and a security deposit.

5. Save 15% Towards Retirement

I mentioned retirement savings in step 2 but that was just to get you started and to ensure you were taking advantage of free money. Once you have the other 4 steps completed it is time to increase your retirement contribution to lead to a fully funded retirement plan.  15% is the recommended amount to ensure you have a least $1 million dollars saved by the average retirement age.

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