3 STEPS TO IMPLEMENT WHEN STARTING YOUR NEW JOB
Your alarm goes off at 6:30am. You hit the snooze button and ten minutes later it goes off again. You get up and turn to your window to notice the cloudy weather. You think to yourself why you couldn’t have gone to bed an hour earlier. Quickly, you sort through your mind on the type of clothes you are considering to wear for work. You revert your eyes back to the clock and realize you have only 49 minutes to brush your teeth, shower, dress up for work, do your hair, and eat breakfast before you run out the front door. It’s the same routine every morning. You even begin brushing your teeth on the same side of your mouth every morning and you begin your shower with washing the same side of your body before you switch to the opposite. Before you walk out the door you spray yourself with your favorite fragrance and grab your keys. You lock the front door, walk over to your car, enter your car, start the ignition and you are off to work. When starting a new job its imperative you begin on taking good care of your finances. Make it a routine so it becomes involuntary. As young adults your job becomes your main source of income. I know this statement may seem simplistically obvious, but think about for a second. With the income you will begin to receive you will have to manage your money on your own. Your parents are no longer your bank and for many of you they never were. I’ve shorn my methodology of what you need to do when starting a new job in to three steps: Step 1: Look at your paystub. What do you see? Aside from the net pay you should notice your gross pay. In the real world, you will never net your gross pay. It will always be less. So if your first job is offering you $2000/month you can bet on about 30% or so to be deducted from your gross pay. Therefore, I welcome you to the world of taxes! You will notice a section on your paystub that reads “Before Tax Deductions” and “After Tax Deductions.” Before tax deductions means those deductions, such as health insurance, 401(k) contributions, etc, which are taken before you even pay taxes to Uncle Sam. Once the before tax deductions are taken then your federal and state taxes are computed from adjusted salary. On the other hand, after tax deductions are those deductions taken after taxes. Finally, your net pay is what you take home. The point of this exercise is for you to gain a better understanding of where your money is allocated.Step 2: Know how and where you are spending your money. I will spare you the repetition of the budget concept, and I will assume by now you know this is the most important step in order to gain an understanding of your money whereabouts. The key is to spend less than you earn.Step 3: Calculate the percentage of income you need to save for your emergency fund and retirement account. I have been asked “how much of my income should I save a month to my emergency fund and my retirement account?” The truth is as much as I would like to say 10%, 15%, 20% or whatever and you will be good to go, it’s impossible to tell you exactly what the percentage should be without reviewing your financial situation. However, there are guidelines that should be followed. For example, a minimum of 10% of your income should be saved in your emergency fund while 12% of your income should go towards your retirement account. An emergency fund is just an accessible savings account which you can withdraw from in case of unexpected situations, such as medical expenses, loss of a job, car repairs, etc. However, I understand it’s not always easy to save 10% or 12% of your income. The percentage of income that’s appropriate for you will depend on your income, expenses, and how much of the immediate gratifications you are willing to forego to protect your current and future financial needs. Even if you could only contribute 5% of your income to your 401(k) or 403(b) or 457, that would be a great start. The same holds true for your emergency fund. If you can only contribute $25/month which is less than $1/day, then you are off to a great start. It doesn’t matter the amount, it matters that you begin and build on these contributions. It’s best to work on saving eight months to one year of your monthly expenses in your emergency fund. I hope this explains to you why I mention “building on these contributions.” Every time you get a raise or a bonus make sure you allocate a portion of that money to your retirement and emergency account. I would like to pause for a moment and remind you that when you begin working for a company there is a benefits package that your employer would have provided to you. In that package should be information about your retirement plan which is your 401(k), 403(b) or 457. I will assume most of you will have a 401(k) to ease my example. Typically, your employer will provide a matching contribution to your 401(k) which is free money. Most employers have a vesting schedule that explains in how many years the employers money will be your money. Meaning, that if you should work for another employer you will be able to rollover your contributions, the return you earned in your investments and your employer contributions. Otherwise, you will not be able rollover you employer contributions. Speaking of investments, you will have options to choose where you should investment your money in your 401(k). At times it can seem a little confusing. What I would encourage you to do is to call the company who administers your 401(k) and speak to the financial advisor. Or, another option would be to head to the website, say Fidelity administers your 401(k), and there should be an investment tool that you could use that will guide you to how you should invest your money based on a series of questions that you answer. When beginning your career, these are the three immediate steps that you need to implement. As you will soon learn, your personal finances will change throughout the different stages of your life.Keep your Moneylicious!