Things to Do When You Start Your First Job

There are many decisions that come with a first job.  Your life is suddenly transitioned from one of school to one of the working world.  Making the right financial decisions at this point will set you up for a life of financial security.  Here are some things you’ll want to do:

1.  Set up an emergency fund.  The first thing you should do is save up enough cash to pay for three months-worth of living expenses.  This will give you time to find a new job if you get laid off without moving back in with mom and dad and also give you the cash you need for little emergencies like a car repair or a broken arm.  These expenses would otherwise be put on a credit card, starting the cycle of debt you do not want to enter.  Being able to pay for emergencies will save you millions of dollars in interest over your working lifetime.

2.  Develop a budget and an envelope system.  Without a plan, money will be spent on junk until your expenses equal your income each month, leaving no money to save and invest.  Most people who start a budget say they feel like they have more money to spend than the had without the budget since they aren’t wasting so much.  Develop a budget with income, expenses, and then money directed to saving and investing.  Allocate every dollar to something.  Then, put cash in envelopes for things like food, clothing, and entertainment/meals out to keep you honest.  Once the envelope is empty, you’re done spending on that category for the month.  If it is a criticalexpense, like you run out of food money a week early, go back to the budget, determine where the money will come from, and make the change so you see the effect of your choices.  Don’t forget to account for things like insurance premiums and retirement accounts.

3.  Fund your 401K.  Every dollar you put into a 401k in your twenties will be worth $64-$124 when you are ready to retire.  Make sure you direct at least 10% of each paycheck into your 401k (15% is better).  If you start immediately, you’ll never miss a payment and be set for retirement.  Never, ever take money out of a 401k unless you owe taxes you can’t pay or you’ll be out on the streets.  The taxes and penalties on early withdrawals will take more than half of the money you take out, plus you’ll be putting your retirement in jeopardy.  The words that really get my blood boiling are “I decided to cash out my 401k” since I know that millions of dollars are being given up when people do that.  This is usually something people who have never saved money do when they are looking to start a business later in life and need cash.  If the business fails, you’ll be in dire straights.

4.  Start an individual IRA.  If you’ve directed enough of your salary to your employer’s 401k to get the full match, it makes sense to then max out an IRA before putting the rest of your 10-15% into the 401k.  You have more investment options in an IRA, plus it is totally disconnected from your work.  If you have a Roth 401k at work, you can do a traditional IRA and get a tax deduction or vice-versa.  Mathematically, it makes more sense to do everything with a ROTH, but you are then depending on the government not to change the rules and tax Roth IRAs and 401k’s (or raise sales tax or other taxes when you spend the money, which has the same effect), so it may make sense to get some tax breaks now and then pay the taxes now and get tax-free growth with the rest.

With an IRA, you’ll need to have the discipline to send in a check each month or every few months.  Waiting until the end of the year is a bad idea since you’ll miss out on growth during the year and also you may not have the cash you need when the time comes.  Regular, monthly contributions are best.  You can probably setup an automatic draft each month from your checking account.

5.  Focus on paying off your student loans before you shop for a house.  A lot of people come out of college owing $40,000 or more in student loans. It is better if you can do without loans, or minimize them as much as possible.  If not, at least get the loan out-of-the-way before you have all kinds of other expenses that cause you to keep the loan for 30 years or more.  With aggressive payments, you should be able to knock that loan out in 3-5 years if you keep living like a college student for a little while longer.  Plan to kill that loan off before getting a home and a mortgage.

6.  Avoid the new car.  Instead, save up and buy a good used car.  If you keep a car payment your whole life, you’ll have a million dollars (or more) less at retirement.  That could be a really nice vacation home on a beach in Hawaii while your friends with their car payments are scrimping to pay for a dilapidated apartment.  Save up $2000, (about 3 months of car payments) and buy a well-running car with a lot of miles.  Drive that for a few months, save up another  $3000, and you can get a good used car with maybe 80,000 that will run great for another 100,000 miles or more.  Even if you have a $500 repair a couple of times a year, you be saving thousand on interest and depreciation.

7.  Save up 20% for a home, then get a 15 year fixed rate mortgage requiring no more than 25% of your take-home pay.  Many people buy too much home and then struggle to save and invest.  Buy a home you can easily afford and pay it off before the kids get to college.  If you are investing, you should be able to add another $100,000 to $200,000 in your early 40’s and either buy your dream home or upgrade the one you’re in.  You’ll end up paying a lot less than the person who bought the McMansion at 25 in interest, meaning you’ll have a lot more money to spend later.  At 45, you may have a nicer house than the McMansionite and still have a half million dollars in investments while he has no savings.

8.  Think about term life insurance.  No one likes to think about death, but tragedies do happen.  They are all the more worse if those you leave behind need to find a way to make an income to replace yours.  While you’re alone, term life makes little sense unless you just want a modest burial policy to pay for a funeral.  When you have a family who depend on your income, it’s critical.  Buy 10 times your salary in a 15 to 20 year level term policy.  It will  only cost a couple of hundred dollars a month if you buy it while you’re young and will prevent a lot of hardship for your family should something happen to you.  If you have kids at home, also look at getting insurance for the spouse who stays home so you can hire a nanny should something happen to them.  If you are saving and investing, you should have the house paid off and plenty of money by the time the policies expire in 15-20 years if nothing happens.

7.  Get involved in professional societies and trade groups.  It is important to get to know others in your industry.  These can be contacts for your next job, experts who help you with a problem, or suppliers you’ll rely on to get your work done.  Join the local professional society if you’re a professional, or join a trade group if you work in the trades.  Then, don’t just sit back and wait for things to come to you.  Get involved and help out planning events and activities.  You’ll often find higher-ups in your company and elsewhere working alongside you.  If you show you can do great work organizing events, your boss might pick you to organize big projects at work.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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