6 tips for work force newtimers


Starting your first full-time job can be both an exciting and overwhelming experience at the same time. Entering the work force often brings a sense of accomplishment, and, as a new grad, you might also look forward to applying at least some of what you learned over the past four years.

Regardless of what armchair portfolio advisors tell you, the most important thing to do is start saving – even a little bit – as soon as possible. Einstein summed it up best when he said, “The most powerful force in the universe is compound interest.”

Here’s a quick example of what he meant. A 22-year-old who invests $2,000 per year and earns a 5 percent annual return on that money will have approximately $226,000 when she reaches the age of 59. Were she to wait until 30 to begin saving, she’d have just $139,000 when she’s 59.

With that in mind, here are some of the best ways for the newly employed to jump-start their financial plans.

Simplify your debt situation

A good financial plan must include an assessment of your debt situation. Left unchecked, debt can lead to a “reverse savings” situation, whereby you pay more out in debt interest than your investments’ appreciation.

At the same time, it’s prudent to differentiate among various types of debt. Credit cards are the archenemy of financial independence, so limit yourself to one credit card (to build a credit history) and vigilantly pay it off every month. This will prevent you from living above your means.

Student loans and mortgages are less egregious forms of debt in that interest rates tend to be substantially lower than they are for credit card debt and you also receive a tax deduction on all or part of your interest. Nonetheless, it still pays to be prudent when managing these more benign debt forms.

First, look to consolidate your student loans and lock in a fixed rate. Many financial companies offer these programs and often will lower your interest rate further if you agree to automatic monthly withdrawals from your checking or savings account.

Take advantage of company benefits

Retirement may be one of the furthest things from your mind right now, but that doesn’t mean you should miss the opportunity to contribute to your company’s retirement plan. Many companies match a portion of your contributions to a retirement plan – for example, if you contribute 5 percent of your salary to a 401(k) plan, the company will match it dollar for dollar. Some firms’ matching contributions may be higher or lower than that, but the best money is free money and you should contribute enough to receive the full benefit. In addition, contributions are automatically taken out of each paycheck and tax-deferred until retirement.

Before you begin contributing to your company’s retirement plan, however, take time to craft an investment plan that makes sense given your time horizon. Job one is to develop an asset-allocation plan. At the same time, be aware of the dangers of overexposure to company stock. Besides retirement planning, you should take the time to understand other company benefits and how to maximize them.

Establish an emergency fund

Once you have settled into your job and have a good idea of what your monthly take-home pay is, concentrate on building an emergency fund. Life is full of uncertainty, and it pays to be prepared. The average worker switches jobs multiple times during his or her career, and most jobs are “at-will” – meaning your employer can let you go at any time.

Your emergency fund should consist of highly liquid investments, such as a savings account, CD or money market fund, and should amount to at least three months’ living expenses. If you decide to go the savings-account route, you might want to look beyond the bank where you keep your checking account in order to obtain the highest possible rate. If you are willing to take on more risk, check out our list of the best mutual funds for short-term goals.

Open a Roth IRA

A Roth IRA is an excellent complement to a tax-deferred retirement account such as a 401(k). Unlike a 401(k), to which one contributes pretax dollars, Roth IRAs are funded with aftertax dollars, but funds withdrawn in retirement (including the built-up capital gains) are tax-free. Those new to the work force are often in a relatively low tax bracket – meaning that they’re not taking a big tax hit on the dollars that they’ll contribute to the Roth – and the tax-free Roth withdrawals help offset the potential of higher taxes (which they’ll pay on their 401(k) withdrawals) in retirement. Investors can contribute up to $4,000 to a Roth IRA this year, subject to income limitations, and contributions can be withdrawn from the account if needed.

Auto-invest is best

Making a habit of investing is probably the best thing you can do to meet your goals. Making automatic contributions to your investments eliminates the temptation to trade your investments based on market news; it also discourages you from trying to time your entry into the market. This approach (referred to as dollar-cost averaging) also allows you to buy shares when your investment is both up and down, potentially smoothing out your returns.

Dollar-cost averaging also enforces discipline. If you’re contributing to a 401(k) plan, your contribution is deducted directly from your paycheck, meaning you never even see that money. In addition, many other financial-service companies make it easy for you to save on a regular schedule by allowing you to have your investment contributions deducted directly from your paycheck or bank account on a regular basis.

I’d lean toward the paycheck option. Company human-resource departments are no longer limiting payroll deductions to just 401(k) and health care expenses; many employers will also let you have savings and investment contributions taken directly from your paycheck. You’re likely to find it easier to live without this money because it’s taken out before you get your check. And you won’t have to worry about having the funds in your checking account on a certain day each month to cover these withdrawals.

Get educated

If you’re not completely comfortable with the subject of finance, we suggest the following books to help get you started. They provide the simple, straightforward basics on many of the topics listed above and will give you the tools and confidence necessary to put your financial profile on solid footing. A couple of our favorites include “Morningstar Guide to Mutual Funds,” “Wall Street Journal Guide to Understanding Money and Investing,” and “The Only Investment Guide You’ll Ever Need.”

Andrew Gogerty does not own shares in any of the securities mentioned above.