10 money tips when you’re just starting out

If you’re just starting out in the workforce, or have a son or daughter who has recently graduated, here are 10 tips that will help a person on their financial journey.

Be careful with debt – A better way of saying this would be to use debt wisely.  When used in the right manner, debt can be a good thing.  The obvious example is buying a house.  A mortgage is responsible debt because it’s backed up by a physical asset, your house.  This is an asset that tends to hold its value or increase at a modest pace over time. There are some tax benefits to owning a house and having a mortgage as well.  A car loan is backed by a physical asset (your car) that loses value over time unless you own a rare collectible, in which case you probably don’t drive it much, if at all.  Irresponsible debt is credit card debt, which isn’t backed by a physical asset at all. Carrying a balance on your credit card should be the worst case scenario.  You’ll pay high-interest rates and the power of compounding will work against you (see below).

Take advantage of your employer retirement plan – You’ve probably heard it before…you’re passing up free money by not contributing to a company retirement plan that offers matching.  Contribute at least enough to your plan to get the full match from your employer.  The more you can contribute to your retirement plan, the better.  So whenever you get a raise, take the opportunity to increase the amount you’re contributing.  You won’t miss the monthly income, and your future self will thank you.

Pay yourself first – The financial author David Bach popularized the method of saving and investing first, as well as automating the process.  The average person gets paid, then pays their bills, then spends some fun money, and if there’s anything left, saves or invests.  By prioritizing the saving and investing part of the process, you’re ensuring that you make progress on those fronts. By setting up an auto-debit from your checking account to your savings or investment account, you’re making it that much harder not to save or invest.  Eliminate potential excuses by automating your monthly savings and investment dollars.

Understand the difference between wants vs needs – We live in a consumer culture.  Consumption represents 70% of our nation’s GDP.  During good times, Americans spend.  During bad times, we still spend, albeit maybe on different things.  If you truly want to build a nest egg and work towards your financial freedom point, then you must find a way to live below your means.  Where many people get tripped up is in confusing wants with needs.  We aren’t here to preach about what’s a want and what’s a need.  You need to make that call.  The better you are at delineating between the two, the better your chances of living below your means.

Have a spending plan – Utilize software like Mint.com to track your spending.  Be curious about where your hard-earned money goes.  When most people hear the word “budget” they think of some kind of ball and chain.  Don’t call it a budget.  Call it a spending plan.  Or don’t call it anything.  The important thing to do is to understand where your money goes and to make sure it matches your values.  Want some help?  Our Five Uses of Money process can help you figure out what’s most important to you in life and make sure your financial decisions are helping you get closer to that point.

Set up an emergency fund – Life can throw some curveballs.  Be ready for them with some cash set aside as an emergency fund.  How much is up to you.  One common rule of thumb is that if you and your spouse both work, three months of your fixed living costs should suffice.  If only one spouse works, then perhaps six months is more appropriate.  There’s no clear-cut answer here.  A lot of it depends on the stability of your job and income, as well as access to other sources of liquidity should you need it.

Set financial goals – Research shows that when you write down a goal and share the goal with another person you are much more likely to achieve the goal.  Make a few financial goals at the start of every year and review them whenever the temptation to veer off-course hits.  If you really want to focus on your financial future, set some longer-term goals.  Want to retire at age 60 and move to a beach community?  Write these goals down and formulate a plan for making it happen.

Start investing – Time is something you have on your side right now.  Take advantage of it.  The power of compound interest is staggering (see below).  When you’re ready to begin investing on your own outside of a retirement plan, we suggest not trying to pick individual stocks, but rather to use mutual funds or exchange-traded funds (ETFs) to gain better diversification.  Index funds have gotten a lot of publicity the last few years.  These low cost, low turnover funds represent a good starting point.  Avoid mutual funds that have a sales load (commission), which are typical when a broker or financial advisor sells them.

Understand the power of compounding – Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t pays it.”  People who grasp this concept use it to their advantage.  People who don’t will have a hard time achieving financial freedom.  Here’s a quick example:  If you begin investing $200 per month at age 25, and continue doing so until age 65, you will have invested a total of $96,000.  Assuming a 6% return on your investments, you will end up with a little over $400,000.  If, instead, you begin at age 35, and invest the same $200 every month until you turn 65, you will have invested a total of $72,000.  Assuming a 6% return on your investments, you will end up with a little over $200,000.  So by delaying 10 years and skipping out on only $14,000 in additions to your investment account, you have cost yourself right at $200,000.  That should drive home the power of starting early and sticking with it.  The longer you wait, the more you’ll have to save on a monthly or annual basis to catch up.  Better late than never though.

Spend on experiences, not stuff – Research shows that the happiness attributable to spending your money on experiences is much higher and longer lasting than that of buying tangible things.  We’ve written about this topic before.

This list isn’t comprehensive, and probably never could be, given everyone’s unique financial situation.  Consider this a good foundation for you or someone you care about.  Even if you only follow a couple of these principles, you will put yourself in a stronger position financially.  Any questions?  Let us know.

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Since 1995, Pittenger & Anderson has guided individuals and families going through money-in-motion events. We are a fee-only Registered Investment Advisor and a full-time fiduciary providing investment management, financial planning, and complimentary services to 800+ clients in over 30 U.S. states.

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