You just graduated college and landed your very first job. You’re excited to start working and start earning a paycheck. The last thing on your mind is saving for your retirement, or even the near future. You’re not thinking about the car you may need in 5 years, the house you’d like to buy in 7 years, the children you’ll have in 10 years, and certainly not your retirement that’s a whopping 40+ years away!
The problem is, if you don’t start thinking about these things now, you’ll end up woefully unprepared for them. Do you know people who are up to their eyeballs in credit card debt? Who buy $30k cars with $5k down? Who have had their houses foreclosed? Who are working in their 70′s because they can’t afford to retire? You don’t want to wind up with those same problems, do you? Then start doing these 10 things right now to build a secure financial future.
1) Take advantage of your employer’s 401(k) match
When you contribute to your 401(k), your employer will likely match a portion of your contribution. The typical employer match is 3% of your salary, but the specific terms vary, so you should check with your employer. You absolutely must contribute up to the employer match. Not doing so is essentially saying, “what’s that? You want to give me free money? Nah, I’ll pass.” If that sounds incredibly stupid to you, that’s because it is. Don’t be stupid. There’s no reason to turn down free money. The 401(k) contribution limit for 2013 will be $17,500. That’s a lot of money, so don’t worry if you can’t max it out. First contribute enough to get the full employer match, then move on to the rest of the list. If you have extra money at that point, you should increase your contributions.
2) Invest in a Roth IRA
Once you’ve contributed enough to your 401(k) to get the full employer match, it’s time to open up an IRA. There are two types of IRAs: traditional and Roth. Contributions to a traditional IRA are tax-deductible, but, like your 401(k), you must pay taxes on money you withdraw later on. Contributions to a Roth IRA are made with post-tax money, but the funds grow tax-free, so you don’t need to pay anything when you withdraw the money in retirement. Since we can never be sure what our futures will hold or what the future tax code will be, I’m a big proponent of tax diversification. If I can pay taxes on some of my retirement funds now, and some of it later, that guarantees I won’t end up paying all of my taxes during a time when my tax rate is at its highest. The IRA (traditional and Roth) contribution limit for 2013 will be $5500. I highly encourage you to max out your IRA every year.
3) Start an emergency fund
Remember how important an emergency fund is? Don’t skip this step. You absolutely need to set aside some cash in case of unexpected expenses. If you have a trip to the emergency room or your car needs new tires, you’ll be thankful for your emergency fund. I know money is tight and I just told you to contribute up to the employer match in your 401(k) and $5500 in your IRA, but this is important. If you go into debt in your 20′s, you’re starting out your adult life on the wrong foot. You have years for compound interest to work for you in your investments, and just as many years for it to work against you in credit card debt, so do everything you can to ensure you won’t ever have to take on credit card debt.
4) Save for targeted goals
Next you have to save for things like a car purchase, a down payment for a house, a wedding, etc. You may not be thinking about these things yet, but at some point you’re going to, and you’ll be thankful that you already have some money saved up when that time comes. I didn’t start saving for these things until they came onto my radar, and let me tell you, I wish I had been saving for them earlier. It turns into an exercise in extreme delayed gratification when you decide you’d like to buy a house, but will need to save up for a down payment for 7 years before you can afford anything. If you start putting aside a small amount of money each month for these things as soon as you get your first job, you’ll be much closer to being able to afford something when the day comes that you decide you’re ready to buy a house, get married, etc.
5) Comparison shop
I just asked you to save a lot of money. If you’re living on an entry-level salary, you may be wondering how on earth you can contribute up to the employer match in your 401(k), max out an IRA, build an emergency fund, save for targeted goals, and then go back and add more to your 401(k). This final step is the answer, and it applies to every aspect of your life. You should comparison shop for absolutely everything. That includes apartments, utility providers (if possible), internet and phone providers, cell phone providers, clothing, food, furniture, outings. Everything. It’s really, really hard to do this when you’re young and don’t have many financial obligations yet. But I promise you will have financial obligations in the future, and your future self will thank you profusely if you take this advice to heart now and look for the best deal on everything you buy, allowing you to save the money called for in the first four steps.
You should also always remember that when you’re comparison shopping, you don’t need to stay within the same category of products. For instance, shopping for the best TV package is great, but you should also consider not paying for TV at all, and watching shows for free on Hulu. Looking for coupons at restaurants is also great, but you should also consider cooking at home instead, which will likely be cheaper even with the restaurant coupon factored in. Instead of shopping around for the best European vacation package, consider a vacation to a cheaper location. You get the idea.
Planning for the future is very difficult when the future seems so far away and the present is much more exciting. Even if you know you should be saving for your future, it’s hard for 20-somethings with entry-level salaries to find the money to put aside. Close your eyes and imagine where you’d like to be in 10 years, 20 years, 50 years. You’re not going to get there without saving, so the time to start is now, even if it means you’ll have to make some sacrifices today. If you follow these five steps, you will be well on your way to a secure financial future.