People are more willing to talk about politics, religion, or their sex life than their personal finances.
In a survey of 1,202 American adults conducted by The Capital Group, survey participants ranked financial topics such as household earnings, retirement savings, debt and inheritances as the most taboo topics of discussion.
This leaves most of us feeling under-prepared and intimidated by personal finances. Below are some helpful tips to kickstart your personal finances early in your career.
Live like a college student
Learn to live on less than you make. This will give you freedom to pursue new endeavors, accumulate wealth, and experience less money-related stress.
We buy things we don’t need with money we don’t have to impress people we don’t like.The Total Money Makeover
Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.The Millionaire Next Door
Most people fail to realize that in life, it’s not how much money you make, it’s how much money you keep.Rich Dad Poor Dad
Live below your means:
- Drink the terrible coffee at your client instead of Starbucks (unless the Firm is buying, then go big)
- Buy your dress shirts from Amazon, instead of Brooks Brothers
- It’s okay to drive a 10-year-old Toyota Camry
- Live with housemates (I know they are messy, don’t do the dishes, their boyfriend is always around, etc.)
Maximize the firm’s 401k match
All the Big 4 firms provide a 401k match. Max it out! Even the low side (25% match) represents a substantial, guaranteed rate of return in Year 1.
Once set up, 401k contributions are automatically deducted from your paycheck.
This is helpful! You don’t have to remember to do anything and you don’t “see” the cash (assuming you are like most people and budget based on take home pay).
Max out a Roth IRA
A Roth IRA is a retirement savings account that gives you a “pay now, save later” tax advantage. A Roth is funded with after-tax dollars (i.e. you have already paid taxes on the money you put into it). In return for no up-front tax break, your money grows tax-free, and when you withdraw at retirement, you pay no taxes on what you contributed or the accumulated growth.
Because of this tax treatment, a Roth IRA can be a fruitful way to invest early in your career (while your marginal tax rate is relatively low) and reap the benefits at/near retirement (when your marginal tax rate may be higher).
Note: the 2020 IRS contribution limit for a Roth IRA is $6,000.
Myth: I will be generous later
Early in my career, a mentor shared with me perspective-changing advice:
Start the habit of being charitable early in your career, it doesn’t get easier to give later – even if you are making considerably more
This advice was challenging, because it was/is true. Being charitable, like most habits (eating well, exercising, etc.), does not come naturally. It is a mindset that needs to be trained/developed.
Consider allocating a percentage of your salary to give charitably. Start small. If possible, have the contribution directly deduct from your paycheck.
Do some research
Do you feel intimidated, unprepared, or naïve navigating personal finances?
Are you comfortable/knowledgeable with personal finances, but recognize there is still room to grow?
If you answer “yes” to either of these questions, the books below provide an accessible, straightforward approach to personal finance.
- The Total Money Makeover: A Proven Plan for Financial Fitness
- The Millionaire Next Door: Enduring Strategies for Building Wealth
- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!
While there are similar themes across all three books, each book provides a unique insight/approach. I recommend all three!
Dave Ramsey uses a slogan that is equal parts cheesy & insightful: If you live like no one else, later you can live like no one else.
Note: I am far from a certified financial advisor. Talk to someone who does this for a living for specific advice.