No matter your salary, your finances can take a nosedive if you do not make some important decisions or pay attention to where your money is going.
Here are some money management mistakes to avoid in order to build wealth, maximize savings and set yourself up for a stable financial future.
1 – Not Taking Advantage of Employer Retirement Match
When you complete your sign-on paperwork, you’ll be asked about retirement. If your employer has a “match,” meaning whatever you contribute, they match that same amount, then opt-in and maximize the contribution.
For instance, if they match up to $500 a month maximum into a retirement account, then you should contribute the full $500. This way, you get $1000 per month put into retirement. The $500 from your employer is essentially free money, so don’t let it go!
Remember, many employer matching programs require that you work a certain number of years until you are “vested.” Once you are vested, you can keep the employer’s contribution. If you change jobs before that vestment period, you will not keep the employer’s contribution (you can keep your own).
If your employer doesn’t do a match, that’s ok, be sure to just put away the maximum allowed. Remember, this is pre-tax money, so you will not be “losing” on your paycheck. You’ll be saving money on taxes and paying your future self!
2. Not Maxxing out Pre-tax Accounts
Look for additional options for saving into pretax accounts, such as a 403b or a 457b, Health Savings Accounts, etc). Even if you can’t make it up to the maximum amount, every little bit counts and will pay off in the future.
Remember: The earlier you start, the less you need to contribute, thanks to compounding interest. The most important thing is to start.
If there are no other options through your work, you can consider opening an IRA- an individual retirement account. This can be traditional or a Roth. A traditional IRA is pre-tax, and if you are below a certain income level, you will likely get a tax refund because of it.
Roth contributions are counted as post-tax. Both require that you are below a maximum annual earnings level to get the tax break or contribute to a Roth. If you call a company that handles these accounts and speak to them about it, they can give you more information.
3 – Not Paying Attention to Insurance Coverage Options
Hopefully, your job gives you health insurance, dental, and vision coverage. Understand your options and choose what’s best for you and your family. Premiums can vary widely, so some due diligence can go a long way.
If dissatisfied with your initial choice, you can change your coverage allocation once a year during open enrollment.
This expense is usually taken out of your paycheck before you are paid. So keep an eye out for that line item on your pay stub.
4 – Not Making an Expense Budget
“It’s easy to make money, it’s harder to keep it” – Shaq
One of the most important money management tips is determining your monthly take-home pay. Then, make a list of the things that you have to pay for – the necessities, for instance:
- Gas (if you own a vehicle)
- Commuting costs (if you ride a bus, taxi, or Uber)
Your take-home pay minus your necessities are what you have left over for everything else. If you find that your costs are high, look at where the money is going, and take the time to reduce expenses where possible.
When it comes to spending for fun, everyone has different priorities; the important thing to remember is not to compare yourself to others. However you decide to save, or wherever you spend your money, is a very personal decision.
5 – Not Building An Emergency Fund
Anything can happen at any time, and you need to be prepared for it.
An emergency fund is a great way to prevent yourself from accumulating debt. To build your fund, you should set aside 3-6 months of expenses. Keep this money in a separate savings account, not to be touched, except for in actual emergencies.
6 – Delaying Debt Repayment
You’ll have to pay off your student loans and other debt at some point. Although there’s normally a “grace period” of six months after graduation, it’s time to pay up once that period is over.
The good news? There are more debt repayment strategies today than ever to help you manage and repay your student loans. Here are some of the ways to do that:
- Consider refinancing and consolidating loans to get a lower interest rate or adjust your loan term to save money over the life of the loan.
- Ask your HR department if they offer a refinancing program through lending partnerships. Many employers now provide loan payback programs as a benefit, just like health insurance, 401Ks, or paid time off.
- Depending on your income level, you may qualify for an income-based repayment program
These are just a few places to get started. The route you decide to take is completely up to you. Just be sure you have a plan and stick to it.
7 – Not Investing Early
You don’t need to hire a financial planner or have much money available to get started. Just a little bit invested each month can go a long way toward building your portfolio.
An easy way to get started is to look into index funds. These mimic an index, like the S&P 500, and are generally low risk. Find some mutual funds or ETFs (exchange-traded funds) and plan to set up auto pay. The amount is up to you; the most important thing is that you start doing this early. As you make more or come to learn more, you can diversify and take more risks.
Starting earlier allows you to take advantage of compound interest and give yourself a higher amount of savings in the future.
8 – Rushing to Make Large Purchases
This is a key money management tip, especially when you first start your job. Getting used to the rhythm of your new workplace, making sense of your paycheck, and realizing how much you’re taking home can take some time. This is particularly true if you have moved to a new city. Give yourself a few months to settle in, and understand where your money is coming from and going.
9 – Not Protecting Yourself
Depending on your field of work, you may require insurance. For instance, in healthcare, it’s recommended that everyone have disability insurance. You may also consider life insurance if you have a family or dependents.
There are many companies out there that offer insurance plans that you may need. Shop around and compare prices to get the best deal (often, if you pay upfront for the year, you’ll get a reduced rate). Purchasing this when you’re young is also better than waiting, as you’ll get locked into significantly lower rates.
10 – Hiring A Financial Planner
This is an expensive mistake. It takes a few minutes a day, or a few hours per month, to understand and figure out what to do with your finances. Financial advisors and planners often don’t have their interests aligned with yours. As a result, they may give advice that helps in the future but hurts you today, which is unnecessary
Instead, read online resources, and talk to representatives at companies like Vanguard or Fidelity, who will be more than happy to walk you through their process and tell you what services are available. Speak to people you know regarding how and where to invest. There’s a ton of information out there, and some of the best advice will come from those who aren’t financial advisors.
11 – Accumulating Credit Card Debt
If at all possible, avoid credit card debt. Pay your credit cards in full each month. The interest payments on these cards are sky-high, and you’ll end up digging a hole for yourself if you carry a balance.
If you find paying off cards difficult, it’s time to re-evaluate. Either you need to cut back expenses, or perhaps you need to abstain from using a card, to begin with.
12 – Not Defining Your Financial Priorities
There is no such thing as keeping up with the Jones’s. They don’t exist, and it’s just not possible.
When it comes to recreational spending, know yourself. What makes you happy? What makes your life easier? What adds value to your life? Your money should go to these areas. Your neighbor may love cars and get a new one every year; however, if you find joy somewhere else, that’s where your focus should be.
Too often, we spend because we feel the need to keep up or do what society is doing. Don’t fall into that trap. Focus on your own life, priorities, and happiness.
13 – Not Communicating Openly With Your Partner
If you’re in a relationship, the money talk will inevitably happen. Depending on your relationship dynamic, you may also have different spending habits.
Make communicating about finances a priority and a regular event. Doing so can help with setting financial goals for your relationship and family. It will also help prevent surprises from cropping up down the road.
These money management tips with your first job are meant to help you understand what to do with your money and utilize it to maximize its value.
It’s exciting to start something new, especially if you’re getting a higher salary. But as long as you are intentional with your finances, you can avoid some of the financial pitfalls that may plague your neighbors. Follow these tips to develop healthy financial habits and secure your future!