You finished college (and probably grad school, law school or medical school), and landed a real job. That real job has turned into your career, and it’s time to get serious about what you’re doing with your money. If you have not figured out your financial priorities, here’s how to get started.
1) Cash in the bank. Call it your emergency fund, your sleep-well-at-night money or your safety net, but you need it. At a bare minimum it should be over $10,000, and realistically it should be four to six months’ salary. (If you are self-employed, a contractor or otherwise have irregular income, you may consider bumping that up towards 6-12 months.) If you’re making $75,000, you should have at least $25,000 in the bank. And I mean the bank. Not in your 401(k), not in an IRA, not your kid’s college fund or that gold you inherited from grandma. Cash, liquid savings in a bank account or CD. If you’d like a better yield than the local bank or credit union, there are legitimate, FDIC-insured online banks with (modestly) better interest rates. Some of the more popular banks are Capital One 360 (formerly ING Direct), Ally Bank and American Express Bank.
2) Kill your consumer debt. No credit card debt. No car loan. No consumer debt – nada. You’re allowed a mortgage and to be working on paying off your student loans. The rate at which you attack your student loans and/or mortgage debt is a bigger part of your financial plan. Consumer debt is never a part of your financial plan, except for getting rid of it.
3) Fund your 401(k) (or similar workplace plan). At an absolutely-no-excuses bare minimum, get your company match (if offered). Your real-life minimum is 10% of your salary, and a good target is 15-20%. No, your company match doesn’t count towards that number. If you’re not sure what else to do, look for a target-date retirement fund.
4) (If you are eligible) Contribute to a Roth IRA. One day in retirement you’ll find that it was advantageous to have saved in both pre-tax (traditional IRA/401(k)) and after-tax (Roth) retirement accounts. This will give you better control over your taxable income in retirement and a hedge against changes in future tax rates.
5) Goals-based savings. Thinking about a downpayment for a new house? New car? Trip to Europe? You’re not borrowing for this stuff, right? If you’re already using an online or other free savings account for goal #1, consider setting up individual accounts for targeted savings. This can make it easier to track your progress towards your goals and eliminate the temptation to dip into emergency or retirement savings for these secondary goals. If you have goals beyond retirement (and I imagine we all do), start socking away some of your income into a dedicated account to help you get there.
Those are the basics.