Have you ever run a race and gotten off to a rotten start? Maybe you were a step slow when the starting gun sounded. What happened next? Once you started running, it was all about catching up. Unless you are a cheetah, your first goal was to get ahead of the person in front of you. Then the next, all the while hoping you’d reach first (or a respectable spot) by the end of the race.
Too many recent graduates get off to a slow start when it comes to managing their finances. Maybe they moved to a new city and feel they deserve the nicest apartment. Maybe they go overboard with new clothes. Or perhaps they just took too many loans in college and their first paycheck isn’t what they had dreamed of. However, unlike a relay race, this slow start could last years.
Live below your means
When you get that first job, make it a priority to live below your means. That means doing everything – from going out to grocery shopping to outfitting your first apartment – for LESS than what you’re bringing home in your paycheck. Not the amount you signed for, but the after-tax, after-healthcare amount being deposited into your checking account.
This reality may be hard to accept. Many of you scrimped and saved and worked hard to get through college. You may be tired of living with the second-hand furniture you got at Goodwill or Salvation Army. But remember – your first job isn’t putting you in the top 1% of wage earners. Your first apartment doesn’t have to look like you’re rolling in the dough either. Even though you may no longer be a poor college student, managing your finances from the get-go will pay off in the long run.
Quality items one-by-one
I’m not saying live with mismatched furniture forever. Nor am I saying to go to work in threadbare clothes. Having the proper wardrobe is essential in a new job, but don’t overdo it. For instance, if you’re buying suits, find sales or shop outlet stores, but choose quality. Two classic quality suits are a better investment than five cheap ones. Find clothes you can mix and match so that you aren’t wearing the same look every day. Purchase a few quality items that you can afford now, then add to them as your savings grow.
Wait for your first paycheck
When you start a new job, the difference between what you accepted and your actual take-home pay is unknown. The number of withholdings you select, your healthcare plan, money for a flexible spending account, and what if any portion you’re contributing to the retirement plan will all make your take-home pay differ. What you’ll bring home can range quite significantly depending on your choices.
I’ve had several corporate jobs and I’ve never been pleasantly surprised by how huge my first paycheck was. Every time I was shocked at how much taxes and other deductions reduced my take-home pay.
Before you start a new job, try to hold off on extra spending until you receive your first paycheck. Like I said, appropriate clothing is essential. Basic cooking utensils – always a good thing. But until you see that first check you have no idea how much you’ll make per month, so there’s no way to determine what you can spend now.
Note – as you’re signing up for healthcare and other deductions, see if HR will give you an estimate of your first check. Even if it’s not penny accurate, it will help you approximate what your take-home pay will be. And consider having some of your pay go straight into a savings account to build up an emergency fund. Even just $20 a paycheck will add up quickly, and you might not even miss it.
Be patient
There’s nothing wrong with wanting to get ahead, to have the nicest clothes or travel the world. But as you start your first job, take a breath and focus on you. You’re young, just starting off. Do your best every day, find a mentor in the workplace, and meet new people. But also, give yourself a chance to enjoy just being independent. Chances are, a lot of your friends and new coworkers are in the same financial boat.
And if they are making a lot more, don’t get caught up with what you see on social media. There are always going to be people who have more, have nicer, etc. You have your whole life to catch up with the Joneses. Give yourself a chance to figure out if the Joneses even matter.
Next steps
So after you’ve seen how much you’re making and bought the essentials, what next?
Continue building an emergency fund. Financial experts say you need three to six months of living expenses in case something happens to your job or you have an unforeseen emergency. Keep building your savings.
Contribute to the retirement plan. I get it. You’re in your early 20s, retirement is literally a lifetime away. But you have an advantage over most other investors. Time. If you start investing now, you can build up more by investing less than someone who starts 10 years later. Plus if your company matches your contributions and you don’t save for retirement, you’re just leaving free money on the table.
Prioritize. What’s important to you? Do you need more furniture? Nicer clothes? Make a list what you think you need and start looking at how much these items would cost. Then you can start buying what you truly need as you save the money to pay for it.
Don’t mindlessly sign up for little things. Don’t let yourself get caught up in subscribing to every streaming service and consider holding off on a gym membership (or see if your company provides discounts). The little things can quickly add up to keep you from living below your means.
Don’t forget friends. It’s easy to go overboard with your friends by always going out to dinner or drinks and not worrying about the consequences or costs. It’s also easy to become something of a hermit. Try to walk the middle ground. Definitely keep in touch, go out when you can, but don’t overspend. If the activities they’re choosing are too expensive, suggest lower cost things from time to time.
Do a great job. This may sound weird on the list of to-dos for living within your means, but a raise provides more money to cover your expenses.
Splurge…occasionally
You deserve accolades for graduating college and finding your first job. Going out to a nice restaurant or spending a weekend with your friends at the beach can be one-time celebrations of your accomplishments. But know the difference between splurging and everyday life, and commit to living within your means. Before you know it, it’ll be second nature.
Photo by Helena Lopes