You’ve graduated from college, started your career and leased your first apartment. You’re assembling Ikea furniture on the weekend, and brewing coffee in the morning. When you look in the mirror, you see the hazy outlines of an adult.
Now all you have to do is start saving.
The road to financial security is long and winding. You’ll inevitably face challenges that could imperil your financial health (layoffs, health scares), and experience life events that will fundamentally alter your financial path (marriage, children).
You’ll inoculate yourself from a lifetime of stress and worry if you start developing good habits early.
Savings and checking accounts
The greatest joy of adulthood is independence. You have your own living space, your own car and you can do what you want with either of them.
The problem is that you need to back up these essential costs with savings. If you lose your job, or something unforeseen and expensive occurs, you’ll rely on a fully funded emergency savings account to keep you from veering into debt.
What’s essential? Rent, health insurance, transportation, food and debt service that won’t give you a break if you’ve fallen on hard times, like private student loans.
Tally those monthly costs and multiply by three to six. This should give you a range of how much you should have in emergency savings. The typical household headed by someone aged 25 to 34 needs somewhere between $10,000 to $20,000.
The good thing is that you don’t have to get there all at once. Automate direct deposit contributions to a high-yielding savings account, so that you pay yourself a little bit every paycheck.
A 22-year-old who pockets $150 every two weeks will reach $10,000 by their 25th birthday.
The median amount held in financial accounts, like savings, for household helmed by those 35 or younger was only $2,600, according to the Federal Reserve.
A savings account is only half the battle. You’ll also need a checking account, preferably one with no fees, as a clearinghouse for money coming in (your paycheck) and money going out (your bills).
The importance of savings for the near term is only outmatched by savings for the long term.
Adequately funding the last third of your life starts from the beginning of your career. The power of compounding interest can only be harnessed if you give it time to do its thing. That’s why you need to participate in your employer-sponsored 401(k) plan as soon as you are allowed, and save at least 10 percent of your pay, including any match from your job.
For instance, a 22-year-old who saved 10 percent of her $50,000 annual income and enjoyed an annual raise of 2 percent would have $1.7 million by the age of 66, assuming annual returns of 7 percent. A 35-year-old who earned twice the salary would end up with about $400,000 less by the same age.
If your company doesn’t offer a 401(k), sign up for an IRA, although you’ll have to put away more of your income since there would be no employer match.
You could opt for a Roth IRA, or do some combination, to hedge against future tax rates.
In addition to checking, savings and retirement accounts, you’re going to need to a credit card.
The 2009 CARD Act limits the ability of college students to attain access to certain loans with high interest rates on revolving balances, which is essentially what a credit card is.
Now that you’re living in the real world, and gainfully employed, it’s time to sign up for a card so you can start building credit in earnest.
But you need to walk before you can crawl. Sign up for a no annual fee card, use no more than 20 to 30 percent of your available credit in a billing cycle and pay your bill on time every month.
You can opt for a rewards card, but if you want to earn a higher credit score, which will come in handy during your next big life event (buying a house), don’t go into debt.