So you’ve graduated from college, started your career and leased your first apartment. Maybe you’re assembling Ikea furniture on the weekend and brewing coffee each morning. As you look in the mirror, you’re starting to 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 inevitably face challenges that could imperil your financial health (layoffs, health scares, car repairs) and experience life events that will fundamentally alter your financial path (marriage, children, pets).
You can protect yourself from a lifetime of stress and worry if you start developing good habits early.
Four accounts you need in your financial starter kit:
1. Checking account
You may have relied on Venmo to send and receive money during college, but you will also want to make sure you have a high yield checking account backed by the Federal Deposit Insurance Corp. or the National Credit Union Administration. A checking account will serve as a clearinghouse for money coming in (your paycheck) and money going out (your bills).
There are all kinds of new options to meet your day-to-day money needs. In more recent years, technology companies have been partnering with banks to offer checking accounts. They are known as challenger banks and they offer fee-free checking account options that pair with mobile apps — often providing helpful financial health features. Some of the accounts, such as those offered by Varo Money, Current and Chime, will even grant you access to your paycheck a couple of days early if you enroll in direct deposit.
You also have account options from the usual suspects: banks and credit unions. Look for an account with no fees. According to Bankrate’s 2019 checking account and ATM fees survey, 42 percent of non-interest bearing accounts are considered free checking accounts. If you tend to overspend, you can also find accounts that won’t charge you overdraft fees.
Shop around before committing to a checking account.
2. Savings account
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 will need to 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 30 needs somewhere between $10,000 to $21,000.
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.
If this approach still sounds too overwhelming, you have another option: outsource the chore to a third-party app. There are a number of digital services, such as Digit and Dobot, that you can download to your phone. Once you link your checking account to the apps, they will move smaller amounts of money into your savings every few days automatically.
3. Credit card
In addition to checking and savings accounts, you’re likely going to want to get 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 adulting, and gainfully employed, it’s time to consider signing up for a card so you can start building credit in earnest. Using a credit card can help you build your credit score — a three-digit number that will affect your next big life event, such as the rate you pay on a mortgage.
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, it’s best to stay out of debt.
If you are a new borrower, you may want to consider applying for something like the Petal card — the company will look at your transaction data (bills and income) to make a credit risk assessment. You may qualify for credit through Petal when a traditional lender would have otherwise turned you down.
4. Retirement account
The importance of near-term savings is only outmatched by saving for the long term.
Adequately funding your retirement starts from the beginning of your career. The power of compounding interest can only work well if you give it time to do its thing. It’s a wise idea to participate in your employer-sponsored 401(k) plan as soon as you are allowed. 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 amassed more than $1.5 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 $500,000 less by the same age.
If your company doesn’t offer a 401(k), sign up for an IRA. However, you will 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.