O’Connor: Money advice for 1st job? Just say, ‘Uncle!’
Lots of people I know end up mentioned in this column, which is one of the dangers of being acquainted with a writer. That includes my spouse (the Long-Suffering Mrs. Funny Money) and my son, (Funny Money Jr. or, as I call him, Li’l Money, ’cuz that’s all he leaves us), as well as my New York City running buddy, The Big Man From Brooklyn.
But I never mention my brother’s spouse and kids in any of my columns, since he’s basically given me the same rules that regulated “Fight Club.”
First rule: Don’t write about my family. Second rule: Don’t write about my family.
I’m going to cross the line just a bit this week to gush with uncle-y pride that The Favorite Nephew is now gainfully and permanently employed after just a two-month job hunt, in a real professional job that — amazingly — is related to what he studied in college. Although I now realize I just made him a bit too easy to identify with those last two facts which, in this economy, apply to maybe five recent graduates in the entire country.
Some suit-able advice
The occasion of landing a job that required the actual wearing of a suit by a millennial requires uncle-y advice, too. So, for anyone starting out in the workforce, here are the basic money moves:
Sign up for the 401(k): If there’s a workplace retirement savings account, sign up for it. Start with 2 percent of your salary, which is deducted pre-tax, which means your take-home pay will be reduced by less than that amount. But even if it wasn’t less, you wouldn’t miss it because, on a $30,000 annual salary, the difference is less than $12 a week. This level of savings will likely be matched at 30 percent to 50 percent by your employer, which is free money. You should always take free money. Your employer may automatically sign you up, so you may not have to do anything (yet).
Don’t sign up for the 401(k): If your employer is the kind of loser tightwad that doesn’t offer an employer match, skip it entirely. Instead, sign up for a Roth IRA at e-Trade, Vanguard or another online operation, and have the same 2 percent deposited. Your take-home pay will be reduced by 2 percent, but you won’t miss it and you won’t pay taxes on your gains. Also: Make sure your next employer offers a match.
You can withdraw contributions from a Roth IRA (but not gains). When you do so, you have to tell the IRS at tax time, to avoid paying tax and a fine. Before you do so you’ll also have to tell your uncle, who wants to hear a very good reason as to why you’re raiding your IRA.
Invest in stocks: Keep it simple to start. Go 100 percent into a big, diverse stock index fund, such as one that matches the S&P 500 or the Wilshire 5000. If your employer automatically enrolled you, the money is most likely going into a low-yielding money market account as the default, so go down to human resources (or online) and fix that. If you get an employer match, the employer can choose where that money goes. Ideally, that choice isn’t company stock.
But not company stock: You already get your entire living from this outfit, so why risk more of your money in its stock? If the place goes broke, you lose your paycheck and your retirement fund. So just don’t.
Diversify: After you build your balance to a respected couple of grand, diversify to this recommended mix from 401khelpcenter.com: 40 percent in large-cap growth funds; 25 percent in small-cap growth funds; 25 percent in large-cap value funds; and 10 percent in a foreign stock fund. You can find out what those terms mean online so, yes, real life comes with homework. Rebalance at least once a year (twice is better), which means adjust your holdings back to this ratio. Some providers will do this automatically, if you set it up that way online.
Save another 2 percent: This will be your emergency fund. Have it automatically deducted from your paycheck and goes into a bank savings account or an online money market account, such as Capital One 360 or Ally Bank. Don’t lock up the money in anything you can’t cash out in a matter of days. You won’t make a lot of interest on this money — like, maybe 1 percent — but that’s not the point. The point is that you won’t put a new transmission on a credit card and lose 22 percent.
An emergency doesn’t involve: Restaurants, clothing, Christmas or plane tickets. Unless you need to fly to New York to see your uncle win the Pulitzer Prize. Plus, he’ll probably be so happy he’ll reimburse you (applies to coach fares only).
Start a budget: A good start is the 50-30-20 budget: In this plan, 50 percent of your take-home pay goes to your fixed costs, including housing, utilities, renter’s insurance (yes, you need that), car payments and your basic overhead. Then, 20 percent goes to your financial priorities: savings, disability insurance (probably comes as a job benefit but, if not, get some), paying off debt, saving for a house or wedding (no, I’m not prying!). The final 30 percent is your flexible spending, such as food, clothing, entertainment and any other spending you can adjust at your discretion.
Avoid debt: Don’t put your lifestyle on plastic. Go into debt only for specific purposes, not because you can’t make ends meet on your salary. When you do make a purchase on credit, make a plan and schedule to pay it off, and stick to it.
Check your taxes: A good rule of thumb is that you’ll take home about 65 percent of what you earn, after state and federal taxes and Social Security. But you can find out exactly how much by checking out the withholding calculator at www.IRS.gov. This avoids the truly unpleasant surprise of owing taxes next spring, or discovering you’ve been short-changing yourself on every paycheck by giving too much to the IRS.
Start a Dream Box: Or a Dream Coffee Can, Dream Sock or whatever. Everything else on this list is good advice, but this is really important. Write down a fun financial goal, big or small, and set aside extra money for it. Then find ways to set aside more. You’ll be surprised at what you can accomplish and at how this will change your relationship with money and work.
Write down a specific goal and dollar amount on your Dream Box. Then collect all your spare change around the house and put it in there. Then add your spare change at the end of each day, or a set amount per week, or any other rule you can come up, such as contributing any $5 bills left in your wallet at night. And definitely use cash — seeing real money start to pile up is a huge motivator.
And ... you’re off! Do this and you’ll be much better off than the majority of workers in this country, you’ll need to save less overall to hit your retirement goal, and you’ll have more money at retirement. Steadily increase your savings rate from 2 percent by upping it by 1 percent or 2 percent a year, or by adding half of any raise, or both. Keep it up until you hit at least 10 percent, though 15 percent would be better.
When you hit 40, we’ll need to add some bonds to your investment mix. That’s only 15 years away, so I’ll still be around to remind you. Just bring me a good bottle of gin in the home.
boconnor@detroitnews.com
Twitter: @BrianOCTweet
(313) 222-2145