Congratulations! You've graduated from school and landed a job.
Your salary, however, is limited, and you don't have much money (if
any) left at the end of the month. So where can you find money to
save? And, once you find it, where should this cash go?
Here are some ways to help free up the money you need for
current expenses, financial protection, and future investments --
all without pushing the panic button.
Get Out From Under
For most young adults, paying down debt is the first step toward
freeing up cash for the financial protection they need. If you're
spending more than you make, think about areas where you can cut
back. Don't rule out getting a less expensive apartment, roommates,
or trading in a more expensive car for a secondhand model. Other
expenses that could be trimmed include dining out, entertainment,
If you owe balances on high-rate credit cards, look into
obtaining a low-interest credit card or bank loan and transferring
your existing balances. Then plan to pay as much as you can each
month to reduce the total balance, and try to avoid adding new
If you have student loans, there's also help to make paying them
back easier. You may be eligible to reduce these payments if you
qualify for the Federal Direct Consolidation Loan program. Though
the program would lengthen the payment time somewhat, it could also
free up extra cash each month to apply to your higher interest
consumer debt. The program can be reached at StudentAid.gov.
What You Really Should Buy
How would you pay the bills if your paychecks suddenly stopped?
That's when you turn to insurance and personal savings -- two items
you should "buy" before considering future big-ticket
Health insurance is your first priority. If
you're not covered under an employer plan, look into the state or
national health insurance exchanges, which offer a variety of
coverage options and providers to choose from. You may also qualify
for a subsidy if your taxable income is under 400% of the federal
Life insurance is the next logical step, but
may only be a concern if you have dependents.
Disability insurance should be another
consideration. In fact, government statistics estimate that just
over 25% of today's 20-year-olds will become disabled before they
retire.1 Disability insurance will replace a
portion of your income if you can't work for an extended period due
to illness or injury. If you can't get this through your employer,
call individual insurance companies to compare rates.
Build a Cash Reserve
If you should ever become disabled or lose your job, you'll also
need savings to fall back on until paychecks start up again. Try to
save at least three months' worth of living expenses in an
easy-to-access "liquid" account, which includes a checking or
savings account. Saving up emergency cash is easier if your
financial institution has an automatic payroll savings plan. These
plans automatically transfer a designated amount of your salary
each pay period -- before you see your paycheck -- directly into
To get the best rate on your liquid savings, look into putting
part of this nest egg into money market funds. Money market funds
invest in Treasury bills, short-term corporate loans, and other
low-risk instruments that typically pay higher returns than savings
accounts. These funds strive to maintain a stable $1 per share
value, but unlike FDIC-insured bank accounts, there is no guarantee
that they won't lose money.2
Some money market funds may require a minimum initial investment
of $1,000 or more. If so, you'll need to build some savings first.
Once you do, you can get an idea of what the top-earning money
market funds are paying by referring to iMoneyNet, which publishes
current yields. Many newspapers also publish yields on a regular
Shopping for the Best Credit Card
Extensive lists of the latest low-interest rate cards in the
United States are available at consumer websites such as Bankrate
Build Your Financial Future
Some long-term financial opportunities are too good to put off,
even if you are still building a cache for current living
One of the best deals is an employer-sponsored
retirement plan such as a 401(k)
plan, if available. These tax-advantaged plans allow you
to make pretax contributions, and taxes aren't owed on any earnings
until they're withdrawn. What's more, new Roth-style plans allow
for after-tax contributions and tax-free withdrawals in retirement,
provided certain eligibility requirements are met. Another big plus
is direct contributions from each paycheck so you won't miss the
money as well as possible employer matches on a portion of your
contributions. Bear in mind, however, that you will have to pay
taxes on the retirement plan savings when you take
If you're already participating, think about either increasing
contributions now or with each raise and promotion.
If a 401(k) isn't available to you, shop around for
individual retirement accounts (IRAs), both
traditional and Roth, at banks or mutual fund firms. In 2020, you
can contribute up to $6,000 to traditional IRAs or Roth IRAs.
Generally, contributions to and income earned on traditional IRAs
are tax deferred until retirement; Roth IRA contributions are made
after taxes, but earnings thereon can be withdrawn tax free upon
retirement. Note that certain eligibility requirements apply, and
nonqualified taxable withdrawals made before age 59½ are
subject to a 10% additional federal tax.
Stop Waiting for the Next Paycheck
Beginning your working life with good financial decisions
doesn't call for complex moves. It does require discipline and a
long-term outlook. This commitment can help get you out of debt and
keep you from a paycheck-to-paycheck lifestyle.