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Your Money Matters

Your First Real Job! Now What?

If you are a recent college graduate, consider yourself very fortunate if you have a job waiting – even if it’s not your dream job.  With a steady income- regardless of size- you are taking your first steps into adult life.  Don’t blow it.

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As I wrote last week, it’s tempting to go on a spending binge.  And extremely important that you don’t.  For suggestions about what to consider, please follow this link:

As tedious- perhaps even impossible- as it sounds, try to take a small amount of what you are earning and stash it away.  Your first goal is to have an emergency fund.

After that, you want a savings account for longer term goals.  David Weliver, the creator and editor of Money Under 30,, recalls friends who began saving, even on a small scale, when they landed their first job.  “The difference between people who save in their 20s versus those who start in their 30s is significant.”

To Compound Things….

Here’s why: thanks to “compounding”- the concept of earning interest on previous interest you have received- a relatively small amount of money can grow to a larger sum than most people imagine.

For instance, say you invest $100/month.  When you break this down, we’re talking about $25/week, or six large coffees from the barista on the corner.  You invest your $100 in a mutual fund that returns a modest 6%/year.   (Obviously, we are not talking about a money market fund, but perhaps a “balanced” fund that owns both stocks and some bonds.)

After 12 months, you’ll have- not $1200 in your account, but almost $1,240.(1)   (Why not $72?  Because you did not have this entire amount in your account until the last month.)

But Wait!  There’s More

Each year you increase your monthly amount by 3% for inflation. At the end of the second year you will have contributed $2,436 and your account will be worth $2,592.  Instead of $39, your gain this year was $156. That’s because you not only earned a return on all of your monthly $100 contributions, you also earned a return on the earnings from the previous year.

If you start a program like this at age 22, by the time you’re 32 you will have invested $13,756.  However your account will be worth $18,579- nearly $5,000 more than you contributed.(2)

Congratulations. While you now have a deposit for your first home, your less thrifty friends are still renting.  If you are married by now and your spouse had the foresight to do the same thing you did, the two of you are well on your way.

Furthermore, if you were smart enough to invest in a mutual fund inside a Roth IRA, all of your contributions can be withdrawn tax-free.  The gains on your investment can also be withdrawn tax-free once they have been in the Roth account for at least five years.

Don’t you feel smug?

Delaying Gratification

All those in-one-ear-and-out-the-other lectures from mom or dad about contributing to an IRA or other retirement account were really not meant to torture you.  Honest.

Believe it or not, they were once your age and also could never imagine reaching 40.  But just as they did, so will you.  If you wait until that point, accumulating the nest egg you’re going to need will require even more sacrifice.  That’s because you have less time, probably a mortgage and, yep, kids of your own. Think: pre-school, bikes, braces, family vacations, and college.

If you are lucky enough to work for a company that offers a 401(k) or similar retirement plan, don’t ignore it.

“Take time to understand your benefits at work,” says Weliver.  “As boring as it is, it’s important.  If your employer matches [your contributions], by not contributing to your 401(k) you’re leaving money on the table- several hundred or thousands of dollars.”  Each year!

Let’s say your salary is $30,000/year.  You decide to contribute 12% to your company’s 401(k).  This amounts to $3,600/year or $300/month.  Only, it’s not like as if this is taking $300 out of your pocket.  That’s because your contributions are being made on a pre-tax basis.  Because you are in the 15% tax bracket, your $300 401(k) contribution equates to a $255 decline in spending money.

Let’s assume that you increase your contribution by 5% each year to account for salary increases over your career.   In addition, your account earns a conservative 6%/year, compounded quarterly.

Are You Sitting Down?

Assuming you start at age 27, by the time you qualify for your full Social Security benefit (age 67), your 401(k) account will be worth…..$1,239,697!

What’s more, your annual contribution was until $10,000 until you were in your mid-40s.  Moreover, you were not contributing $20,000/year until you were age 64 and well into your peak earnings years.(3)

Wait 20 years to start?  Forget about retiring.  You’ll have just $208,565 by age 64.

That’s because compounding has it biggest impact at the end of the savings period.

Deeep Breath

Yes, this is a lot of digest.  Start by taking the steps outlined last week.  Think about whether it’s worth it to get a part-time job to pay off your student loans ASAP.  A short-term sacrifice like that can pay off big-time in terms of freeing up money for other purposes and just, well, reducing stress.

Use the resources available online to help you figure out what you can afford. (I wish they’d been available way-back-when.)  Think about finding a financial advisor willing to work with someone at your stage of life.  Perhaps it’s the same person your parents with.

Or just dig out your Dr. Seuss books and re-read them.  You’ll be amazed at how much financial advice you absorbed at a young age:

You have brains in your head.

You have feet in your shoes.

You can steer yourself any direction you choose.(4)

1. Assuming your return is compounded quarterly. 2. $4,822.33 to be exact. 3.  Annual contributions to 401(k) plans are adjusted for inflation each year.  This year the maximum amount for someone who is age 50 or older is $23,000. 4. From “Oh, The Places You’ll Go.”

What do you think?

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