When you start your first full-time job after college, you will have many important financial decisions to make. With greater earning potential comes greater financial responsibility, from maximizing your employee benefits, such as life insurance and retirement planning, to paying down your student and credit card debts to investing in an emergency fund. You can help to set yourself up for lifelong financial comfort if you learn the basics and establish good habits now by following our first day at your new job financial checklist.
Take full advantage of employee benefits
Depending on the type and size of company you start working for, you might be offered next to nothing in the way of benefits or you might be offered everything from health insurance to life insurance to disability income insurance and more. The choices can be confusing. Here’s some information to consider when contemplating them.
Job hopping is becoming more common in today’s labor market. The first wave of Gen Z workers — those born after 1997 — plan to move from an employer in three years or less, according to a study from online recruitment firm Yello. Indeed, the median tenure of workers ages 25 to 34 years old is 2.8 years, according to the Bureau of Labor Statistics.
With the likelihood that you will change jobs several times in your 20s and 30s, getting life insurance through your employer may not be your best option.
Yes, it may be your cheapest option — your employer might offer life insurance with a death benefit of one, two, or three times your annual salary as a free or inexpensive employee benefit — but if you leave the company, you usually will not be able to take your policy with you. (Learn more: Group vs. individual life insurance)
You will then be dependent on getting good coverage through your new employer, or you will be subject to what you can purchase in the individual life insurance market given your health situation at that time. Since none of us ever knows when our health might worsen, it is generally a good idea to purchase insurance when you are young and less likely to have a history of serious or chronic health conditions.
While you may not need life insurance in your 20s in the sense that you may not yet have a spouse or children who depend on your income, buying at least a small, inexpensive term life insurance policy could be a smart move so that you know you have established a baseline of coverage, regardless of what happens with your health or your job, if you do end up having dependents. (Related: Single? Why you still may need life insurance)
There are many types of life insurance available at different price points, so even if you do not have much disposable income, you may be able to find an affordable policy that offers a good value in terms of coverage, especially if you are a nonsmoker with a healthy weight. (Get a quote)
Disability income insurance
Disability income insurance provides can protect a portion of your income if you are too sick or injured to work. According to the Social Security Administration, one in four 20-year-olds will become disabled before retirement age.2 (Calculator: How would a disability affect my finances?)
But, like life insurance, the question of whether your employer’s offering is the best option also applies to disability income insurance. As with life insurance, you may not be able to take an employer-sponsored disability insurance policy with you when you change jobs, and the coverage your employer offers might not provide as much financial protection as you would like. Also, benefits from an employer policy are typically taxable.
And again, as with life insurance, disability income insurance is less expensive if you purchase it when you are young and healthy than when you are older and potentially less healthy.
The Social Security and Supplemental Income disability programs can provide assistance, but only those who meet Social Security’s definition of disability and other criteria may qualify for benefits under either program.
Private disability insurance may provide more liberal benefits to what you might receive through Social Security, and you can customize the policy to your needs. You can choose the amount of coverage, within limits based on your income, and you can decide how long you would be willing to wait before benefits would kick in — for example, three months versus six months. A private disability policy can also be designed to help supplement what’s available through an employer’s offerings.(Learn more: Is disability income insurance worth it?)
The basic decision when choosing health insurance through work usually comes down to HMO vs. PPO and high deductible, low premium vs. low deductible, high premium.
If you choose an HMO, or health maintenance organization, your premiums may be lower than those for a PPO, but you will lose flexibility: you will have to see your designated primary care doctor first when you need a referral to a specialist. HMOs also limit you to in-network providers, but the price you will pay for a doctor visit is fixed.
PPOs, or preferred provider organizations, give you more flexibility to see whichever doctor you want, whenever you want, often without a referral. You will pay less when you choose an in-network provider, but you can choose to see an out-of-network provider, although you will pay more than if you received your care in-network. A PPO has a deductible, or an amount you have to pay out of pocket for care before the insurer will pay its agreed-upon share. Some HMOs have deductibles, while others do not.
If you choose a PPO, your employer may offer a choice between a high deductible plan with low premiums, which can save you money if you are healthy and anticipate few doctor visits, and a low deductible plan with higher premiums, which may save you money if you have a preexisting condition or are a woman planning to get pregnant in the upcoming year.
Some high deductible PPO plans include the option to open a health savings account (HSA), which allows you to set aside pretax dollars from your paycheck to pay your medical expenses throughout the year. If you do not need to spend the money during the year, you can save it indefinitely and some HSA’s allow you the option to invest it. And if you change jobs, your HSA goes with you.
Your employer might also offer a flexible spending account (FSA). Similar to an HSA, it allows you to set aside pretax dollars from your paycheck to pay your medical expenses throughout the year. Unlike an HSA, however, any funds you do not use during the year must be forfeited, though some employers allow you to carry over a portion of unused funds to the following year or provide a short grace period the following year to use up the previous year’s funds. Also, an FSA is not portable if you change jobs.
Employer-sponsored retirement plan
Experts agree that if your employer offers a retirement plan with matching contributions, it’s a good idea to enroll and contribute at least enough to get any matching contributions that may be offered by your employer. If you do not contribute up to the match percentage, you are leaving money on the table. For example, your employer might match 100 percent of your contributions up to 5 percent of your income each year. This means that if you earn $50,000 and you contribute 5 percent of that, or $2,500, to your employer-sponsored retirement account, your employer will kick in another $2,500. (Learn more: The better math of saving early)
If you work for a private sector company, 401(k)s are the most common type of employer-sponsored retirement plan, and if you work for a nonprofit such as a school, hospital, or church, your employer may offer a similar retirement plan called a 403(b).
What should you do if your employer does not offer matching contributions? If your plan offers good investment options with low fees, you may want to go ahead and contribute as much as you can afford to. If not, you can save for retirement on your own through a Roth IRA. Here are the main differences between a 401(k) or 403(b) and a Roth IRA:
401(k) or 403(b)
- Contributions come directly out of your paycheck, before tax.
- Withdrawals in retirement are taxed.
- Annual employee contribution limit is $19,500 in 2021, indexed for inflation; employers may contribute more.
- The money remains yours when you change jobs, but you may choose to do a rollover to move your funds to a Roth IRA or to your new employer’s retirement plan.
- You are responsible for contributing to your account with after-tax dollars from your paycheck.
- Qualified withdrawals in retirement are tax-free.
- Annual contribution limit is $6,000 in 2021, indexed for inflation.
- The money is always yours, regardless of where you work, and you do not have to move your money when you change jobs.
(Related: The winning Roth-401(k) combination )
Some employer retirement plans will require you to make some investment decisions, which will be discussed further below. Other financial basics need to be considered first.
Create a flexible budget
The decisions you make about which benefits to get from work and which benefits to pay for on your own, as well as how to contribute to your retirement savings, will affect your monthly budget. For example, if you choose a high-deductible health insurance plan, your monthly premiums will be lower, but you will need to save more, ideally in a health savings account, to pay out-of-pocket medical expenses before you meet your deductible and to pay coinsurance even after (and if) you meet your deductible. If you choose to purchase life insurance and disability income insurance individually, you will have less to spend in other areas.
“The temptation to spend money affects most people, but can be especially challenging for people who have a sudden increase in income or wealth,” said financial planner Tim Hewitt, senior wealth advisor at Wiley Group in Conshohocken, Pennsylvania. He suggested creating a budget based on your spending patterns over the last 12 months and taking advantage of various online tools to let you see the activity in all of your financial accounts in one place, to simplify the task. (Learn more: Budgeting essentials)
“For anyone looking for a rule of thumb, I like the 50-20-30 budget,” he said. Allocate 50 percent of your income to needs, 20 percent to savings and debt payments, and 30 percent to wants — things like entertainment, shopping, dining out, hobbies, and travel.
“This strategy has become so popular because it is easy to understand and provides flexibility,” Hewitt said. “Budgets can feel restrictive, and this strategy allows for room to enjoy your hard-earned money. This creates a higher probability that you will stay the course over time.”
The rationale behind this budget follows other rules of thumb, such as saving 10 to 15 percent of your salary for retirement and using 28 percent of your income for housing.
“Life isn’t all about saving — you want to be able to enjoy yourself as well,” Hewitt said.
Your 50-20-30 plan might look something like the one below if you have a monthly take-home pay of $4,000 a month. For simplicity, assume that taxes, your 401(k) contribution, and your portion of premiums for employer-sponsored health insurance, life insurance, and disability insurance are already subtracted from your gross pay. If that isn’t the case for you, an obvious place to make a dent in the budget below would be rent — can you get a roommate or spend a year living at home?
50 percent to necessities: $2,000
Groceries and household necessities: $300
Car insurance, gas, and maintenance: $350
Phone and internet: $100
Health (copays, prescriptions): $100
20 percent to savings and debt: $800
Roth IRA contribution: $200
Emergency fund: $200
Student loan payment: $400
30 percent to wants: $1,200
Work lunches: $200
Weekend activities with friends: $300
Annual travel fund: $200
Payment/saving on a nicer car: $300
Depending on how motivated you are to get out of debt and save for the future, your local cost of living, and other individual circumstances and personal preferences, you might want to modify the 50-20-30 budget. If you live in Los Angeles where the rents are high, a 60-20-20 budget might be more realistic. If you are still living with your parents to save on rent and get out of debt, a 25-50-25 budget might make more sense. And with time you may want to adjust your planning to account for income increases, family considerations, and specific retirement needs. (Related: MassMutual’s 5-10-15-20 Calculator)
The important things are to decide how you will spend your money before you receive it and to live within your means.
By creating a plan for where your money will go that is broken down by category, it will be easy to stay on track. If you simply buy whatever you feel like whenever you want, you are likely to overspend and end up sacrificing key components of your future financial stability, like your emergency fund and your retirement savings. Setting up automatic monthly transfers for those two categories will ensure that you actually save rather than spend the money.
If your employer offers direct deposit, it may be possible to have a portion of each paycheck routed directly to your savings account instead of your checking account. Automating your savings can make it easier to achieve your savings goals and remove the temptation to spend the money.
Get out of debt
The budget above assumes you do not have any credit card or personal loan debt. If you do, put some or your emergency fund and Roth IRA savings toward paying down your debt.
Whether you should prioritize debt payments or saving depends on several factors, Hewitt said.
- If you have a stable job and are paying a high rate of interest, direct your disposable income toward paying down the debt.
- If you have access to a company match at work, prioritize retirement savings.
- If you have a low interest rate on your debt, building an emergency fund might take precedence.
You can also take a combination approach to allocating your disposable income. (Related: When student loans and 401(k) compete)
Getting out of debt as quickly as possible is important because it will allow you to redirect the money you are spending on interest to long-term savings.
Start an emergency fund
The lower your job security, the more you should sock away in your emergency fund. Your job security is greater if you work in an occupation with a low unemployment rate and solid projected employment growth. Dentists, physicians assistants, aerospace engineers, and physicians are examples of workers that can expect high job security, though technological or political upheaval could affect any profession’s prospects. Your job security is lower if you work in a field with a high jobless rate: acting, for example.
Your emergency fund can help tide you over during a period of unemployment and keep you from incurring costly debt. Your employer may or may not give you a severance package if you are laid off, and state unemployment benefits are far too low to make ends meet. Having your own savings to fall back on is the safest form of security against job loss. An emergency fund can also help with unforeseeable but irregular expenses such as medical bills. (Learn more: Emergency fund basics)
The goal is to accumulate three to six months’ worth of your annual expenses in cash, “but even starting out by saving $25 per week for 24 months can build an emergency fund of $2,600,” Hewitt pointed out.
Learn the basics of investing
Whether you are contributing to an employer sponsored retirement plan, a Roth IRA, or both, it is not enough to just put cash into those accounts. Nor is it always appropriate to let your employer decide how your payroll deductions get invested (some retirement plans put your contributions into preselected investment options by default). Different funds and investment options offered through your employer plan can have different costs and risk levels.
“I tell young people to do your own research and find out the fees of each fund,” said Chartered Financial Analyst® Doug Carey, president at WealthTrace, a financial planning software company in Boulder, Colorado. “I have found that many 401(k) plans contain investment funds with fees well above 1 percent. That is outrageous in today’s world, where some fund families offer funds that charge fees of 0.1 percent or less,” he said.
What constitutes an appropriate investment will depend on the investor’s individual circumstances and risk tolerance.
Most investment professionals suggest a combination of higher and lower risk investments, typically stock and bond funds that can be adjusted over time as circumstances change. One typical strategy is to subtract your age from 100 and invest that percentage of your portfolio in stocks and the rest in bonds. A 25-year-old using this strategy would invest 75 percent of their portfolio in stocks, which are considered a higher risk than bonds, and the other 25 percent in bonds, which are generally considered less risky than stocks. (Learn more: Know your risk profile)
But other financial experts argue such strategies are overly simplistic, and too conservative for investors that are just starting out. “A 25-year-old has the luxury of taking on more risk since they won’t need their retirement money for 35 to 40 more years,” Carey said.
Opinions on proper investment strategy are as varied as investments themselves. In the end deciding on an investment strategy depends on knowing what the risks are with various investment vehicles and deciding what risk level you are personally comfortable with. But all experts agree that starting early is wise. (Related: Retirement calculator)
Regardless of the strategy you choose, it’s important to note that all investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy or product will provide positive performance over time.
The bottom line
Creating a flexible budget for your take-home pay suitable for your situation, getting out of debt, starting an emergency fund, and learning how to invest are essential skills that should be on every 20-something’s financial checklist once they start earning a regular paycheck. Getting on the right path to managing your money from a young age will set you up for life. The goal is for money to become a source of security and freedom for you — not a source of ongoing stress.
Learn more from MassMutual…
This article was originally published in March 2017. It has been updated.
1 Social Security Administration, Publication No. 05-10570, January 2018.