6 Mistakes of New Earners and How to Fix Them
Years ago, in the fall after graduation, I had been out of college for five months and working full time for three. I was making more money than I ever had in my life, and had no idea what to do with it. Then I read The Automatic Millionaire and The Money Book for the Young, Fabulous and Broke, and turned to the web for even more financial advice.
Now I’m managing my budget, saving for multiple goals, paying off my student loan as fast as possible, and contributing as much as I can to my retirement funds. But for a little while there, I was just earning and spending without a plan. Below, I highlight a few mistakes that I made – and that I’ve watched friends make as well – as well as ways to fix them. If there are new earners out there looking for advice, I hope these can help! And of course many of them can be applied to just about anyone.
1. View your paycheck as “so much money.”
Problem: Whether it’s $25,000 or $80,000 your annual salary probably sounds like a huge number to you. It’s easy to think you have all the money in the world to spend frivolously. But by the time you divide that number by 24 or 26 (depending on how often you are paid), and take out taxes and your portion of any benefits (such as health insurance premiums), your take home pay isn’t nearly as much as you expected.
The solution: Wait until you are working for at least a month so that you can get an idea of how much you are spending, and understand how much you will actually see each time you get paid. Then use the two amounts to draw up a reasonable budget that allows you to meet all obligations without turning to credit. If you find yourself a little short on money, look for ways to decrease your outflow, like bringing your lunch, or increase your inflow. Make sure to allow for short- and long-term savings too!
2. Purchase a new work wardrobe and full apartment’s worth of furniture all at once.
Problem: You have a new job and a new apartment—and you want to use your new paycheck to look the part of the successful professional. So you go out and buy a whole new wardrobe and multiple pieces of brand new furniture. The only problem? You’re spending so much money on clothing and furniture, you don’t have much left for anything else. Or worse, you don’t have enough money to buy those things at all, and are turning to credit to finance them instead.
The solution: Purchase just the essentials up front, and add a little more with each paycheck. When you do buy, visit the outlet mall (my mom and I had a great bonding experience there before I started my job!) or online discount sites (my bedroom furniture all came from overstock.com). Buy a couple skirts/pairs of pants in neutral colors like black, grey and khaki. Buy shirts/blouses that can match any of the bottoms, and mix and match to create multiple outfits. For furniture, all you really need up front is a bed. As time goes on you can add a couch, coffee tables, dressers, etc. I used plastic stackable drawers for a few weeks until my dresser was set up! Commit to spending no more than a certain dollar amount or percentage of each paycheck, and stick to it. And when you have enough to get you through – stop buying and use that money for something else!
3. Think you’re too young for words like “retirement” or “emergency” to be in your vocabulary.
Problem: You’re only 22 (or 25, or 28), and retirement is seemingly light years away. What’s more, your definition of an emergency is not having shoes for an upcoming event, or missing out on tickets to see your favorite band. But your retirement savings have the most time to grow if you contribute when you’re young. And emergencies do come up even if you don’t have a house or family – a few examples are car failure, illness, or the need for a sudden flight home to deal with a family emergency. If you don’t make room in your budget for these types of savings now, it will never be easy to add them in later.
Solution: Build up an emergency fund of at least 6 months of expenses. Start by contributing $25 or $50 per paycheck to a high-interest savings account. If that’s easy, increase your savings amount to $100 or more. In addition, commit to saving at least 10% of your income in a tax-advantaged retirement account like a 401(k) or Roth IRA. If you can’t afford 10%, try to start with enough to get your full employer match if you are entitled to one. If you can’t afford that much, start with 1 or 2%. The point is, start. Good habits now will stick with you throughout life. And once you start putting aside money before you have the chance to spend it, you’d be surprised at how much you don’t miss it. Once you start try to save 1% more each year.
4. Live like your friends, regardless of salary differences.
Problem: You work for a non-profit, and your friends…don’t. It’s easy to feel the need to meet them for nice dinners, buy an iPhone (with expensive data plan), live in a bigger apartment, etc. But the reality is that living within your means is the only responsible thing to do.
The solution: As discussed earlier, create a budget and stick to it. If your friends are living a lifestyle you can’t afford, pick one or two times to join them and refrain from the rest. Alternatively, suggest some entertainment options that are more in your price range. Whatever you do, don’t let yourself feel inferior for living a less-flashy lifestyle. You have to do what makes sense for you. And it’s worth noting that these seemingly wealthy friends may not have the money to live said lifestyles any more than you do – so you’re really a step up by choosing to handle your money more responsibly. In the long run, you’ll be much better off.
5. Leave debt to pay later.
Problem: You have thousands of dollars in student loan, auto, and/or credit card debt that you think you can tackle “later” – you know, when you have “more money.”
The solution: Take it from me – you’ll never think you have quite enough money to do everything you want to do. But no matter how much (or little) you make, paying off debt should be at the top of your list. The longer you wait to pay off your debts, the more you’ll pay in interest. What’s more, outstanding debt could prevent you from getting approved for necessary credit (such as a mortgage) later in life. Commit to using a certain amount of your paycheck to pay off debt. Then create a plan to pay off your debts as soon as possible using that money. As an added bonus, when you do make more money later, you’ll get to enjoy more of it since you’re not sending off debt payments!
6. Do it alone.
Problem: You think you can handle your money on your own – or even when you realize you might need help, you’re not sure where to turn.
Solution: Talk to your parents, other relatives, or older friends – they’ve been earning and spending money much longer than you! Get to the library and check out personal finance books. The two I mentioned above are great starts. Use online resources to learn. Lastly, seek out workshops or seminars targeted at young people. Your college or local non-profits are great places to start.
Earning your first “real” paycheck is an exciting time, but only if you handle it well. The younger you are when you start managing your money well, the better positioned you will be later in life. Take these and other money tips into consideration and you’ll be sitting pretty.
What other problems and solutions can you offer? Share them in the comments…and make an effort to start a conversation about financial management with any new earners you might know!
This is a great list. I started working about 4 months ago, and you pretty much nailed it. I’ve been limiting myself to buying one new shirt a month, and I figure after a year I’ll have a nice wardrobe with clothes I actually like. If I bought everything all at once, I can see myself choosing some shirts I like but am not in love with.
What I really need is more time to pay off my student loans. I’m saving and I’m keeping to my budget, but it just seems like it will take a really long time to make any significant progress. What should I do to keep my head up and continue on my path?
Bear in mind that interest on student loans is a tax deduction, so the loss in cash flow you experience each month from paying the loans, you do somewhat recoup at tax time.
True but it’s a fairly small deduction. The $600 deduction (@25% tax bracket) isn’t much at all considering the $20,000 loan amounts.
Another problem and solution: Forgetting about insurance. Young 20-somethings often think that they are healthy, young, and it’s not worh the $100 for health insurance. For the most part, insurance isn’t meant for expected events. The reason to get insurance is because sometimes things happen, and at those moments, you don’t want to be worrying about how you’re going to pay the bill.
Have you consolidated your loans at a better interest rate? Do you have private loans? What I would do is pay the minimum on several of the loans (if you have not consolidated them all together), and choose one loan to pay double or triple on. That way, you will see progress hopefully in a year or so with getting rid of one loan. After getting rid of that loan, work on the next one. Perhaps you can even take one out with an income tax return.
When I graduated the interest rates were incredible, and so I consolidated all of my loans with Sallie Mae at 2.65% interest. I had one private student loan at some ridiculous interest rate (like 9%!!!), so I did not consolidate that one because it would have raised the interest rate on the bulk of the debt. Instead, I paid that loan off in less than two years, then worked on the bulk.
I hope this helps!
Great conversation going!
Good for you for trying to pay off your loan faster. I wrote a REALLY long reply and then stupidly clicked on a link before pressing submit. I tried to recreate below:
1) If your payment is going to all or mostly interest, it’s very frustrating. If you can, make a big payment to reduce the principle so that future monthly payments go less toward interest. You can use a tax refund or year-end bonus at work to do this.
2) Use UPromise.com to earn cash back on certain online purchases (including travel!) and restaurants. For 1% back on everything, get the UPromise credit card (only if you will pay it off each month – finance charges defeat the purpose). You can link your account straight to your Student Loan account (if serviced by Sallie Mae). I’ve earned over $500 in 2 years! This is my favorite time of year bc I do all Christmas shopping through UPromise. Even if the cash back is not quite as good as Ebates, the psychology of having it go straight to your loan, without giving you the chance to spend it somewhere else, is great.
3) Look for ways to earn extra income. I like Bargaineering.com’s points/auction system where you can earn points for commenting and use them to bid on the chance to send over ING referrals (earning $10 each). If you don’t have an ING account, look for a referral at https://www.mydollarplan.com/ing-25-signup-bonus/
4) Use Amanda’s suggestion of attacking one at a time. This is the snowball effect at it’s finest, and it does make a difference.
5) Lastly, hang in there and set mini goals for yourself along the way. The beginning is when big debt seems most unmanageable – as your income goes up, and the interest portion of your payments go down, you’ll hit milestones faster and faster. I LOVE getting under another $1,000 mark, and getting close usually inspires me to tighten spending for a couple weeks to make whatever payment I need to get me there.
This super long comment could almost be another post – hope it helped – keep us posted on your progress 🙂
They actually changed the law a few years ago so now consolidating doesn’t really lower the interest rate, it can actually raise it. Honestly, I have very low rates right now and am able to pay a few hundred dollars a month on them. I guess I can’t complain as long as the rates are below 4 or 5%, which they seem like they may be for at least the next year.
Nice article! I would just LIVE IT UP again from ages 22-25. The value of spending your dollar then is much greater b/c that’s when you make the least.
After 25, start saving more diligently. But when you’re just out, have fun! Just don’t go into debt.
I thought my salary was sooooo big when I first started out. I divvied it up into 12 and figured I had tons of money to spend.
Forgot about taxes. Forgot about bills. Forgot about all of that stuff.
Not so much money anymore.
Ahh to be young and stupid again!
Thanks all for the comments!
I think I have a decent balance between fun and paying off loans. One thing I try to avoid is buying stuff just to keep myself entertained for a short period of time. I have absolutely no problem paying for quality experiences, however. Or to make my girlfriend happy.
I really like setting smaller goals. I have extremely low costs for some reason. My loan payments are 15% of my expenses. And my expenses are less than 50% of my income, at least for the next 7 months while rent is low, so I’m able to save a lot (my plan is to build some savings and then invest and beat the 3% on my student loans). Theoretically I COULD pay off the loans in about 2 years if I stopped my 401k contributions and didn’t save anything, but that would just be weird.
Great post and sound advice. I say this both as a financial planner and as the father of three budding young adults. This may sound odd, but this is also the type of advice that pro athletes and entertainers should be getting as well, even if the numbers are a bit bigger.
I completely agree with the salary looking like a $1,000,000 when you first enter the real world. One tip I would add is to avoid making big purchases when you first come out of college.
When your salary looks infinite, you’re more likely to make spur of the moment decisions, like buying a new muscle car or renting a house you can’t afford on a one-year lease, without considering how that will affect you for years to come…
Excellent tips!! My wife and I committed these mistakes. I would have loved for someone to sit me down with this after the honeymoon. Good stuff!
I’ll try to keep a lot of these in mind, but I have to admit, I am looking forward to graduating and earning those huge initial paychecks. 😉 (Anything over $1k a month in income is huge to me… Sad, right?)
I think I’ll do okay, because I’m already married and hubby’s the primary support. (We’ve decided that we’ll live off of what he makes, and what I make is the gravy, savings and all that good stuff.) This way I can tackle my student loans head-on and get them gone as soon as possible. By the time I graduate, this should be the only debt between the two of us, so it’d be nice to get it gone quickly.
For now, I’m working on those good habits, even though I don’t earn a lot. I’ve started an IRA, contribute to a 401(k) with match and am working on an emergency fund. I figure that all this will be MUCH easier to continue when I’m earning more because I’m already used to these expenses.
Damn, I can’t tell you how many of these things I did when I got my first job. Wish I had read this! Now worries, I am on the right track now. Thanks for the post!
@Roger Wohlner It is my secret dream to be a planner for pro athletes or young actors. People who go from 0 to millionaires in literally a split second.
@Meg sounds like you are already doing great. I cannot stress enough that you should not count on how much your paycheck will be, and what you can do with it, until you actually see it. Don’t try to do too much at once – be realistic. As long as you stick to your plans of paying off debt and long term savings, you will be A-ok!
Re: #2 (clothes and furniture):
I think I spent $200 total on clothes when I got my first job – and I still wear those clothes regularly (three years later). For those three years, I think I also spent ~$3-400 on all the furniture in my apartment. This year, I am FINALLY upgrading – I got a real bed!
And waiting for that, man, it’s awesome to go to bed each night. When you wait and anticipate and pick the right clothes and furniture, it’s wonderful!
I am so guilty of buying furniture. Luckily I recovered quickly and started paying attention to my money.
A few of my co-workers fell victum to the idea that they can plan for retirement and pay debt at a later date.
Great article – should be given out at graduation ceremonies. It is a scary world out there and I don’t think our educational institutes prepare new grads for the reality of having money and the responsibilities that come with it.