Beginning a new job can be an exciting time, especially if you were hunting for a while and even more so if the new job pays better than your previous one. Throughout your first year in a position, you may find yourself caught up in the fervor of it all — but it’s important to stay financially sharp. There are quite a few money mistakes you’re prone to make in your first year at a new job.
Here’s a helpful review what they are and how to avoid them.
Not Reviewing Your Benefits Package
Most salaried positions in the U.S. come with benefits packages of some kind. It’s important to review and fully comprehend these packages, as they’re part of the financial big picture of the job.
“In the whirlwind of starting a new job, one of the most common oversights is not thoroughly reviewing your benefits package,” said Taylor Kovar, CFP, CEO at The Money Couple and Kovar Wealth Management. “By not understanding the full range of benefits offered, you could miss out on employer matches for retirement contributions, leave unused vacation days on the table or not take full advantage of health benefits.”
If there’s something you aren’t clear on or don’t understand, get in touch with your human resources department ASAP. A big part of their job is to help you navigate the ropes when you’re starting out.
Not Setting Up Retirement Contributions
One of the most important benefits your new job may come with is a retirement plan such as a 401(k). Do not overlook this, as doing so could devastate your financial future in your golden years.
“Another mistake we see in the first year of a new job is neglecting to set up or optimize retirement contributions,” Kovar said. “While it might seem like there’s plenty of time to think about retirement, failing to start early, especially if your employer offers a match, can mean leaving free money on the table.”
The severity of the mistake of walking away from free money in this respect cannot be overstated.
“One of the most important financial decisions anyone makes in their life is the decision to participate in an employer sponsored retirement plan,” said Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University. “If one does not contribute enough in a 401(k) plan that has a company match to earn that match, one is basically turning down free money. Many people put such a high priority on paying down debt that they do not participate in their company 401(k) plan. Contributing the max to your 401(k) also reduces your tax bill. People should do whatever it takes to participate in their company’s 401(k) plan to the level to get the full employer match.”
Not Taking Enough Risk in Your Portfolio
Now that you know the importance of enrolling in an employer sponsored 401(k) plan, you can begin to consider strategy of you want to make it work for you. Johnson suggests an aggressive approach.
“Counterintuitively, the biggest mistake many people make in 401(k) plans is not taking enough risk,” Johnson said. “Individuals need to be taught to invest for retirement and not to save for retirement. The surest way to build true long-term wealth for retirement is to invest in the stock market. Albert Einstein said that compound interest is the greatest mathematical discovery of all time. Time is the greatest ally of the investor because of the ‘magic’ of compound interest. Investors need to begin compounding early, and let that compounding work its patient magic over decades.”
According to data compiled by Duff & Phelps, since 1926 the average annual return on a large capitalization stock index (think S&P 500) is 10.1%. “If these historical average returns hold in the future, an investor would double their money in slightly over seven years, and have 10 times their original investment in 23 years,” Johnson said.
Rushing To Buy a Home
Perhaps it’s long been your desire to own a home and this new job makes it feel like you can finally achieve that dream. While it’s important to form financial goals with a new job (we’ll get to that more later), it’s just as important to not rush into massive commitments like buying a home.
“With respect to homeownership, many fail to realize all the attendant costs beyond the mortgage payment — property taxes, insurance, upkeep, etc.,” Johnson said, adding that homeownership isn’t necessarily as sound an investment as one may believe.
“Nobel Laureate economist and Yale Professor Robert Shiller makes a compelling case that real estate, particularly residential homes, is a much inferior investment when compared to stocks,” Johnson said. “Shiller finds that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years. Contrast that with the stock market. According to data compiled by Ibbotson Associates cited above. The average return on a large stock index (the S&P 500) has been approximately 10% while inflation has average around 3%. The inflation adjusted return of the stock market over the past 90 years has been approximately 7%. In addition, stocks do not need a new furnace, a lawn mowed, or a new roof, and they do not require annual property tax payments.”
Making a down payment on a home could be the right move for you if you’re making a fat new paycheck and want to get out of the vicious cycle of renting. However, if you’re looking into homeownership purely as an investment, don’t rule out other options.
Developing Lifestyle Inflation
Maybe your new job also means more income and better perks. But don’t let a raise or bonus get to your head to the point where it affects your ability to smartly budget.
“A new job means new clothes and new accessories to a lot of people, and they quickly fall into the trap of lifestyle inflation,” Kovar said. “Just because you’re earning more doesn’t mean you should increase your spending proportionally. It’s tempting to upgrade your lifestyle with a new car or apartment, but it’s wiser to allocate any extra funds toward savings or investments.”
Treating Savings as Optional
If you’re making more money, or even if you’re making the same amount of money, you must prioritize saving. Think of saving as mandatory.
“Make it easy and automate it,” said Tanya Peterson, vice president of brand with Achieve. “Even if your employer does not offer automatic deposit, you usually can set up your own automated transfers from checking to savings accounts. Record this transaction like you would do with a bill every month. Start small if you need to and gradually build.”
Failing To Budget Aggressively
On the same page as not saving, is not doing smart or aggressive budgeting. Consider one of the more popular methods out there: the 50/30/20 rule.
“The 50/30/20 rule is a standard budgeting strategy that can be tailored to any income, and it is a straightforward system that is easier to follow for those just starting to manage their money,” said Mary Foote, CEO of Pipeline AZ. “First, put aside half of your monthly post-tax income to essentials, such as education, housing and groceries. No more than 30% of your monthly post-tax income to non-essential expenses, such as setting aside money for a vacation. Reserve the remaining portion, at least 20% of your monthly post-tax income, for savings. This can encompass both an emergency fund and investments, like contributions to a 401(k) or IRA plan.”
The goal with this budgeting approach is to build 6 month’s worth of savings. “You can prevent overspending on expenses that you cannot afford by adhering to these guidelines,” Foote said. “You can also make progress toward achieving long-term financial goals that require a larger investment.”
Failing To Set Financial Goals at All
You may have just met your big goal of landing a new job, but what are your financial goals with the new job? It’s important to flesh this out.
“So many people start a new job with no goal in mind,” Kovar said. “Whether it’s saving for a down payment, planning a vacation or aiming for early retirement, having clear financial goals can guide your spending and saving decisions.”
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