Whether you’re fresh out of high school or a someone who is finally seeking financial independence, it is never too late to start mapping your future. While plans often change, there are some great financial advice I would like to share to those who are just starting out. While the order is ideal, you can take a lot of these steps at once, depending on your financial situation.
Build Credit with One Credit Card
Right off the bat, most of us have to take out a loan for something, typically for education and a car. Before you do this, and if you are on good terms with your parents, ask if you can be added to their credit card. You don’t have to spend a thing – as long as your parents are using the credit card and your name is on it, you will earn that credit. This is so important down the line, as this will lower the interest rate of your future loans. It’s ideal to do this as a teenager, but you can do this at any time in your life.
Whoever you do this with requires a lot of trust – trust that you won’t spend their money and trust that they will pay their credit bills so you can have that good credit score. Give it a year or two, then you can apply for your own credit card with a low interest rate and build credit on your own, preferably through your bank. Only have the one credit card and pay it off every month. I use my credit card to pay for gas – it helps for budgeting purposes while keeping my credit score healthy. But remember to always pay your credit card balance in full. Never the minimum amount, as this will incur interest.
A lesson by example: Don’t get tricked into accepting multiple credit cards because of their sign-up deals. It may be tempting, but I know someone who got 20 credit cards because he wanted free money upfront, and he felt invincible buying items and experiences, putting off paying a bulk of it. Fast-forward 15 years later, he has incurred so much debt that he is paying the equivalency of rent to his credit card companies. He has no choice but to live with his parents while raising his child. Don’t be this guy. Just have the one credit card at a time.
Earn Steady Income
Pretty basic, right? In order to build wealth, you need to earn an income. Unless you have connections with someone who is already established, it is challenging to get that first job.
Once it happens though, it will become easier to find the next job, and the next. It is important to remember that your first job is most likely just that, your first. You will be paid low, most likely minimum wage. But whatever you can get, be grateful, at least in the beginning. As time goes on, start setting the bar higher for yourself in both income and the work. Apply for jobs every day, try to make connections on sites like LinkedIn, volunteer, beef up your resume, and learn to sell yourself during interviews. Learning centers at colleges can help your interview skills and resumes.
Once you have the job, come in on time every day, stay late if you need to, and try to get along with your coworkers. And always keep your eyes open for opportunities within and outside of the organization. If you stay somewhere too long, people tend to feel “stuck” at their jobs, because they assume that is all they can do. And they miss out on doubling their income down the road. Don’t ever get stuck at a job.
Earn Extra Income (Side Hustle)
Never hurts to try other methods of earning income – usually it will only be a fraction of a typical job. People have used freelance sites, youtube, and selling sites to earn extra income as a side business. If you have the time and have a skill, try it.
Just know that taxes might change for you if you are self-employed/running your own business. If you want to dodge taxes and keep the skill-level minimum, going back to mowing lawns or pet-sitting is a good alternative to making extra income under the table.
Some basic side-hustle ideas to look into:
- Selling items online (eBay, Amazon, Etsy)
- Lawn Care
- Freelance work (graphic design, writing, photography)
Build an Emergency Fund
So you are earning income. Now what? If mom and dad aren’t there to bail you out, then you need at least three months’ worth of expenses saved in a savings account, but six months is ideal. Expenses are the essentials, including rent, car payments, bills, and food.
This gives you peace of mind, because you never know when you will need the cash, and this will prevent you from having to get more loans than you already have when an emergency occurs, adding to your debt. Even if you have good insurance, even if you feel secure at your job, even if your car is brand new, you never know what will hit you. So having that 3-6-month buffer is important for when life happens. You should always have a buffer for the unpredictable.
Try to save at least 20% of your income monthly (or any amount you can) specifically for this emergency fund if you don’t have it already. I strongly recommend budgeting your finances to try to set aside that 20%. Using an Excel sheet or a similar program can help you stay on track and the results will inspire you to keep saving.
Get a Degree? Depends
This is a tricky subject, because I personally feel that our education system is a scam. Very few people work in the field that reflects their studies. And this is the biggest debt for most people outside of buying a home. Student debt has ironically destroyed people’s chances of building wealth. While college education does little for someone’s actual line of work, for some reason employers are impressed with that French Philosophy degree.
So it’s a catch-22. Don’t earn a degree and risk working low-level jobs all your life, missing out on higher income. Or spend the next 10 years paying down high-interest debt in order to earn that higher income, while it eats at your savings. It may break even – who knows. That’s why my number one advice on education is get into a field that you are actually passionate about, and can truly see yourself doing in the future.
Obviously if you are going into something specialized like becoming a doctor, lawyer or engineer, you have to have those degrees. And you have to be sure this is what you want. If you want to be a license electrician, you need to go to technical school. But if the job you want is basic, such as sales, realty, finances, graphic design, etc, or you simply don’t know what you want to do, you need to weigh your options.
Here’s a tip; don’t knock community colleges. They are often cheaper, and it will count toward your bachelor’s degree. I also think it looks good on a resume to have more than one college and more than one degree, and while you are at community college, you can save up and decide if you want a bachelors.
I also found that community colleges offer more intimate settings with smaller classrooms and more one-on-one with professors. So even if you are going into something basic, like a business major or communications, I think it looks good to have at least the associates degree.
I also recommend a broad major, such as business, communications, or English. This will broaden your options down the road. With an English degree, you may be on your way to becoming a teacher, a lawyer, a writer, PR, HR, or a manager in communications.
Some companies will pay you to continue going to school too. If you are lucky enough to take advantage of that, that’s all the more reason to go to community college first while you are job hunting. Your company may very well pay for your next degree.
Pay Off Debt
If you have debt that charges you 5% or more in interest, focus on paying this off. While long-term investing will most likely build your wealth over time, it is with absolute certainty debt will eat away at your savings long-term. The sooner you pay this off, the sooner you will gain more savings down the road.
I strongly recommend shifting your focus to paying down debt after you have that 3-6 months of buffer for the unexpected. However, if you truly feel secure regardless of the lack of an emergency fund, then it may be best to start off right away paying down debt. You should do both if you can.
So, what if you don’t have debt? You have a steady income. Every month you pay off your credit card, you bought a used car without a loan, and your parents paid for your education, or your scholarship made it manageable to pay off. What would have been going toward debt should now go toward investments.
The most basic form of investing is contributing to your company’s 401(K) plan if that’s offered. What’s nice about the 401(K) is that it is usually a pool of long-term stocks, bonds, and mutual funds (in other words, a diverse portfolio) that makes it a safe place to park your money. Compound interest will work in your favor as the decades pass. If you already have money in a 401(K), whatever you do, avoid at all costs taking money out of it. Withdrawing early will make all that compound interest pointless, as you will pay penalty fees for withdrawing prior to retirement age.
Another great benefit of the 401(K) is the tax break. While yes, a small portion of your check is going toward retirement rather than your bank account, it’s not as much as it should be, because you are not paying taxes on that portion. You will be pay taxes later when you withdraw, ideally in your retirement years when your taxes will be in a lower tax bracket anyway.
And if your company offers a company match to your 401(K) (percentage of your income that the company is willing to contribute with a match), meet the full match! Even if that match isn’t fully vested (a.k.a. not fully yours until a certain number of years), it’s still worth it. Maybe you don’t plan to spend 4-6 years at this company, but if you end up being there, then that match is free money. I recommend putting away at least the match. And if your company doesn’t offer a match, I would put away at least 3% of your income toward it, but 15% is recommended if you are not saving up for anything in the near future.
Your employer’s 401(K) isn’t your only option for a retirement account. As long as you are making income, regardless of self-employment, you are eligible to contribute to an Individual Retirement Account (IRA), which is like your own personal 401(K), but with no match and yet more options. IRA’s usually have lower fees. If you want your own IRA, I recommend Charles Schwab, Fidelity, or Vanguard. All three have minimal to low fees and are trusted accounts.
It is highly recommended to always invest for your retirement years no matter what stage of life, but you can make additional investments elsewhere that is a bit more liquid (i.e., money you can withdraw anytime without penalties).
You can put money in a brokerage account for investments. You can pick individual stocks or you can have a broad portfolio built for you. There are plenty of online options, some of which are free or have minimal fees. A few examples: Ally, Betterment, Robinhood, Acorns, and M1. Just be aware that Uncle Sam will want his portion when you sell shares/stocks (capital gains tax), and stocks that earn dividends (money that’s given to you quarterly for owning the shares) will be considered additional income, and therefore will be taxed as well.
If you are just starting out, I highly recommend the 401(K) if it is available, because it is so simple and it does the work for you. But if your company doesn’t offer it, or you are interested in higher returns, less fees, and more options, you can delve into other means of investments, such as IRA’s, stocks, mutual funds, bonds, crypto currency, precious metals, and real estate, all of which have their own risks and advantages. A safe, mixed portfolio of stocks and other investments may earn you 5% return, but depending on the risks you take, you may earn 12% or more annually.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.