The Financial Commandments for a Young Employee – Parts 1 and 2

Just like Noah was told in some folks’ bible we have discovered a few self evident truths for those just staring out.  Obey for a better life.

I started out this series intended for a young trainee named Malevolent Missy (MM).  We work specifically at a large chemical manufacturing facility.  I’ll share my opinions in hopes that others can avoid the mistakes of my youth, which number too many to count.

Even with all my fuck-ups along the journey on the yellow brick road I still managed financial independence before age 50.  If I can do it with a late start just think how easily a person who follows some simple rules starting out young can rule their own life versus being beholden the the golden handcuffs of traditional employment for 40 years or more.  Part one of the series involves some workplace advice for just staring out and you can find that here for a laugh:  First Real Job as a New Graduate: Here are Some Young Employee Maneuvers.  Here is what I’ve learned about the financial end of the spectrum and some steps that would have made my life easier and less stressful along the way.

Commandment #1:  Thou Shalt Get the 401k Match as Soon as Possible

If you work for a company like MM and me the traditional pension plan has gone the way of the dodo bird (extinct, for you gutter snipes).  Most companies enhanced their 401k matches as they phased out the pensions and YOU as the new employee are essentially solely responsible for saving for your retirement years.  The best move for the newbie is to at least initially contribute to get the full employer matching funds.  At our salt mine if you contribute 6% you’ll get a pretty healthy 9% match from the company.  It’s OK to start small so long as you Get The Money (GTM!) that big brother is giving just for being present.  Individual circumstances will dictate your initial contribution level like how much your life presently costs when you start out.  Some folks are going to have large student loan burdens or high housing costs or maybe even childcare at a young age.  If you are fortunate to enter the workforce with a slightly positive or near zero net worth then I would call that ahead of the game compared to an average 20-something.  Once you get started and get your monthly outlays straight and your emergency fund bucket (see commandment #2) filled you will probably feel some savings momentum.  Momentum is a powerful force whether it’s paying off debt or seeing your investments grow.  Use it to your advantage as savings begets more savings and success begets success.  I think Moses said that first.

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When we first reviewed the 401k plan here with MM I was pleasantly surprised the plan administrator defaulted new employees into a reasonable mix of investments with most of the plan fees below 0.1%, which is pretty darned good.  The default included some international exposure, some large, mid, and small cap US stocks and some REITS.  My only quarrel with the set-up was an allocation towards a managed International fund with an expense ratio of 0.67% when there was a similar index available for 0.05% or her hard earned steam.  My suggestion is to change over to the lower cost version.  Even when the administrator does something pretty decent like default a new person to good investment choices it seems like the sneaky bastards can’t help but try and scoop just a little extra where it might not be noticed by the average employee.  That 0.58 difference can make a big lifetime difference, so just try and be aware of relevant fees.

Commandment #2:  Thou Shalt Get Started on an Emergency Fund

Your emergency fund is the acorn that eventually  grown into the giant oak tree of financial independence known as Fuck You Money.  Lots of people will tell you that your E-fund ought to be enough to cover something like 6 months of normal living expenses.  I’m here to say that I think it depends and there are no hard and fast rules except that you should have one.  Missy has to remember that wanting to go out for a birthday dinner with friends or a destination wedding do not constitute emergencies.  Neither does a set of brakes for your car or that sweet designer dress or shoes.  Those expenses are known and are saved in a different bucket.  Your emergency fund is for something more like job loss, escape from a toxic relationship, or maybe a medical or auto disaster where there is a large deductible involved.  I would recommend to have at a minimum the amount of your medical deductible in your E-fund which can be quite high with modern POS insurance plans.  Of course, unless you showed up in the work force independently wealthy, you will have to work up to this amount.

Some other factors I like to consider in building a proper and bulletproof E-fund are things that not everybody has and are a luxury.  Some folks have a support system like a parent or parents they could fall back on in case of disaster and could have the luxury of moving back to their old room in their 20’s in case of job loss if the economy takes a giant dump.  Not everybody will have that luxury and somebody without it would want to save more for that rainy day.  I remember being unemployed in my early 20’s and thinking I would rather be a panhandler or eat cat food and rocks than have to come crawling back home to my folks’ house and follow rules at the time.  Some people have better relationships than that and maybe could save a little less in the E-fund but keep in mind that full adulthood really has to show itself at some point and the sooner the better.  You never want to need to play that card if the chips are down.  When you’re setting up your E-fund I suggest an online bank that pays a decent interest rate like Ally bank.  I’ve been using them for my checking and savings for a few years now and have zero complaints and have never paid them one stinking red cent in fees in that time.  The current interest rate on a savings account there is 2.0% and they raise it regularly as the US Federal Reserve raises rates.  I like keeping my travel and special occasion bucket there too as it only takes a day to transfer money from savings back to checking or even instantly if your checking is with the same online bank.

In our case we built up to $10k in our emergency fund and haven’t touched it since we got there in 2006.  Much of that is good fortune and much is also good planning and not having any “true” emergencies.  Hopefully Malevolent Missy listens above the siren song of lifestyle inflation and avocado toast and puts together the first couple of steps.  They don’t happen overnight but I can’t state strongly enough that even if you don’t get to full financial independence at a young age that F-U money will keep you free.  This is a marathon and not a sprint and enjoy the ride responsibly.  That a lot of material for just 2 little commandments.  That Noah must have been a busy guy back in the day carting those stone tablets around with 10 of those bad boys engraved.  I’ll see how many more I can come up with that are useful.

*footnote:  Most of my 20-30 regular readers have been there and done that and will likely agree in principle on most of these points.  They have already taken the steps as reflected in the comments.  I’m open to any ideas of how to get the 20-something eyeballs on the material as I might not be interesting for the youth of today as a crusty old curmudgeon.

What about you Smidlappers?  Did you start all these things as soon as you started your first real job?  Or were you late to the party like me?

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You don’t have to save every single dime, just be consistent and get the grilled octopus every now and then….and some wine.

20 Replies to “The Financial Commandments for a Young Employee – Parts 1 and 2”

  1. Ahh, the siren song of lifestyle inflation and avocado toast. Tough to ignore.

    I think everyone should obey your first 2 Commandments; they are the first two buckets in my Investing Hierarchy as well. By the way, a 9% match is pretty decent! Wish I could say the same for my company.

    Alas, I must admit that my young protege (who started under my chemical tutelage at approximately the same time) appears to not be making the same prudent moves as yours. Her smartphone doubled in size (and cost) with her first paycheck, and she’s already looking to buy a house- in this market! I hope I will be able to make her see the light her before it’s too late.

    1. part of the bucket system is the emergency fund being a separate bucket from the house downpayment fund. i preach a little patience and paying some dues but try to do it lightly as this isn’t a friend of relative, just somebody i want to see succeed.

      i just hope the ship starts out in the right direction and the amount increases will follow.

  2. I have two step kids (well, 3, but one is a bobo who literally spent 50% of his take home pay in a strip club last month so we don’t mention him without a cringe and a hand rubbed across a forehead). Both of them got the following advice from us upon college graduation.
    1) Get a credit card, use it once a month to fill your gas tank, and pay it off. Do not use it for anything else. At some point you will need to borrow money and having a few years of on time payments will do wonders for the rate you are able to get.
    2) Start a 401(k) so you at least get the company match. Every year you get a raise at least 1% goes to the 401(k), the rest can go to you. You can listen to me now and feel a little bit of a strain or you can ignore me now and be sad when you’re 50.
    3) Get a savings account going in a high interest mm account. Put away whatever you can. $25. $50/month. Use it to keep the wolves away when stuff pops up.

    The first one didn’t listen on the credit card, totaled his car, and ended up paying 18% interest on the only car loan he could get. His sister followed advice #1 and got a 2.5% car loan when her beat up Camry finally gave up the ghost. He saw that and decided that his dad and I aren’t completely ignorant and hopped on the saving train like a champ. He paid off his car as fast as he could, he and his gf now wife lived in a crappy, cheap, 1BR apt for several years, are up to 10% and climbing to 11% this month on each of their 401(k)s, and just put 20% down on a fixer upper with great bones in a great school district. The last part is key because she’s due in June.

    The daughter has so far ignored us on the 401(k), saying “I’d rather be able to travel now than have a 401(k) at 50.” She doesn’t seem to have figured out that those are not mutually exclusive. But we’ve gotten the hint and have stopped mentioning it. She’ll figure it out. Hopefully it’s sooner than later.

    The third one we’ll just keep cringing and rubbing our foreheads and hope a light turns on before he gets a stripper pregnant.

    As far as the hubster and I, we both made some colossal financial mistakes in our past lives that set us back some, so we’re a little late to the party. But we’re making up for lost time now. 🙂

    But as Mark Twain said,”Good judgement is the result of experience and experience the result of bad judgement.”

    1. we made a lot of the same mistakes and you can come back from that but it’s so much easier if you never are set back. that’s what i try to emphasize.

      i’m glad 1 and 2 are at least partly having the good advice sink in. hell, it’s a start and much better than all wrong moves. i sure didn’t listen to all the correct stuff much wiser people were telling me in my 20’s. my credit card post will be coming as another commandment as will echo what you said and there will be one that is all about fees and avoiding them.

      i hope you don’t end up with a hybrid bobo/stripper grandbaby any time soon, megan g.!

  3. I love the motivation that you would rather eat rocks than move back with your parents. I wonder if that is actually one of the most essential elements of starting on “the yellow brick road” as you say. I’ve been trying to school my niece on the basics but I think she still is willing to eat the rocks.

    When I grew up, my Dad used to constantly say that we should never live with anyone else once we got married. He was from a large, poor family in Kentucky and all his sisters married young and lived at home, quickly ending up in divorce. His advice was given in a way that made me always want to have that emergency fund once I left the nest.

    By the way, an alternative to Ally bank is Marcus by Goldman Sachs. They are currently at 2.25%, which like you say, these banks are raising rates right now, so Ally will probably do that soon too. I have an account I manage for my in-laws at 89 years old, so I avoid the market and just keep things simple for them. It is pretty good money.

    1. full credit to your dad for that good advice. i’ll be writing a significant other commandment too. especially not to let a boyfriend/girlfriend derail any good you’ve done.

      all we can do is drop the hints, as non-parents, i think. i use examples sometimes like “this is what worked for me and this is where i really missed the mark.” the stories keep ’em listening without hammering on the real point.

      i’ll be checking out marcus as a good alternative. there is a good chunk of change to be had if a person listens to the advice and trusts you have nothing to gain from their doing well except some satisfaction in doing the right thing.

  4. Yep- did most of these as soon as I had a steady pay check. Of course i still blew money on stupid stuff. Like was I really going to use that $3000 massage chair THAT much?! Answer: No. As for reaching the younger demographic, I highly recommend “Jab, Jab, Jab, Right Hook” by Gary Vaynerchuk. Social media is everywhere now- I’ve written a very short summary of each chapter, outlining the approaches for some of the major social media outlets, if you want me to email it to you.

    1. i would surely like to read your summary and thanks in advance for sending it over. you were in aerospace? at least you invested. some is better than none and much better than crushing debt. i enjoy your cooking series on the blog and your staycation sounded great to me. aloha!

  5. I love this Freddy! Always keep room for special yummies and wine. I declared January a booze free month. Gretchen Rubin would be aghast but I have come up with one exception so far–my favorite margarita at our local Mexican restaurant. I was going to go off sugar too but that proved to be unrealistic–I still have Trader Joe’s Christmas Jo Jo’s in the house.

    My emergency fund (and most of my cash reserves) are in 5 year CD’s earning just over 3%. The six month interest penalty to access this money early would help someone to keep their mitts off. I did a break even analysis and found I was better off with CD’s after just 13 months even if I ended up paying the penalty.

    I opened the CD’s in small chunks so if I need some money, I’m only paying the penalty on a small amount.

    Might be worth exploring my friend! Hope your holidays were happy. Keep up your good work.

    1. now i’m craving a margarita and it’s only 11am here. i love that idea of a barrier to getting at your money. i think cd’s are a great idea for saving for a house, especially the chunk approach you mention. i’m so glad smart thinkers read this. thanks for the notion.

  6. Ha I would say I pretty much enjoyed my youth, so you do the math. lol! But they are VERY good memories! Very good! Of course with youth, time was on my side and if I just did a TINY bit more to save, I’d be in a much better position today.

    1. i’m thinking my math at that age looks a lot like your math. i likely knew a couple of versions of you in the rock n’ roll clubs around albany, ny.

      yeah, cashing out those 401k’s from my early jobs because they were ONLY a few grand probably wasn’t the best move, but it sure did fund a lot of good times. i’m preaching balance on this type of lifestyle funding now.

  7. When I got my first real job I wanted to invest it as soon as possible. However, I ended up loading up on expensive mutual funds unknowingly. Learned the lesson and went DIY all the way and haven’t looked back!

    That grilled octopus looks good, almost as good as the pralines!

    1. i think if i were starting out i would split the 401k between regular and roth, which our company allows. i know the tax savings are great with traditional but you have to pay them eventually and i love the flexibility and tax free retirement withdrawals from roth.

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