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.
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?