The Most Important Money Decisions 20-Somethings Make

The first day at a new job is full of excitement, anxiety, optimism and confusion. Am I dressed right? Will I fit in? Will I find the bathroom?

Getting all those things right is important, of course. But some things that seem less pressing will have an even bigger impact on your future. There’s always a mountain of paperwork, courtesy of the HR department, when you start a new job. And you’ll soon be facing a lot of money decisions. Here’s how to get it all right, whether you’ve just landed your first job out of college, or you’ve been lucky enough to land a new job recently.

1. Use that credit card. Wisely.

Yes, you will have to spend money before you make money. You’ll buy some clothes, buy a monthly bus pass, maybe even have some moving expenses. Short-term credit is made for transition times like these, particularly when you have good reason to expect new income soon. It’s not the end of the world if you end up carrying a credit card balance for a couple of months while you wait for your first paycheck. But if you can’t pay down the balance within 90 days, you are living beyond your means, and something is going to have to change. One common problem: the salary offered vs. take-home pay.

2. What can you spend?

Nearly every worker is disappointed on their first payday, when the reality of “take-home pay” arrives. Often, the disappointment turns to fear over the next credit card bill. Very roughly, you’ll be taking home between 66%-75% of what you’ve been told your salary will be. When deductions for health insurance and retirement kick in after another paycheck or two, it might be even less. So spruce up your wardrobe, yes, but don’t make any decisions on a new car or other large purchase until your paycheck settles down and your monthly budget has endured a few reality cycles.

3. 401K, right away.

One overwhelming form you’ll get on day one is an election form for your retirement savings, probably a 401K enrollment. Your firm, hopefully, will give you “matching” contributions, up to a modest limit — such as 50 cents for every dollar you contribute up to 6% of your salary. Do that. Take as much of your company’s money as you can.

As a second step, you’ll have to decide where to put that money. You may get a form that lets you elect 10 or 15 places you can invest this money, such as mutual funds. If you don’t really know what to do, put it all into an S&P 500 index fund and leave it alone. Don’t spread the money around into a lot of places because that seems like diversifying. Even if you are struggling to pay your student loans, or credit card bills, contribute to the 401K and get that company match. Otherwise you are turning away free money. Much has been written about the power of saving for retirement in your 20s. Put simply, the lifelong earnings you’ll enjoy are worth paying a little more interest on your debt. And money contributed to a Roth 401K can be used for emergencies, or school or home down payments, without penalty, so it’s a sure bet.

4. Set up an emergency fund.

Today’s reality is that few jobs are stable. From day one on the job, you should think about what you’d do if the job disappears. The best tool for handling this depressing possibility is money. Take your rent payment, multiply it by three to get your monthly costs, and then by three again so you know what you need for an emergency. If possible, open a separate savings account where you sock away this money. A simple way to get started: Put the same amount you place into your 401K into your emergency fund. It might take you a year or two before you have that lump sum stashed away, which is why you should get started immediately. The next tip will help a lot.

5. Save more tomorrow.

Commit immediately to saving half of any raise or bonus you receive into your emergency fund. Some companies actually encourage this through a program named “Save More Tomorrow” or something similar. Studies show it’s a lot easier to save money before it becomes a part of your monthly budget — folks never miss the raise if they don’t start spending it. This is the fastest way to build up emergency savings…and a down payment for a house.

6. Create a long-term debt map.

While deciding how much to save for retirement and emergencies, make a debt map. How much will you need to pay off short-term debt (credit card debt) and long-term debt (student loans)? Even if you are enjoying a grace period before loan repayment starts, make that calculation now so you can budget for it. Understand how long you’ll need and how many raises you’ll need to get the debt under control. With this year’s students averaging $30,000 in debt, it may take 10 years or more to pay down your loan, and that’s no fun to think about. But it’s essential to have a plan. Following a workable get-out-of-debt plan can also do good things for your credit, especially by making your payments on time. (You can figure out a debt plan, and see how it could affect your credit scores if you follow it, by using free tools on Credit.com.)

7. Make a down-payment plan.

Now that your head is full of financial negativity, it’ll help to give yourself a positive goal, too — even if it’s a long-term, stretch goal. Many homeowners find the biggest impediment to buying a home is gathering up enough for a down payment. The sooner you start that long-term project, the better. How much will you need for a down payment? There’s too many factors to even hazard a guess. But a conventional mortgage on a $200,000 home requires a $40,000 down payment (though many programs allow borrowers to buy with less than a 20% down payment). How might you pile up $40,000 in the next 5-10 years? The Save More Tomorrow plan is probably your best bet. To make things even easier, you could try living from home…

8. Consider living at home.

It’s the new reality. With youth unemployment stubbornly high, young adults are living with mom and dad for longer and longer stretches. In February, Gallup said 15% of U.S. adults under 35 were living at home. The numbers are higher for singles and those in their 20s. If that’s you, that’s reality. But don’t be tempted to waste this opportunity to save money. You still need an emergency fund, and it’s not mom and dad. Don’t know how large? Ask a friend what they pay for rent. Multiply that by three, and by three again, and you’ve got your first goal. Don’t get used to living life without rent; make rent-sized payments towards your debt or your emergency fund.

9. Check your health insurance.

It’s easier for young people to stay on their parents’ plan a bit later into adulthood now. It’s quite possible that’s a better idea than paying for insurance benefits with a new employer. The calculation isn’t so simple, however. Health insurance costs aren’t just about monthly premiums; they’re also about coverage costs. If the adult child will live far from the parents — in a different state, particularly — doctor visits and drugs might not be covered at the same rate. That’s also true of insurance that’s available through state exchanges and Obamacare. It’s possible that exchange insurance is cheaper, or a better deal, than an employer plan, but it’s a tricky calculation. Crunch the numbers before the HR department demands that health insurance election form.

10. Read that non-compete.

Tucked into the paperwork you’ll receive from HR might be a non-compete agreement that would limit your ability to get another job if things don’t work out with this employer. It’s a little like signing a pre-nuptial agreement on your wedding day. No one wants to think about an unhappy ending at the beginning, but of course, it’s a reality. Non-competes are generally very unfriendly to workers, and benefit only employers. Sign one, and you may not be able to work for a competing company for a year or two after you leave. You may feel like you have no choice when presented with the form, but at least read it carefully and make sure you understand what how it will impact you. Ask to take it home so you can read it in a quiet place; if you can, ask to opt out of it, or shorten the term.

11. Don’t overwork.

Finally, don’t leave your first day without understanding your company’s vacation and sick day policy. Spend the first few months understanding the reality of your boss’ and your work group’s time off culture. Overwork and binge working is a real problem in today’s corporations, fueled by fears from a tight labor market and by always-on technology like smartphones. While it can be nerve wracking, set boundaries for yourself and your boss early on. Don’t let people around you assume you’ll be happy to work on nights and weekends, and don’t make yourself sick because of your job. Ultimately, you’ll be a better performer and you’ll get more respect if you say no once in a while and make sure you get proper rest.