SkyLogic

I graduated college a few years ago. A lot of changes happened financially for me, and I realized I had extremely little guidance on what to do and what NOT to do. I will be honest, I made some mistakes. But I also built some habits that really helped me financially. Here are some of the things I learned.

1. Do not buy that new car

Ok, this is where I made a mistake. I will admit it. Here was the situation: I was moving to a new city far away from my previous one. At the time, I was fortunate enough that my parents had let me use my mom’s old car all through college. It was an old Toyota Camry, and had around 200k miles on it. The air conditioning was completely broken and needed around $2000 in replacement parts. Also, it would’ve been a VERY long drive to drive it to my new location, or I would’ve had to pay around $1000 to ship it there. The car was hardly worth $4000 probably because of the AC issues. The decision we came to was to sell the car, and use the money as a down payment on a new car.

What I did not realize

It sounded like a no brainer at the time, get rid of the old car that is starting to have issues and get a new one that will last. So I bought a new car, and financed it. It is another very reliable car that will (hopefully) last me for years. But maintaining a car payment and putting that money down really set me back in the beginning. I would have likely been better off keeping the old car, saving up some more money, and maybe buying something 3-4 years old and used if the older car finally crapped out on me.

What would I do?

If you have a car, keep the old car as long as you can, and get a head start financially. Don’t shoot yourself in the foot in the beginning.

Need a car?

If you need to buy a car, go with 3-5 year old used car from a reliable brand. Toyota, Honda, Mazda, Lexus, or Subaru. The car market is tough, do your research thoroughly and be diligent when negotiating with a dealer.

2. Go open a Roth IRA account right now

This one is a no brainer. If you are not familiar with a Roth IRA, it is a retirement account where your contributions can be invested and the investments will grow tax free. If you are at least 18 years of age, you can go online and open an account in probably less than 10 minutes. Fidelity is a great option for this. 

Even if you do not plan to contribute any money immediately, just open an account because some benefits of the Roth IRA depend on how long you have had the account open. There is a $7000 limit currently to contribute yearly for people under the age of 50. Once you can put aside some money, start contributing early to watch your investments compound.

3. Get a no annual fee credit card and start building credit

If you’ve never had a credit card, it may sound like a bad idea. Why get a credit card where I will just spend, spend, spend? I am going to lose money. And yes, this does happen. But if you use it the right way, it can really help you in the long run.

The main reason you should get a credit card early is for this reason: a large metric of your credit score is based on how long you have had a credit history. The earlier you get a card, the earlier you can build credit. Just make sure to pay off the statement in full before the end of each month. Maintaining a balance or missing payments can significantly hurt your credit score. Not to mention, you will have to pay very high credit card interest rates if you do not pay it off.

What card?

My recommendation is the Discover It card. It is a great all around starter card and has no annual fee.

Get a credit card with no annual fee, buy maybe one or two things that you would normally buy anyway on it, and pay it off. Keeping this habit will help your credit score in the long run. A good credit score can help you get better rates when you are looking for a mortgage or car loan.

4. Start contributing any amount to an investment account

It is one thing to have a savings account with an emergency fund. But I think it is also important to have a brokerage account where you just invest in stocks, ETFs, index funds, etc. Not only will this act as it’s own savings account, it will compound over time and it will even teach you a little about investing in general and how it is not as daunting as it seems at first.

I would highly recommend setting aside a set amount each paycheck that will go into this account. If your pay system allows it, set it up so it automatically sends a set amount to the account. It is a mental thing, but it really helps if the money just automatically goes there.

The common advice that I mostly follow is to start off by investing in ETFs (Exchange Traded Funds) that track the S&P 500. An ETF, put simply, is a basket of stocks that you can invest in. VOO is a popular example of one. Here’s why I pick these type of ETFs: over the last almost 100 years that the S&P 500 has been around, it has returned 8.55% on investments. That is much higher than a savings account would return in interest, however of course it carries the risk of the stock market going down.

Let’s just put it this way. If you invested just $100 per month, and it compounds at that rate of 8.55% that we talked about, that will be around $359,000 dollars after 40 years. Wow!

5. USE YOUR BENEFITS

One thing you will quickly realize when you get your first big job is that the government takes a lot of money from you in taxes. One of the few ways around this is to maximize your employment benefits. What do I mean by this? Here are 2 main benefits that I use.

Maximize 401k matching

Check your 401k plan to see what your company will match. This is basically free money as long as you maximize it. Use this to your advantage!

Max out HSA (if available)

If you are on a High Deductible Health Plan (HDHP) for your health insurance, you should have access to an HSA. If this is the case, I would suggest maxing out your HSA contributions every year. These contributions are pre-tax, grow tax free, and are not taxed on withdrawals for qualified medical expenses. This is a huge tax leverage!

Conclusion

Hopefully these tips can point you in the right direction! I feel much better about my savings after implementing these things in my finances. Until next time!