5 Financial Tips When Starting a New Job
So, you’ve landed a new job. Congratulations! It’s an exciting time and a great chance to take a step forward financially. Today we’ll give you 5 financial tips on how to maximize this opportunity.
Create / update your plan
If you’re one of the 30% of people who have a financial plan, a new job is the perfect time to revisit it and ensure it’s up to date. However, if you’re like most people and don’t have a plan yet, seize the opportunity. You wouldn’t think of approaching a significant new project at work without establishing some initial goals and a path you think can get you from point a to point b. Why would you handles you major life priorities any differently? Sure, your life and your priorities will certainly change over time, just like projects at work are rarely static, but having a plan gives you a framework for making intelligent decisions and adjustments along the way. It also helps you to understand the potential ripple effect of decisions you make in the short-term.
For example, if you are considering 2 cars and one will cost you $200 more per month for the next 5 years ( when taking into account everything from car payments to gas and maintenance), how much are you giving up versus if you had invested that money towards your retirement. Good financial planning software will let you quickly and easily answer questions like these, and the answers will probably surprise you. If you are 25, plan to retire at 65 and can make 8% on the savings, you’d have ~$250,000 more at retirement by driving the cheaper car for the next 5 years.
Save the raise
If your new job comes with an increase in salary, put the new money either towards reducing your debt or increasing your savings. Resist the temptation to consume more. You were able to live on your old salary, so you should certainly be able to live on the new one. The decision to reduce debt or invest is something of a personal one. Factors to consider include the interest rate on your debt as well as your own personal comfort level with debt and the associated risks. For me, as long as my debt level was reasonable, I would choose to invest if the rate of return I thought I could achieve was higher than the interest rate on the debt. Don’t forget to take taxes into account when figuring this out. Also remember that paying off debt is like getting a guaranteed return whereas your investments always comes with some level of risk that you won’t get the expected returns.
Take advantage of your company’s retirement plan
According to a recent Wells Fargo survey, less than half of employees participate in their employer’s retirement plan. If you take nothing else away from this article, don’t be one of those people. If your employer provides a match, you are simply throwing away free money, and even if they don’t, automating your savings and taking advantage of tax deferred compounding are major benefits you don’t want to ignore. To see just how big an impact tax-deferred compounding can have, check out “Compounding and why you should care more“.
Take full advantage of your company’s other benefits
Don’t ignore the other benefits your company may offer. Here are a few examples of things you should pay attention to.
- Disability Insurance – One of the most overlooked forms of insurance, your ability to generate income is vital to your well being. Make sure you are adequately protected in the case of a long-term disability.
- Health Savings Account – If your company offers a high deductible plan, make sure you pair it with an appropriate HSA. There are 2 great things about these accounts. One, you now pay your medical bills with pre-tax dollars, so it’s like getting an instant discount equal to your tax rate. Two, they carry over from year to year, so you don’t have to worry as much about over-funding the account.
- Flexible Spending Accounts – Another great way to get a discount equal to your tax rate on medical related expenses. Just make sure you know what you can use it for, and don’t over-fund this account, as you lose any unused funds at the end of each year.
- Life Insurance – If you have a spouse or family, you need life insurance. Many employers will provide a small policy as part of your employment. They will also offer the ability to buy additional insurance. For most people, they’d be better off with a simple term policy to supplement their company’s policy, but it’s worth looking into the costs of your employer’s plan too.
Don’t forget to rollover your old retirement plan
If you have enough money in your account, most employers will let you continue to hold your money in their plan. Unless you have a really low-cost plan with lots of investment options, you should probably roll your money into an IRA. Doing this will give you many more investment choices and should lower your annual costs significantly. For most people, picking a diversified set of index funds that match their asset allocation is the sound choice. Rolling over an account is not difficult, and all of the discount brokerages are more than happy to help you through the process.
The one thing you absolutely don’t want to do is cash out your 401k. Unfortunately, according to Hewitt Associates that’s exactly what 45% of people do. If you cash out your plan, you will immediately owe taxes on your entire account balance and you will pay an additional 10% penalty if you aren’t 59 1/2. With one simple decision, you will have wiped out all the benefits you gained by investing in your employer’s retirement plan in the first place. DO NOT make this mistake!
Summary of financial tips
Starting a new job is an exciting time. Use it as an opportunity to put yourself in a better place for achieving your life goals.
- Create / revisit your goals and your plan to get there
- Save the raise
- Fund your retirement plan
- Make sure you take full advantage of your company’s benefits
- Be smart with your existing retirement funds
Follow these simple financial tips and your new job will be a launching point for much more than your career.
This article was syndicated from Business 2 Community: 5 Financial Tips When Starting a New Job
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