Landing your first job as a young professional can make you feel positively wealthy. You’ll make increasingly more money with age and experience in your career. But this, right now, might be the time you feel like you’re making the most money ever.
Perhaps you’re swapping ramen noodles for quinoa and thrice-used tea bags for kombucha, but proceed with caution. With great money comes great responsibility. Launching your paycheck-earning years with good financial habits is a smart investment in your future.
You should enjoy your newfound sense of wealth, but resist the temptation to go crazy. Here are four personal finance tips for young professionals like you.
1. Build Your Credit
Solid credit history and a high credit score clear the path to many of your financial goals. If buying a home, a car, or another major purchase is on your wishlist, you’ll need good credit.
If you have no credit history or a poor credit score, you may not qualify for a credit card. Or if you do, it might charge a sky-high interest rate. Make a smart move toward building a credit history and raising your score by applying for a credit builder card.
Once you’re approved, you will need to deposit a certain amount of money into the credit card account. This becomes your credit limit, and it reduces the risk the card company takes on you. Then you can use the card to make purchases just as you would with a traditional credit card.
Whether you have a credit builder card or a regular credit card, start your history off on the right foot. Aim to use only 10% of the credit you’ve been approved for and always keep it under 30%. Make payments on time and try to pay off the balance in full every month.
Wise use of newfound credit will pay off down the road. If you start with good spending habits, you won’t have to break bad ones later.
2. Chip Away at Those Student Loans
Most college graduates these days enter the “real world” with a lot of student loan debt. That lender has been giving you money freely for the past few years. At some point, you’ll have to pay the piper.
In the U.S., $393 is the average minimum monthly payment on student loans. For some, the payback period, 30 years, is the same as the typical home mortgage. If you’re planning to buy a home, it might be difficult to come up with enough money to pay for both.
Instead of just paying back what you owe, chip away at your student loans. Paying an extra $100 on the loan principal every month will cut years off your payback period. The more additional money you pay, the sooner you can check that loan off your list.
When you start earning your post-grad paycheck, you need to develop a budget. (See #3, below.) If you plug in a higher-than-required payment on student loan debt from the get-go, you won’t even notice it’s gone. You will, however, notice when that debt is paid in full.
It’s likely that you needed a college degree to be eligible for the career you want. You probably also had to incur debt to afford your foray into higher education. Just make sure that investment lifts you up rather than drags you down.
3. Develop a Budget and Set Goals
One of the worst things you can do is just spend your hard-earned cash without knowing where you spent it. That’s easy to do if you don’t take the time to develop a monthly budget, so have a plan.
Start with your take-home pay amount and plug in your payments for the necessities. Those would include things like rent, car payments, utilities, groceries, gas, and student loans. Then add line items for things like extra payments on loan principals, investments, and savings deposits.
Your budget and your life goals should go hand in hand, so include those goals. Let’s say you want to retire at age 50. You’ll need to determine how much to sock away in retirement accounts every month to achieve that goal.
Commit your goals to paper. Doing so will remind you why you’re depositing the maximum amount in your 401(k) rather than buying a Tesla. In 2022, by the way, that max is $20,500.
There are probably few 50-year-old retirees traveling the world who wish they’d spent more on designer clothes in their youth. Whatever your financial and life goals are, make sure your budget matches the dream. Then, stick to it like gum on the bottom of your non-designer shoes.
4. Make Cash King
If you’re earning a fat check and building a credit history, all sorts of credit offers may come your way. It can be extremely tempting to accept them. The problem is that you could find yourself using it all and drowning in debt.
A good habit to start when you’re a young professional is to use cash, not credit, as much as possible. You don’t want to find yourself paying for groceries with a credit card because your checking account is dry. That’s a sure sign you’re in trouble.
Instead, save up to pay for major purchases in cash rather than expediting them using credit. You may have to wait a little longer, but you’ll avoid adding hundreds of dollars in interest to the cost. Plus, you’ll learn some valuable financial lessons in patience and perseverance.
If you want to take advantage of travel and other credit card incentives, that’s OK. Just make sure you pay the balance in full monthly to avoid interest. Then save for whatever trip or shopping spree you’ve received the incentives for.
While you’re paying cash as you go, don’t forget to save some of it for a rainy day. Create an emergency fund you can use if you need to go without a paycheck or two. When things come down to cash or credit, remember cash is king.
If you’re a young professional, you should feel like the world is your oyster. Just make sure you practice a few sound financial habits, and you may find a pearl.
