Now that you’re out of college, it’s time to start thinking about what you’re going to do with all that money from your new job. Or, how you’re going to survive on your entry-level wages. If you want to retire in comfort, there are some important steps to take. Here is what every millenial needs to know about savings and finance.
The difference between a 401(k) and an IRA
Both of these are retirement savings accounts with special tax benefits. The primary difference between the two is who is administering the funds. Oftentimes, your employer will run your 401(k) plan while an IRA is managed individually.
A 401(k) allows you to contribute up to $17,500 in pre-tax income, with potential matches from your employer. Maxing out your 401(k) not only gets as much employer contribution as possible, but reduces your taxable income at year’s end. IRAs have a similar tax advantage, but with a lower limit ($5,000).
How much to contribute to your 401(k) and how to invest
You should contribute at least to the level your employer will match. Beyond that, it ultimately depends on whether you have other savings accounts and what your goals are. In general, the investment strategy should include a diversity of risk and expense, leaning toward stocks in your younger days (which grow faster) and bonds as you near retirement (which do not grow as fast but are much safer).
How much you need to retire
Want to retire at 67? Doing some relatively simple math right now can help you figure out how much you’ll need. The rule of them in the investing industry is that you’ll need eight times your last year’s salary. This isn’t as impossible as it seems. The magic of compound interest is your friend. Squirrelling money away in your 20s and 30s will pay big dividends decades from now.
What your credit score means
Your credit score is made up of five factors: your payment history (do you pay your bills on time?), your “credit utilization” (yes, it’s good to owe a little money), your “credit mix” (the different types of credit you have), how long you’ve held credit, and a measure of your “new credit” (opening several credit cards in a short period of time will hurt this factor). At its most basic, to get a good credit score you need to have some credit history, borrow a little bit, and always make your payment on time. Your credit score will affect things such as your ability to take out a loan and even, in some cases, your ability to rent a place or get a job.
How much you need for emergencies
The rule of thumb is that you should have six months of expenses saved up in case of emergency (losing your job, suffering a medical catastrophe, or other large, unexpected expenses). Six months may seem like a lot, but keep in mind that the average unemployment spell these days is eight months and it can happen to just about anyone.
The world of finance and saving can seem daunting. But you don’t have to be a Wall Street trader to make good decisions with your money. Most important? Set yourself some goals, plan for retirement, and keep your spending reasonable.
Michelle Smith is a retired financial advisor turned freelancer. As her former title may suggest, she enjoys writing about financial tips and ways to keep out of financial trouble. To make sure she is up to date on her facts, she often looks at the blog of bankruptcy attorney Deluca & Associates.