Transitioning from college to the working world is a big step and landing your first “real” job is a major accomplishment. If you’ve gotten used to being a broke student, getting your first paycheck may feel like you’ve hit the jackpot.
When you’re making more money than you ever have before, figuring out the best way to manage it can be difficult. You know that paying down your student loans and saving money are top priorities but where do you park your extra cash and how much should you be hanging on to? The sooner you get started with building some financial reserves, the better off your long-term outlook will be and we’ve got the best saving tips so you can make every penny count.
1. Your employer’s retirement plan
The most obvious choice for new grads to get started saving is right in the workplace. If your employer offers a 401(k) or similar retirement plan, it’s a relatively painless way to begin growing your nest egg. You choose what percentage of your income you want to defer into the plan and in most cases, your employer throws in a matching contribution. Basically, you’re getting a tax break for contributing and free money from the match so it’s a win-win situation.
How much of your pay you should funnel into your 401(k) really depends on what you’re making and what your overhead costs are. If you’re pulling in around $30,000 a year and you’re battling $50,000 in student loan debt, you may only want to contribute enough to qualify for the company match. If debt isn’t a problem or you were able to score a six-figure salary right out of the gate, socking away anywhere from 10 to 20 percent might be more appropriate.
2. Online savings account
Once you’ve gotten a start on saving for retirement, your next move is to start working on your emergency savings. This is money that you’d only need to touch if extra expenses, like a car repair or doctor visit, pops up out of the blue unexpectedly. Most financial experts recommend keeping anywhere from three to six months’ worth of expenses in an emergency fund so you have to decide how big you want your cushion to be based on your expenses and your comfort level.
Keeping the money in a savings account offers convenient access and you can earn a little interest on what you’re setting aside. You could go with a regular account through your local bank or credit union but online banks tend to offer slightly higher rates. When you’re comparing accounts online, make sure you’re paying attention to the fees and account minimums so you find the best deal.
3. Money market account
Money market accounts are another good choice for recent grads who want a safe place to stash their cash but also need check-writing abilities. The yield on a money market also tends to be a little higher compared to what you’d get with an online savings account. If you want to save for a long-term goal like buying a car, putting it in a money market that’s separate from your emergency savings isn’t a bad idea.
The one thing that you want to keep in mind when you’re shopping around for a money market account is that it’s not the same as a money market fund. The latter is actually a type of investment offered by brokerage firms and mutual fund companies. Allocating some of your savings to a money market fund can generate some bigger returns but you’re also taking on a lot more risk, so it pays to know the difference.
4. Certificate of deposit
You might want to consider a certificate of deposit or CD if you’ve got a steady cash flow coming in from your new job and you don’t mind tying up some of your money over the long-term. When you deposit money in a CD, you’re required to leave it there for a set period of time until it matures. Maturity lengths can be as short as three months or as long as five years, based on what kind of CD you choose.
CDs are a good place to start if you’re new to investing and you’re looking for a safe way to earn some interest. The longer term you choose, the higher the rate will be. You can purchase one with as little as $100, which is an advantage if you want to save but you’re not raking in the big bucks at your job yet.
5. Treasury securities
If your risk tolerance level is pretty much zero, treasury securities are something you might want to look into. Since they’re backed by the federal government, the odds are extremely slim that you’ll end up losing money, although you shouldn’t expect to see staggering returns. When you’re looking into treasury securities, you’ll have to decide whether you want to invest in bills, bonds or notes.
Aside from their relative safety, the other nice thing about federal securities is that you don’t need a lot of money to purchase them. The minimum purchase levels range from $25 for bonds to $100 for T-bills so you’re not forking over a huge amount of cash. Maturity terms range from a few days to 30 years so you’ve got plenty of flexibility when it comes to how long you want to set the money aside.