You’ve done it. You’ve graduated from college – or high school – and gotten your first “real” job with a decent paycheck. No more surviving on 10 hours a week at minimum wage; we’re talking real money here.
Once you start getting those big paychecks, it can be tempting to make up for all of the years of going without by going on a much-too-long spending spree and buying whatever you wish. But as an older and (I hope) wiser person who has had his struggles with major league debt ($52,000 to be exact), I’d like to share some advice as to how you can make your new big paycheck serve you well – both now and in the future.
The tips I’m sharing here are things I wish I’d done when I started getting those big paychecks for the first time. My wife and I are on a roll now, having paid off our $52,000 in consumer debt in just 18 months. Now that we started following the tips below, we’ve got no consumer debt, we have a healthy savings account and a mortgage that will be paid off in just four (?) years. Plus, we’re building a wealth portfolio that will allow us both to retire early.
Does that sound like the financial road you’d like to be on by the time you hit your mid-thirties (or earlier)? If so, read on for suggestions on how to make your money work for you so that you can have financial freedom for the long-term.
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Create your financial goals
Now that you’re making real money, do you know what you want from that money? Without written goals for your cash, it’s real easy to let it fly out the window on whatever spur-of-the-moment purchase comes your way.
In order to avoid having your cash disappear into the black hole of unplanned spending, it’s important to sit down one afternoon and really think about what it is that you want from the cash you’re working so hard to earn.
Create some one, five, 10 and 20 year goals and write down the specific steps you’ll take to reach those goals.
In order to help you stay on track with reaching those goals, post them prominently in a place where you’ll see them often and have quarterly check-ins to monitor your progress.
Pay off any debt
If you’ve got debt from student loans or other sources, now is the time to pay it off. Every dime you pay in interest is money that can’t be used to help you grow wealth. I suggest paying off debt as soon as possible so that you can begin making your money work for you.
Save a percentage of each paycheck
If you take a certain percentage off the top of each paycheck for savings from the very beginning, you’ll never miss the money. Just have the percentage automatically deposited into a separate savings account and train your mind to think that the remainder is all that you have.
Before you know it, you’ll have thousands of dollars sitting in a savings account that can be used for whatever big dream you want to use it for.
Save money to pay for a reliable car
New cars can take a big bite out of your financial success when you factor in opportunity cost. Instead of spending money on interest costs for a new car – money that could be used to help you grow wealth – choose instead to save money and pay cash for a reliable used car.
By avoiding the massive depreciation that comes with an expensive new car purchase – and by avoiding carrying monthly car payments – you’ll have several hundred dollars a month extra to use for purposes that are of more importance to you.
Put something towards retirement
Whether that means contributing to a 401(k) program at work or opening a Traditional or Roth IRA – or maybe both – that’s your call. The important thing to remember is that the earlier you start contributing to retirement accounts, the more time compound interest has to work in your favor and grow your money, leading to a more-than-comfortable retirement.
Start saving for a house
Chances are that eventually you’ll begin to consider purchasing your own home. By starting to save now for that home, you’ll have plenty of time to build up a down payment of at least 20%, which will help you to avoid having to pay private mortgage insurance on your home loan.
If you really make home savings a priority you can save enough to buy your first home in cash, resulting in six-digit savings on the interest payments that would have been. From there you can take the money that would’ve been spent on interest and use it to continue growing your wealth and reaching all of your financial goals.
Beginning smart money management as soon as you start working at your first real job will help you develop wealth-building money habits that will last a lifetime.
Read more: How to buy a house with cash