So, you’ve landed a new job. Congratulations! Not only does a new job often mean a bigger salary, it’s also a great time to level up your financial planning. We’ve got five tips to help you get the most out of your bigger paycheck and your personal finances right now.
1. Create or Update Your Financial Plan
If you’re one of the 30% of people who already have a financial plan, a new job is the perfect time to revisit it and reassess to ensure everything’s up to date. However, if you’re like most people and don’t have a plan yet, seize the opportunity. A new job is an ideal time to set some financial goals and create a plan to achieve them. You wouldn’t think of approaching a significant new project at work without establishing some initial goals and a plan to get you from point a to point b, so why would you handle major life priorities any differently? Sure, your life and your priorities will change over time, just as 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 purchasing one of two cars and one will cost you $200 more per month for the next five years (when taking into account everything from car payments to gas and maintenance), knowing how much investing that extra $200 a month could help you meet your retirement goals might help you make that decision. If you are 25, plan to retire at 65, and your investments earn an 8% annual return on that $200 monthly saving, you’d have ~$250,000 more at retirement. A financial advisor can work with you to identify your goals and create a plan that will help you make financial decisions today that will help you reach those goals in the years to come.
2. Invest in Yourself by Saving Your Raises and Paying Down Debt
If your new job comes with an increase in salary, consider putting the new money either towards reducing debt or increasing savings. Resist the temptation to consume and spend more. You were able to live on your old salary while you had your old job, so you could probably continue living on the same amount of money with your new one. The decision to reduce debt or invest is personal and your situation is unique, but a financial advisor can help you determine your priorities and come up with a plan. Factors to consider include the interest rate on your debt as well as your own personal comfort level with carrying 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.
Keep in mind that paying off debt is like getting a guaranteed return whereas investments always comes with some level of risk that you might not get the expected and hoped for return on investment.
3. Take Advantage of Your Company’s Retirement Plan
According to a Wells Fargo survey, less than half of employees participate in their employer’s retirement plan. If you take nothing else away from this article, please don’t be one of those people, especially if your employer provides a 401k match. Not getting the company match means you are throwing away free money. But, even if your company doesn’t offer any 401k matching, you will keep more of your money by investing in your 401k because anything that goes into a 401k plan is tax-deferred. You will pay less tax on your overall salary if some of it is diverted into a 401k plan (up to $18,000 per year, or $2400 if you are over age 50). Automating your 401k savings and taking advantage of the compounding benefits of tax deferred investing are major benefits you don’t want to ignore.
4. 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 – This is one of the most overlooked forms of insurance. Your ability to generate income is vital to your well-being and financial stability. Make sure you are adequately protected in the case of a long-term disability.
- Health Savings Account - If your company offers a high deductible insurance plan, make sure you pair it with an appropriate HSA. There are two 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 can carry over from year to year, so you don’t have to worry as much about over-funding the account.
- Flexible Spending Accounts - An FSA is 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 may lose any unused funds at the end of each year, depending on the rules of your company FSA. Understanding the differences between HSAs and FSAs can also help you with this decisions.
- 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. Many 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.
5. 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. In fact, rolling over a 401k plan is a great way to begin working with a financial advisor on developing a more comprehensive financial life plan. The WealthMinder proposal request tool allows you to find and connect with licensed financial advisors who can help you rollover your 401k, as well as with more comprehensive financial planning.
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 exciting. It’s also an excellent opportunity to position yourself to better meet your life and financial goals. To recap, make sure to:
- Create or revisit your goals and your plan to get there
- Save and invest any raises or bonuses whenever possible
- Fund your retirement plan and avail yourself of any company matching
- Make sure you take full advantage of your company’s employee benefits
- Be smart with your existing retirement funds and roll over any existing 401k plans
Follow these simple financial tips and your new job will be a launching point for much more than just your career.