“I’m about to leave college and enter the workforce. I don’t want to work forever, and I want my options to be open as much as possible later on. What should I do?” I hear some variation on this question at least once a week from readers of Money360. Here’s my eternal answer to that question.
The reason people wind up committed to jobs they hate is because they didn’t start off making themselves truly independent. Instead, they chose to spend their money on stuff – newly leased cars, lattes, and all of those other luxury goods. Eventually, though, they find themselves stuck in a career that they can’t get out of, even if their heart is begging them to leap – they don’t have the financial safety to make that jump. Instead, they have stuff.
On your first day at work, do these two things.
First, sign up for your retirement plan, including a 401(k)/403(b). Within that plan, contribute whatever you need to contribute up to the employer match limit. In other words, contribute exactly enough so that you’re also getting every single dime that your employer might offer up into that plan.
Next, set up two separate but equal direct deposits for your paycheck. Have one of these deposits go into your normal active checking account. Have the other one go into a savings account you can’t access easily, like the one offered by ING Direct (they’re the “high interest” bank that I use). If you can’t split them up yourself, set up an automatic transfer within your checking account to transfer half of your check each time you’re paid straight to that high-yield savings account.
That second one is likely to shock some of you, because it basically means “save 50% of your paycheck and live off the other 50%.” For people freshly flush with a high-paying new job, that can be very hard to do – you’re tempted to buy a nice car, nice clothes, and some expensive toys. I know I was certainly tempted, and I fell squarely into that trap. Falling into that trap was the single biggest regret of my life. If I could roll back the clock six years and do things differently, I gladly would.
Using the Savings Account
In short, you shouldn’t use that account for anything. Try to live off of the amount in your checking account and pretend as though the other part doesn’t even exist. If you’re freshly out of college, you should be quite good at the art of living off of a tight budget – even half of the paycheck from a good job can seem like a mint.
If you find that you simply cannot make ends meet this way, then change the ratio to 60/40, but give the half-and-half split a sincere try first.
The Next Step
Once you’ve settled into a routine, every three months invest 80% of your account balance in an index fund. It’s easy as pie – just sign up over at Vanguard and slip your money in. I recommend reading The Lazy Person’s Guide to Investing and following one of the recipes in there. You can do all of this online, then just sit back and forget about it.
Eventually, you’ll amass a pretty sizeable bankroll. When you have a couple years’ worth of living expenses socked away, you’ll find that your horizons suddenly get a lot wider. You can easily quit your job if it’s not fulfilling you. You can seek other career opportunities if you wish. Whatever you want.
What Are Your Real Goals In Life?
For most people, it doesn’t involve settling in at the same job, living as a single person, and working there until retirement. Most of us have big dreams – a career of public service, a career as a freelance writer, some years as a stay at home parent, a trip through Europe with nothing but a backpack and a laptop.
Putting half of your paycheck away buys you a little more than a year of complete freedom for every year that you work. If you work for ten years, then you’ve probably built up eleven or twelve years of living expenses. Even if you work a single year, you’ll be able to just follow your muse for another year on that savings.
“I Don’t Want To Live In Poverty!!”
Some people will immediately reject this concept out of a need to “not live like a poor person.” If that’s your justification, realize what you’re trading – you’re trading years of your life away for stuff. You’re trading away countless amazing experiences so you can have some quick-fix material conveniences.
This plan buys freedom – freedom to go where you want and do what you want with your life. Not wanting to live in poverty rejects this freedom and trades it for extra stuff. Before you outright reject the plan, sit down and imagine yourself in ten years if you buy a bunch of trendy stuff – or if you started socking it away hardcore? I’ll give you a hint: one of those future selves will be locked into working a job and will be burdened with stress, while the other one will have the freedom to follow his or her muse. One will have lots of stuff – the other one will be living out lots of dreams.
It’s your choice, and you’ll never have the opportunity to make it again. Think about it, and make the right choice for you.