Starting your career is an exciting, and overwhelming time especially when it comes to managing your finances. I was earning significantly more when I started working than I did as student, and you probably will too. This transition afforded me a lot of luxuries that I did not previously have and made me realize that I also needed to have proper financial planning. There are so many options available and it’s easy to get lost in all the financial accounts thrown at you.
I’ll breakdown some of the accounts that you can take advantage of to set a solid foundation for your financial future. These are a great starting point to taking control of your finances, building wealth or simply having financial security and independence.
Roth IRA or Online Brokerage Account
My biggest financial mistake is definitely not opening a Roth IRA account as soon as I learned about it. Even though the idea of investing sounds daunting, a Roth IRA is a great account for anyone who is starting out in their career and can afford to contribute to retirement savings. Contributions to a Roth IRA are made with after-tax dollars and your investment earnings grow tax-free so you don’t pay taxes on your withdrawals at retirement. You can also withdraw your contributions after 5 years without penalty. Learn more about Roth IRA here.
You could also open a regular brokerage account for investing. You can use both the Roth and brokerage account to buy and sell stocks, bonds and mutual funds. Investing comes with a lot risks but you can learn more about what to do before you get started with investing if you decide to open these accounts. When done right, investing is a valuable tool to grow your wealth over time so if you have extra money to invest beyond your checking or savings accounts, consider opening an investment account.
Employer-Sponsored & Traditional IRA
An individual retirement account (IRA) is another retirement savings option to save for retirement. There are two types of IRAs: traditional and the Roth which we have previously covered. A traditional IRA allows you to contribute pre-tax dollars, while a Roth IRA allows you to contribute after-tax dollars.
A traditional IRA allows you to save for retirement even if your employer doesn’t offer a retirement plan. Unlike a Roth IRA, in a traditional IRA your contributions are tax-deductible so you’ll pay taxes on your withdrawals in retirement.
In addition to the IRA, a lot of employers offer 401(k) retirement plans. A 401(k) plan allows you to contribute a portion of your salary to a tax-advantaged retirement account which is then invested and earns returns from the stock market. Some employers offer incentives such percentage-matching if you contribute a certain amount. Contributing to a retirement plan early in your career maximizes the effects of compound interest and builds substantial retirement savings over time. I personally use a 401k instead of a traditional IRA since it’s easier and I can maximize to get a company match.
Health Savings Account:
A health savings account allows you to save money for medical expenses on a tax-advantaged basis. Contributions to the account are also made with pre-tax dollars and earnings are tax-free. I have a HSA and I’ve used it for prescription drugs, dental cleaning, sunscreen, body oil, a heating pad and so much more. There’s tons of items in the FSA store that you can buy. Amazon has an equivalent version for FSA/HSA eligible items. You can also leverage this for glass prescriptions and other medical expenses. I like that I get a separate HSA credit card so I don’t mix these expenses with my regular credit card.
Additionally, HSA funds can be carried over from year to year. If you don’t use all the funds in a given year, the money rolls over to the next year, so you can continue to build your savings through significant balance over time. I carried over $850 from 2022 which I am yet to exhaust!
High-Yield Savings Account
A high-yield savings account(HYSA) is a great option for saving money that you may need in the short term, such as an emergency fund. I didn’t have one until recently and I opened one on Ally. I appreciate the features Ally has to place my savings in different visual ‘buckets’. They also have a 3.6 annual percentage yield which is one of the higher ones.
Ally works for me but there are tons of options for saving accounts. I’d recommend going with any that offers a high interest rate and is FDIC insured so your money can earn interest over time at low-risk. Credit unions also offer such high-yield savings accounts with no minimum balance requirements or monthly fees.
A high-yield savings account is the perfect place to stash money although the growth rate might not be similar to that or a brokerage account. However, unlike an investment account, you can make easy withdraws in case of an emergency without having to worry about investments or the stock market.
Reward Credit Cards
I’m a big fan of reward credit cards. Credit cards can be a great tool for building your credit score and earning rewards on your purchases. Look for a card that offers cashback or points that can be redeemed for travel or other perks. Just be sure to pay off your balance in full each month to avoid paying interest. I love to travel and I have the Amex Platinum card which I leverage for reward points, lounge access and other perks.
Most of these accounts are friendly for people who are just starting out in their careers as they build a strong financial foundation.
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Opening any of these accounts can help you pay off debt, travel, invest, build an emergency fund, save for retirement and set you up for long-term financial success. Take time to research your options and choose accounts that align with your financial goals and needs. Similarly, make contributions that suit your financial situation and grow from there. Leverage each of these accounts to do so comfortably.
Make your money to work for you. The earlier you start, the better off you’ll be in the long run. It takes patience and discipline, but it is 100% worth it.
