First-Job Fiascos – Part 1
Posted by Gail | Filed under Money Management
I received a letter from a young lass recently that brought home the problem a lot of young people face when they get their first jobs.
K wrote: Gail, my mom made me sit down and watch your show the other day and what an eye-opener it was. I can’t believe the mess so many people get themselves into. Well, actually, I can believe it since I’ve gotten myself into a mess too. And all because I finally got a good job and was making more money than I had ever seen before. After being a poor student for years, I went nuts. But with you in my head now, I’m on my way to making it better.
Lots of young people get a rush when they get their first real pay cheques. With “so much money” in their accounts they imagine they’ll never be able to spend it all. This is particularly true when they walk away from the human resources department with the echo of their new “annual income” rattling around in their brains.
Hang on now chickadees, don’t forget you must pay tax on that money. There may also be other deductions that eat away at your take-home pay. And then there are your expenses like rent and food. While it may seem like more money than you’ll ever be able to spend, you’ll be surprised at how quickly it evaporates.
To avoid a So-Much-Money Fiasco, you should spend carefully and track your expenses for your first two or three months until you get a good handle on what life is costing you before you go out and blow your wad. Use your experience in those first few months to draw up a realistic budget that covers all your needs and some of your wants. Don’t forget to stick some money away for emergencies and start your long-term savings. It doesn’t have to be a lot to start. But you must start.
One of the biggest temptations the newly independent face is the urge to fill up their closets and apartments with all the stuff they’ve done without. Sure you have a new job and need some professional outfits to carry off your new image. But that doesn’t mean you can go out and build yourself a whole new work wardrobe in one swipe of the credit card. Nor can you furnish your apartment overnight simply because a buy-now-pay-later offers you everything your heart desires with no money down and 12 months to pay.
To avoid the I-Have-to-Have-It-All-Now Fiasco, start by buying just the essentials and creating a list of all the other things you’ll want over time. Each month you can allocate a specific amount in your budget to acquiring the thing you’ve put on your list. When you do buy, shop smart so that your money goes as far as possible.
When it comes to clothes, stick with basic pieces in neutral colors like black, grey and khaki. Buy shirts/blouses that can match any of the bottoms, and mix and match to create multiple outfits.
For furniture, all you really need up front is a bed. Beg, borrow and swap for pieces that can act as stand ins until you’ve saved up the money to buy the couch or coffee table you really love. Try Freecycle or Craig’s List. Hit the second hand stores. Turn the furnishing of your home into a process — and a fun one at that — instead of another case of immediate gratification.
Put your credit card or debit card away so you aren’t tempted to buy when you’re out and about. Make shopping for what you need and want a purposeful event: you decide to buy those black pants you need today, you set a budget based on what you’ve seen while you were shopping around (window-shopping, checking prices online, etc.), you put the money in your wallet, you go shopping, you buy.
Perhaps the biggest mistake the newly independent make is to think they are too young for words like “retirement” or “emergency” to be in their vocabularies. This is the I’m-Invincible Fiasco, and it strikes because you’re sure that all that saving and planning is for “older” people. Sure you’re only 24 and retirement is a long, long, long way off. But the earlier you start saving, the less you’ll have to save each year. Besides, savings is a good habit and you’re never too young to start a good habit.
If your idea of an emergency is not having the right shoes for your cousin’s wedding, give your head a shake. Now that you’re independent and self-sufficient, who’s going to pick up the slack if you’re off work ill for a few days and your pay slip shows it? What about if your car breaks down or your cat get sick? Having an emergency fund is the only way to have options when dealing with unforeseen events. Money in the bank means you have the means to deal with whatever life throws at you. And, no, a credit card or line of credit is not an emergency fund. Its debt waiting to grab you by the short and curlies.
Aim to build up an emergency fund of at least 6 months of essential expenses. Set up an automatic savings plan to move just $25 or $50 per pay to a high-interest savings account. Increase your emergency savings over time until you’re up to $100 or more a month.
Set up a retirement savings plan and contribute a minimum of 5% of everything you earn. You’re aiming to get to 10% within your first two years. If you have a pension plan at work, you can reduce your personal savings by an equal amount.
Tomorrow: Part 2
July 21, 2010 at 6:43 am
Good advice as usual Gail. I wish I had known your advice when I stareted down the road of debt on credit cards in college.
July 21, 2010 at 6:45 am
When I got my first good-paying job, I mostly continued on with the poor student lifestyle and put all that extra money into savings. This turned out to be a lifesaving habit when I got pregnant a year later, was on bedrest and couldn’t work and hubby got laid off. Because we’d aggressively paid off almost all our student debt and had a hefty EF, we were fine until he got hired again.
July 21, 2010 at 7:28 am
Great blog today Gail! Can’t wait for Part 2!
Today’s blog definitely hit home for me. For my savings, I almost feel like I need about 5 ING TFSAs to separate my savings according to purpose (downpayment on home, emergency $, etc.)
Thanks again!
July 21, 2010 at 9:07 am
Too True! I set up my apartment with my credit card when I first moved out, no big deal, pay it off in a few months I thought.
Lost my job 2 months later.
July 21, 2010 at 9:15 am
Great post Gail! I’m sure we all could have used this advice when we were starting out. My biggest problem is that when I am on my own I am very responsible with money, however when I add a significant other….I indulge them, I enable them, I allow them to drag me down a different road than what we should be going(of course it didn’t help that he was suffering from depression either). I don’t do that with my children, and I am finished with that other distructive behaviour/relationship. I have a long history of those relationships actually. My current relationship is very different. All of our finances are separate, and always will be. I am very open about my emergency fund, and savings etc. He understands all that and respects my feelings about it.
July 21, 2010 at 9:32 am
When I moved out I still had the crummy paying job but I did do my homework as to what things like electricity and phone service actually cost. I really messed up when I got my first credit card. Wow you can buy what ever and only have to pay $30.00 a month. Sounded great untill I realized how long that $1500.00 takes to pay off at $30.00. Plus it was so tempting when I saw the credit availabe being $200.00, Hmmm New shoes? I also had NO clue about interest rates and how they actually work, then the credit increases for being a good cusomer. Well pretty soon the $1500.00 became $5000.00 on one card and another $4000.00 on another ( you need a Visa incase they don’t take MC… Right, more like when the one gets maxed out).
My husband and I purchased our first home and that made us both sit and face the reality of our mess and we made aplan to clean up our act. We are now paying down the debt and actually have an emergency fund, RRSPs, and we have a planned spending fund to cover future expenses that we know are coming.
Thanks Gail and everyone else here for keeping me focused on the straight and narrow.
July 21, 2010 at 9:39 am
I found that if you start saving the instant you start making more money, you never get used to having a bunch of money to spend. When I finally got my first “real” job out of grad school I anxiously set up my RRSP and emergency fund automatic withdrawals as I felt a desire to “catch up” on missed time. The same goes for raises-I have increased my RRSP contribution whenever I’ve gotten a raise, so I don’t ever miss the money.
July 21, 2010 at 10:11 am
What threw me for a loop was getting a car. I had saved until that point and was doing ok financially (not great, but ok) and getting a car wiped out my savings and the cost of gas, insurance, and repairs quickly ate upany ‘extra’ that I would normally have saved. It took me quite a while to figure out that I needed to budget (duh!) for things like big repairs, winter tires, and quarterly insurance payments.
I have this habit of buying myself a present every time I get a new job. Luckily (for my bank account) I’ve had my present job for almost 5 years now and don’t plan on switching anytime soon! That was a treat I couldn’t really afford either.
What got me shaped up was embarrasment. My parents are retired and live on a limited, fixed income…and they had enough savings to help me out when I totalled my car and needed another one. That is what got me budgeting and working in a focussed way to pay off my debt!
July 21, 2010 at 10:44 am
How/Where should an under-25 save for retirement?
I bank with TD and ING but the RSP account at ING is only at 1.3% — that’s less than half what inflation is! How is my retirement fund going to grow there? GIC rates are also quite low right now, which is dissuading me from that also (if they go up a bit I would ideally like to just ladder 5 year GICs as part of my RRSP for the next 40ish years). TD is generally even worse for savings rates, from what I’ve seen.
I already have mutual funds with ING, but they’re not RSP — should I open another set registered as RSP? Or should I open some with TD instead, since they have some creative money market mutual funds that have the potential for high returns (which should pay out at least somewhat as the market gradually recovers — I can definitely wait out any ups & downs for YEARS!)
I want to save for retirement, but where? How? I’m scared of locking my contribution in a poor-returns account.
sidenote: I’m a graduate student so I don’t have any sort of employer or company pension/retirement plan, but I probably will in my first job in a few years from now. In the meantime, no one’s helping me save, so I’m looking for the best I can do for myself!
July 21, 2010 at 10:53 am
I remember my first job. Ha! Try saving money when it’s at a department store and you’re working in the clothing department! Just seeing those beautiful things everyday convinced me that I “needed” them. Funny how I haven’t owed that store a cent since leaving that line of work years ago!
I agree with Rosemary. I definitely could have used your advice way back then.
July 21, 2010 at 10:55 am
Great post Gail! I’m in my late 20s and have had my fair share of credit card and student debt. I was fortunate to know to put at least a little bit of money into an RRSP so that a couple of years ago I could buy a condo (with still a bit of money in the RRSP that won’t be taken out until retirement and still more going in now) so now that condo is paying me as its rented out while I live with my BF in a rental. Unfortunately it took getting into credit card debt to teach me about paying attention to the money that I spend. Its crazy that you can feel deprived when you spend spend spend and then see the credit card balance, but if you have a certain amount set aside for shopping, entertainment, etc its fun to spend because you don’t feel guilty. I have also lost my job recently and am waiting for EI to kick in and have no emergency fund – lucky for me I have a great BF with a great job but this has also been a lesson on spending and saving as I don’t ever carry credit card debt I have found lots to do without spending money. I don’t want to go to the mall and the gratification from purchasing is a lot lower than the guilt of the debt so I stay home and read all the books that I have previsously purchased and haven’t had the time to read, I bake, watch TV, and work out everyday with the gym membership that I have and love. It feels great to be able to entertain myself with little or no money while looking for a job and really I think when I go back to work soon it will be so easy to not get that afternoon coffee and cookie or go for lunch all the time and buy that cute top on my lunch break! Looking forward to getting something is just as much fun as swiping the credit card!!
Because of your show Gail I can see that I need to be patient and put all of my extra money to my debt and pay it off before we can buy a house, etc. What I have found to motivate me is the plan. I sat down and figured out how much I have to pay to get it all paid off in less than a year and then figured out how much a trip to Vegas would cost so at the end of my very limited spending year I know that I will have money set aside for this trip so it will be great to celebrate DFF with a trip away for a few days that won’t be on a credit card. After that the savings will continue on a bigger scale.
I read your blog everyday! I can’t wait for your new show to start!!
July 21, 2010 at 11:41 am
One important aspect that some people mentioned already is the possibility of layoffs, getting fired, etc. You only earned the paycheck for that week/month… not the money for the whole year. Verify the rules about severance pay (especially if you were not there for long). The Emergency Fund applies to everyone!
My first paychecks did not have too much fun associated with them. I was either saving for university or needed to pay back my student loan. It takes the fun out if it!
July 21, 2010 at 12:22 pm
My first “real” pay cheque… hmmm…. when I got married at 21, I worked two part-time jobs, neither paid well, and can’t say that I spent foolishly, as we got married with nothing, and ‘needed’ was more of a priority than ‘wanted’… A year later, I got my first ‘real’ job, but it was only part time so I kept my other two for a while, and bought myself a second hand car which I paid off in under a year, so no ‘extra’ money for spending… then, the following year, I got full-time, and kept one part-time job, and we bought a house… no big spending again… we’ve continued like that for our 18 years of marriage; when a raise or something comes along, well, we had children who took up the ‘extra’, and we’ve always figured that we weren’t ‘rich enough’ to afford much debt, a mentality that I have my DH to thank, although, he’s fallen off the wagon a little bit in the last year or so.
We did start RRSP’s fairly early, but this dwindled as the kids came. Now we are almost caught up on my husband’s, and then mine won’t be far off…
Maybe there are some “should have’s”, but mostly we did what was right for us at the time, and we’ve had some hard struggles, but we made it through, with one ‘help-out’ from my parents (who insist that they not get paid back, because they gave more to my sister, but we just spend more on them for Christmas, and give it to them in American Express gift cards).
July 21, 2010 at 12:38 pm
B, I’m 25 and working through similar issues. To make your RRSPs worthwile you’ll have to have them in something more volitile than a GIC. Most RRSP calculations bank on a rate of return of 6% or more, and you will never get that consistantly with it in a regular savings account or GIC. Because we are young, we can benefit from the time we have until retirement and take bigger risks. I am not particularly risky myself and I’d like to protect my principle investment, but I can see the long view and the benefit of taking some risk with my investments.
All that being said, I’m still 20k in the hole from student debt (down from 42k in 2 years!) and so along with my retirement plan at work, I’m saving 5% in a TFSA for the time being just to have the money set aside for when I feel comfortable making those investments and actually doing the research necessary. While saving for retirement is really important, you shouldn’t feel the need to have the money in an actual RRSP until later because your marginal tax rate will only go up as you work more, so you shouldn’t be claiming it on your taxes for a bigger refund until your income is higher.
If I stay the course in 2 years I’ll have over 5k in my TFSA (to be put into an RRSP), 10k in my Emergency fund TFSA, and my loans will be long gone. Once the debt is gone, I’ll be contributing the full 18% of my gross income into the mutual funds, stocks, or bonds of my choosing and be at an income level which would maximise my tax breaks from making RRSP contributions. I’ll then put any refunds and raises into the RRSP to help catch up from this time when I’m not contributing the max.
One last thing, ING rates for TFSAs are great but both ING and TD might not be the best solution for long-term investing. You should research around for different rates at banks and also investment firms. You need to really assess how much risk you’re willing to take, what you expect to have when you retire, and the advisor (or self-directed approach) you want to take.
July 21, 2010 at 12:51 pm
I was a saver from the time I got my first pay cheque, and although I bought all new items for my first apartment I spent carefully. I saved to buy the first car and to take European vacations so didn’t use credit. I didn’t need the excellent advice Gail provides in this post and I must credit my parents’ example. Finances were never discussed in our family although I knew how little my parents made as I did their income tax forms from the time I turned twelve. We never lacked for anything necessary so I guess I learned from watching and experiencing.
I think it’s much harder for young people now because there are so many temptations – things to buy and offers of credit cards. It’s so important that parents set a good example.
July 21, 2010 at 1:04 pm
i really like this blog & all the responses. thank you gail, and all the responders, for giving me another day of inspiration. today marks 8 weeks since i had surgery & i will be going back to work in a mere 14 days. while i had the advantage of the state of california paying approx 62% of my wages and my employer paying 38%, i have been truly blessed. my situation seems like it was much easier than what some of the people who post have been through, waiting for the check to come in, etc. i have been at my job for a mere 5 years after relocating, but i came to realize that my company truly offers some great benefits. like leave of absence paid when there are hours saved in the extended sick leave bank. that’s what’s carried me through (though gail, i DID sit down and make my budget based on the 62% – it would have been tight but i would have made it THANKS TO YOU TEACHING ME HOW TO BUDGET CORRECTLY).
i am working hard to pay off that debt i carry, though these past 2 months have also been a blessing of sorts; disability pay is non-taxable so i’ve actually made an extra bit & have been dedicating that to (what else) debt repayment!!!! so i have made better progress there…and i have to say this blog has really saved me from just going out and buying whatever with my new-found riches (lol). feels much better to pay off debt, definitely.
i am going to reno in 2 weeks to visit with my daughter, who is coming from new york city to see her dad, friends, mom, etc. and yes, that trip is paid in advance, as i also set aside enough of my “extra” to pay for that in full, cash. i am really proud of myself because i believe, in my entire life, this is the 1st time i’ve accomplished that. thanks to gail & all of you, i am really learning to turn my life around. and at 52, i’ve learned it is never too late!
July 21, 2010 at 1:47 pm
The first few months at my Real Job were only half-time, which turned out to be a blessing in disguise, as it wasn’t a huge jump from student job paycheques. I’d really wanted to pay off my student loans and did so in three years. Right from the start I made RRSP contributions, if only to have the thrill of a refund. It took me until after I bought an apartment to even think of new furniture. The first thing my aunt said when she saw my place a year later was, “So you’re FINALLY not living like a student anymore”…
July 21, 2010 at 3:12 pm
That is so true. I fell face-first into the so-much-money trap, though I spent everything and then some not on “stuff”, but on going out, going on vacation, throwing parties, and letting a bunch of cute freeloaders hang around and drink all the beer.
I would put a bed lower on the list of needed furniture, actually, because a good bed is expensive, and in your 20s, sleeping on a cheap mattress on the floor while you are saving for a bed that will still be good in your 30s is unlikely to hurt you. Top of the list, for me, would be a table, a chair or two, and a non-smelly wardrobe or chest of drawers to store the work clothes.
Don’t know how it is in the rest of the world, but in Germany getting private disability insurance can become impossible after you get something serious for the first time in your life. If you want one, get it while you still feel invincible.
July 21, 2010 at 4:29 pm
I went from no annual income (or negative income, if you think about what student loans really are) to +$50k a year within about a year and a half. Yay for a practical degree but I did everything exactly wrong and now I’m in debt. Thanks for reminding me, Gail! Reflecting on what got you where you are makes a big difference in fixing problems.
Trying to teach the kids by example. Can already tell that one will do the opposite and one will follow in my footsteps… sigh.
July 22, 2010 at 6:10 am
Great blog post and lots of great comments!
I graduated from my Master’s in 2004 and out of necessity lived like a student for years after. At first I was unemployed apart from the occasional small contract and odd jobs – I lived tight because I absolutely had to. But at the same time, I didn’t budget because I was afraid it would reveal what I kinda knew – I didn’t have enough money really to live. Silly, huh? I got a full-time job after about a year, and began paying back the debt I’d accumulated, as well as the massive student loans I’d built up doing three degrees on OSAP.
Once I had a steady income I got over my fear of budgeting and did one, but sticking to it was another story – I finally could do things like buy new clothes and go on trips and put it on the credit card, so I did and my debt didn’t dwindle for a while (though thankfully it didn’t grow). Finally, I realized there was a problem and have begun not just budgeting but tracking my expenses. My approach is that rent, retirement savings, emergency fund and debt repayment are sacrosanct – I don’t even include them in my budget, they just happen automatically and so that money is simply unavailable. Everything else is discretionary. If I really feel I need to blow a particular line item, I go ahead and do so – but I absolutely MUST record every expense and if a line item goes over budget, I HAVE to make it up elsewhere. That way, choices are made mindfully and in full knowledge of the effect they will have on my finances – and often that means I choose not to buy the book, have the dinner out or pick up the round of drinks. It’s been extremely helpful to me, and I’d recommend it to any new grad – a great combination of discipline in tracking your expenses and allowing yourself the flexibility to make your own choices about your money – and to be accountable to yourself for them.
In the past three years, my non-student loan debt has almost disappeared (it’s on track to be completely gone by October) and I’ve paid off more than half of the student loans – those will be gone by December 2011, and I plan on celebrating being completely debt-free by spending two months’ worth of student loan payments on a trip to Italy with my hubby
Wish me luck! 
July 22, 2010 at 11:11 am
@ Tlily – have to comment on the ‘practical’ degree. Every degree is pratical, it’s how you apply it and yourself that matters. I earn a great salary in the private sector on a BA in history.
July 23, 2010 at 8:53 am
@ Geoff – I second that (except that my BA is in English with a minor in History).
July 25, 2010 at 10:58 am
Hi Gail,
I think this article is good but there are some real financial challenges that students face when they graduate that may not have existed 20 years ago. One of those is the higher costs of education and along with that the ease of which OSAP or student loans are available.
I find it amazing that the government will give students access to loans but no access to loan information sessions for 1st year students. If the government is going to give a 19 year old $8,000 a year they should at least tell them what is going to happen when they graduate and have to pay that money back.
I think student loans are big business and the government and banks make money at it.
I have a question for Gail…Gail what is the average debt for a 35 year single person (excluding mortgage debt)? This may give some young people more perspective in how debt changes over time (ie 10 years into the future).
Khris
July 27, 2010 at 8:12 am
Wow! Fantastic advice Gail! (no surprise there!)
I wish the internet had been as a powerful of a tool in 1993 as it is today. Had I come across your wisdom then, life might have been very different today. BUT, we live and learn right?