Looking back, what do you wish someone had told you before you sat in the human resources department at your first real-world job and faced that pile of paperwork?
I was fortunate. Before I started working full time as a reporter, my grandmother Big Mama passed along – well, more like drilled into me – three money lessons. They laid the groundwork for a lifetime of financial security. For college grads and other young folk entering the workforce, here’s her priceless advice.
▪ Spread your money around. Big Mama told me to get four banking accounts at two different institutions.
The first two accounts – checking and savings – should be with the same bank/institution. (Search around for no-fee options.) Use them to pay your regular expenses.
Store money you'll need later in the savings account. If, for example, you pay for your car insurance twice a year, keep the funds in the savings account and then transfer them into checking when the bill is due. Or let’s say you budget $100 a week for groceries. But you use some coupons, shop smart and only spend $80. Transfer the extra $20 into your savings and later move it back should you splurge one week.
However, when it comes to your savings account, be aware of federal limits for withdrawals. You can make only six transfers and withdrawals per month or statement period before being charged a fee.
As for the other two accounts – again, both checking and savings – designate them as your “just in case” money. Keep these funds at a different institution so they’re not mixed with your main accounts. Having this cash separate will help remind you that it isn’t supposed to be used for everyday stuff.
You might consider opening these accounts at a credit union. Membership in such an institution has its advantages. Should you want to borrow money – say, for a used car – you may find lower interest rates there than at your local bank.
Go to culookup.com to check if you’re eligible to join a credit union. Membership could be based on where you live or through a company or professional affiliation.
Call the second checking account your “life-happens fund.” Set a goal to save $1,000. As your lifestyle needs and wants grow, increase the reserves in this pot. It’s where you'll keep money for expenses you don’t expect. And don’t feel guilty about withdrawing funds because this account is meant to be a supplement to your main checking and savings.
In the second savings account, you'll deposit your emergency money or rainy-day funds. Just starting out, set a goal of at least one month’s worth of living expenses. (Eventually save up to three to six months’.) You won’t touch this money unless you are in dire need, for example if you lose your job. Leave the ATM cards for these accounts at home.
▪ Set it and forget it.On your first day on the job, while you’re filling out the paperwork, have your wages directly deposited into the two checking accounts. You might need to request a special form to split the deposits. If you are allowed three splits, put the majority in your main checking, and then split the rest of the money between the secondary checking (life-happens fund) and savings (emergency fund) accounts.
A survey by NACHA, an electronic payments association, found that an overwhelming majority of people said splitting their deposits helped them save. But the poll also found that many workers aren’t aware they can split their deposits.
If your employer doesn’t offer the option to direct-deposit your pay into multiple institutions, you'll have to set up automatic transfers on your own. With online banking, this is easy to do.
▪ Save for retirement from the start. Big Mama taught me to take money away from myself, starting with my first paycheck, so I could get used to living on less.
That’s the beauty of splitting your deposits. Send the money away before you get a chance to spend it.
On your first day at work, sign up for the retirement plan. Aim to put in at least enough to get the maximum company match. But if that’s too much, just save something. The important thing is to create the habit.
If your employer doesn’t offer a workplace retirement account, you can get your own starter account, called a “myRA.” To sign up, go to myra.gov.
Pay it forward. Pass along Big Mama’s financial readiness tips to college graduates or young adults you know. It will be their saving grace.