Thomas Edison is said to have made 1,000 light bulbs before one worked — imagine what else he could have invented if he’d gotten it right at try number 25. James Dyson made 5,127 prototypes before perfecting the centrifugal force Dyson vacuum — imagine how many more advanced vacuums would be sucking up dirt in homes around the world if he’d hit the right idea at 1,000 tries instead. If Facebook had hired Brian Acton in 2009 when he applied, WhatsApp could have been developed in-house, saving the company a cool $19 billion (if they picked up Jan Koum along the way, too).
Of course, with tenacity and self-examination, we can learn from our mistakes. But regardless, certain errors can keep us from reaching our full potential in the long term.
Financial mistakes made early on can compound over time — which is why the first five years of your career are crucial. There may be chances to recover later in life, but a missed opportunity for a fantastic financial start only happens once. Here are five financial moves to make in the first five years of your career:
Keep your overhead as low as possible. For many people, rent takes up the largest portion of take-home pay, so keep rent to a bare minimum. In fact, if you can, live at home. A recent Gallup poll reported that 14% of adults between the ages of 24 and 34 are living with their parents. Half of these young adults are employed full time, and more power to them — as long as they’re making the most of the situation. Kelli, a friend of my youngest son, graduated from college and lived with her parents for the following three years. Instead of frittering away her savings, she took the funds she would have used for rent, utilities and food and socked them away. She amassed a savings of more than $40K that way, and plans on using it for a down payment on a home in the future.
If living with parents isn’t feasible or desired, stick with the lowest possible rent option. My son Rick recently upgraded from his first micro apartment — a 336 square-foot studio above a restaurant in Pasadena, Calif. — to a 650 square-foot place down the hall. His minimalist space allows him to live a nice lifestyle while building his financial future. Consider having roommates or living further from the center of the action in the city in order to reduce rent.
At the end of the day, your rent check is paying someone else’s mortgage or funding someone else’s lifestyle. Choose the lowest common denominator possible when it comes to living expenses early in your career.
Invest in your education. Making sacrifices to get an advanced degree can be a huge financial win. According to a 2002 analysis of U.S. Census Bureau statistics, a four-year college degree can earn a worker one-third more over the course of his or her career than someone who doesn’t complete college — on average, $2.1 million in total. Those with master’s degrees can expect to rake in about $2.5 million during their working years, and those with professional degrees a whopping $4.4 million.
Taking on advanced studies early in life can help ensure that you actually complete your next degree. Once you start a family, it can be challenging to dedicate yourself to studying in the evening and on weekends when you may need (and want) to help out with the kids. Obviously, the earlier the degree is completed, the better.
Your company may even pay for it. If your employer offers tuition reimbursement as an employee benefit, take advantage of it.
Invest in your skills. Not every profession requires an advanced degree—but every field has its share of specialized skills. Make sure you have them, and then some. For example, every financial analyst needs a strong background in Excel as an entry point. However, taking it a step further and learning a program like Microsoft Access could make you the “go-to” analyst for special projects at your office.
Have you studied a foreign language? Become proficient in it. Your company may offer free training courses, or you could simply ask for reimbursement. If they won’t, do it yourself with Rosetta Stone or Duolingo.
Possible savings from not being caught up in a round of layoffs since you contribute unique skills (given a $70K gross salary and four months of job hunting) — about $23K (or about $17K after taxes in a 25% combined federal and state tax bracket.)
Maximize your company’s employee benefits. For many companies, there is an open enrollment period in the fall when employees can choose benefits for the following year. Employees may only spend a few hours reviewing their choices. However, many people may not realize that their company benefits can actually make up an additional 30% of their pay—meaning that someone who earns a $70K salary has about $21K in benefits to tap into. Learning how to maximize the benefits your employer offers is time well spent, as they can often help you create wealth over time.
Understanding and taking advantage of retirement benefits such as a 401(k) match and any Employee Stock Purchase Plans is vital, of course. But additional voluntary benefits are easily overlooked, which they shouldn’t be—often, they can help employees to save money or utilize important services that are free to them. When it´s time to retire, make sure you learn everything there is to retirement at RetireWise before quiting.
For example, a Health Savings Account may save employees 25% or more on their co-pays and medical bills that aren’t covered by insurance. Additional benefits that are often overlooked include: Pre-paid legal benefits to set up a will and powers of attorney, EAPs (an employee assistance program that provides counseling services, could save an employee $60 an hour or more) and financial education/wellness programs to help employees with all of the above.
Learn the ins and outs of personal income taxes. The I.R.S. has a vested interest in your career, since the more you make, the more they take! If you are able to pick up a few more deductions, exemptions and credits because you know tax basics, you could save tens of thousands of dollars in income taxes over your lifetime.
One way to learn about taxes is to help others. Sign up for the Volunteer Income Tax Assistance and/or Tax Counseling for the Elderly (VITA/TCE) programs. The I.R.S. will teach you how to prepare taxes with their online e-learning courses, and you can help a few people along the way.
Even if you don’t go this route, doing your taxes yourself using a low-cost tax software program such as Turbo Tax or Tax Act could save you cash in tax preparation costs.
Any of these financial moves can be made at any time (though living with your parents may not be ideal at every age). By making the right financial moves within five years of starting your career, you may be able to end your career a whole lot richer. In fact, you may even be able to end your career a whole lot earlier by starting out on the right financial track.