This is the first post in a (semi-)regular series about getting started in the working world. It will be tailored to my personal experience, so some parts may not completely apply to your situation. I hope it will be a good intro to young professionals just entering the working world (or a refresher for those of us who've been through it for a few years!).
Getting your first "real" job can be the most exciting feeling in the world. It can also be one of the most overwhelming/confusing/scary feelings as you start reading through the new hire forms and trying to piece together what everything means.
The first thing you should do after getting your new job (after running around the house celebrating, of course) is read all the new hire paperwork. Get familiar with the benefits that your company is offering. And since my focus is on personal finance... read up on your 401k options!
Note: this is only applicable to my specific situation but your employer may have something similar.
I work for the federal government. We get a pretty sweet deal- the employer will automatically contribute an amount equal to 1% of your paycheck to your 401k, whether you contribute any money or not. That is called the "Agency Automatic Contributions". That's pretty cool, but we can do better than 1%, right?
"Agency Matching Contributions" happen when you put some of your own money into the account. Your employer will give you matching contributions up to the first 3% that you put into your account, and will match half of the next 2% that you contribute. Yeah, that's pretty confusing, I know. Take a look at the chart below.
The way to take maximum advantage of this system is for you to contribute at least 5% of your paycheck. You'll get an agency matching contribution equal to 4% of your paycheck plus the automatic 1%. This gives you the most possible free money, since anything you put in above 5% does not get matched. You'll be putting in 5% and your employer will also be putting in 5%!
For 20-somethings just starting their career, I strongly advise that you contribute (at a minimum) that full-matching amount (for me, that is 5%; it may vary for your employer). I understand that it's hard to "give up" 5% of your hard earned paycheck and not see it for 40+ years, but you'll DOUBLE your money by doing that! It's the easiest free money you can earn! And another good way to think of it-- instead of your employer payingyou $50,000, they are giving you an extra 5% of that in retirement funds, so your annual salary is really $52,500! But only if you take advantage of the matching!
Pro tip: set the 401k contributions up as soon as you are hired. This way, when you get your first paycheck, the money is already taken out... there will be no "aww, my first paycheck was $100 more than this!" ;)
If you can swing it, contribute even more! The rule changes each year but in 2013, you can contribute up to $17,500 in your 401k (and that doesn't include the employer matching amount-- just the money you contribute). I'm still sitting at the 5% contribution but should probably think about bumping that up a bit...
One final note: the agency automatic 1% contribution is "vested", meaning you must work for 3 years to be able to keep that money. If you leave before you have reached 3 years of employment, that money will be forfeited. Matching contributions are not vested- as soon as you earn them, they're yours!
PS: For those who want another retirement savings option, I discuss IRAs here!
Next Post: Setting Yourself Up to Succeed!
Do you contribute to your retirement account regularly? If so, how much do you contribute?