The most financially challenging state of life is not retirement, it is early career.
That's the time when your salary is still probably low, but you have the longest list of expenses: career clothes, cell phone bills, your first home furnishings, cars, weddings, rent - need I go on? You probably don't have enough money to pay for all of that at once, unless your parents have set you up very well or you are a junior investment banker.
The rest of us have to make choices with our limited "discretionary" income. Here is a rough priorities list for newbies who have shopping lists that are bigger than their bank accounts.
- First, feed the 401(k) to the match, not the max. If your employer matches your contributions, make sure that your paycheck withdrawals are high enough to capture the entire company match. That is free money. If you have enough money to contribute more to your 401(k), that is a good thing to do, but only if you're able to cover other key expenses.
- Invest in items that will improve your lifetime earning power: A good interview suit. An advanced degree. The right electronic devices and services for the serious job hunt.
- Pay off credit card balances. Chasing those "balance due" notices every month will kill just about any other financial goal you have. If you're carrying significant credit card balances, abandon all other extra savings and spending until you've paid them off, in chunks as large as possible.
- Put money into a Roth Individual Retirement Account. The younger you are and the lower your tax bracket, the better this works out for you. Money goes in on an after-tax basis and comes out tax-free in retirement. You can also withdraw your own contributions tax-free once the account has been in existence for five years. You can pull an additional $10,000 out, tax-free, to buy a home. It's nice to have a Roth, and the younger you start it the better.
- Save for a home down payment. Homeownership is still a smart way to build equity over a lifetime. New guidelines will once again make mortgages available to people who make downpayments as low as 3 percent. Even though interest rates are still at unrewarding lows, it's good to amass these earmarked funds in a savings or money market account.
- Pay down high-interest student loans. If you had private loans with interest rates over 8 percent, find out whether you can refinance them at a lower rate. If not, consider paying extra principal to burn that costly debt more quickly. Don't race to pay off lower-interest student loans; the interest on them may be tax deductible, and there are better places to put extra cash.
- Buy experiences, not things. Still have some money left? Fly across the country to attend your college roommate's wedding. Take road trips with friends. Spend money to join a sports team, theater group or fantasy football league. Focus your finances on making memories, not acquiring things - academic research holds that you get more happiness for the dollar by doing that, and you'll probably be moving soon anyway.
- Buy a couch. For now, make this the bottom of your list. Sure, everyone needs a place to sit, but there's nothing wrong with living like a student just a little bit longer. If you defer expensive things for a few years while you put money towards all the higher priorities on this list, you'll be sitting pretty in the future.
Linda Stern is a Reuters columnist. The opinions expressed are her own.