A newcomer’s guide to fixed-income investing

So ... you’ve heard those magic words (“You’re hired!”) and responded in kind (“I accept”). Whether you’re fresh out of school or fondly recalling a gap year, that first “real” job comes with real income—and a real responsibility to use it wisely.

Welcome to adulting: Ramen-less dinners out. Ikea furnishings in. Following a budget that lets you afford both (and more)—and still have money left over to put toward your financial goals.

Whatever those goals—from shorter-term targets like buying a car or a house to longer-term aims like a comfortable retirement—meeting them requires planning and a solid investing strategy. But before you invest, it’s smart to create a strong financial foundation.

This checklist will help you prioritize your steps to financial stability.

Build a financial buffer

The old saying is true: When you fail to plan, you plan to fail. Inevitably, there will be surprises in your life that cost you money—sometimes a lot of money. Sure, you’ll want an interest-earning savings account—attached to a checking account—to cover everyday expenses. But it’s wise to build a financial cushion that allows you to cover big, unexpected costs without going into debt.

That means creating or improving an emergency fund.

Simply put, an emergency fund equals peace of mind for the financially savvy. A recent Bankrate survey showed that 22% of American adults have no rainy-day savings, and only 30% have enough set aside to cover three months’ living expenses.

Experts say your emergency fund should equal at least six to 12 months of your standard living expenses. It should cover your rent or mortgage, utilities, car and other loan payments, and miscellaneous (but necessary) costs such as groceries and gas. If you should leave (or lose) your job, this will give you the latitude to make a well-reasoned decision on your next move.

Of course, that sort of sum can seem like a tall order at first. But it’s okay to start small, then build your buffer with automatic transfers from your checking or savings account.

There are different schools of thought on where to keep emergency money. Your checking account could suffice if you’re disciplined enough to never touch it. But if you’re like the rest of us, consider parking the money in a high-yield savings account. Besides the extra interest you might earn, you may not be as tempted to use it if it’s in a separate place.

Pay down debt

Debt is the enemy of progress—it reduces your net worth and keeps you tied to other financial commitments. If you have revolving debt (like credit cards) or installment debt (like auto loans), it’s important to pay them off so you can free up money to invest in your retirement.

Dump your highest interest-rate debt first

Loan or credit card balances with high interest rates can keep you in debt longer. That’s because interest on your original balance continues to accrue and compound on itself. So, the longer you maintain a balance, the more interest you’ll pay.

One effective approach is to use the “avalanche” method: You pay more on the accounts with the highest interest rates while paying the minimum on all other accounts. Once you pay off that top-rate card, move on to the one with the next-highest rate, and so on. The faster you pay down the highest-rate accounts, the less you’ll pay in the long run.

Here’s an example. Let’s say you have three credit cards. Each has a balance of $1,000, and its interest compounds monthly.

Example of three credit cards interest compounds monthly

With $50 monthly payments and an 18% interest rate, it would take 24 months—and $1,197—to pay off Card 1’s original $1,000 balance. But with the same payments, draining the same balance with a 26% interest rate would take three months longer—and $128 more. That might not seem like much of a difference. But the average American household’s credit card balance recently topped $6,000. If that (or worse) is true for you, well, do the math.

Focus on other debt

Once your credit card debts are eliminated, it’s time to focus on others like car payments or student loans. Adding $50 to each payment can eliminate months of interest over time.

Student loans are often the next priority. Besides paying down as much as you can on your own, you may be able to get help at work. While many employers help cover current higher education costs, find out if yours participates in a direct student loan repayment program. This might involve matching your loan payments or providing a lump sum to use toward your student loan balance(s).

In addition to employer-sponsored plans, the Biden administration recently introduced the Saving on a Valuable Education (SAVE) plan. This program can lower your monthly payments, keep your balance from growing due to unpaid interest, and lower the payments you need to cancel the rest of your debt. Under the plan, if you borrowed less than $12,000, your loan will be completely forgiven after 120 payments. Also, if you’re struggling to make payments, check with your loan administrator to see if you qualify for an income-based repayment plan.

Time to invest 

Savings are essential for short-term needs. But in the long run, you need the power of compound interest to really grow your money. So, once you’ve built your emergency fund and reduced your debt, evaluate your recurring expenses and try to eliminate anything you don’t need. Check for subscriptions you no longer use or monthly bills that you could lower. The less money you waste, the more you can invest.

Once you have some breathing room in your budget, it’s time to start investing:

Take advantage of workplace retirement savings options

Most employers offer a tax-advantaged retirement plan for employees—usually a 401(k), 403(b), or 457, depending on the industry. (Organizations might provide similar plans for members as well.) These plans allow you to put some of your salary into an investment account you can use in your retirement. Employers will often match some of your contributions. If yours offers to match—say, the first 3% or 5% of pay you put in—you should save at least enough to take full advantage of it. A match is like free money and can result in significant gains as it can compound over time.

Even so, that’s likely not enough to retire on. Instead of relying solely on a match, use it to determine the minimum amount that you invest. Aim to save 10% to 15% of your income in an employer-sponsored plan and/or a separate IRA. (If that feels like too much now, start smaller, then gradually increase your contributions by, say, one or two percentage points a year.)

Fund an IRA

If you don’t have access to an employer-sponsored plan, it’s a good idea to contribute to a tax-advantaged individual retirement account (IRA). (Even if you do have a retirement plan at work, you might prefer an IRA’s flexibility or investment options—just make sure to take full advantage of any employer match first.) As you change jobs over the course of your career, your IRA will remain the same—no need to roll it over to a new employer’s plan.

Let’s detail two common types of IRAs with different benefits:

• Traditional. A traditional IRA invests money that has not yet been taxed. The plus: You can deduct some or all of your contributions from your taxable income when you file your federal return for the year. While a traditional IRA will save you money now, you’ll owe income taxes when you withdraw from it (presumably) in retirement. This can make a traditional account the better choice if you think your tax bracket may be lower down the road than when you contribute. Traditional IRAs also trigger required minimum distributions (RMDs)—in most cases, you must start withdrawing a certain percentage of your money after age 73.
• Roth. A Roth IRA takes the opposite approach to taxes—you contribute money that you’ve already paid taxes on. The benefit: As long as you hold the account at least five years and meet other criteria, you won’t owe tax on withdrawals. This makes a Roth the better option if you think your tax bracket will be higher down the road, or you’d simply prefer tax-free income in retirement. Roth IRAs also don’t require minimum distributions, so if you don’t need the money, you can continue to let it grow.

Invest for other goals

Retirement is seldom your only financial goal. If you’re interested in buying a home, car, or boat, or eventually paying for a child’s education, your new income can help.

Save for a home

If you’re pining for a place to call your own, consider a high-yield savings account or a brokerage account. A high-yield account combines safety with easy access to your money, but the payoff can be modest. A brokerage account allows you to invest in “the market”—stocks, bonds, mutual funds, ETFs, and more—without the limitations (or tax advantages) of retirement accounts. But while you might earn a lot more than with a savings account, you’ll probably face investment fees, and you’ll definitely risk losing money. Both accounts are taxable—you’ll owe income tax at your regular rate on interest (and dividends for certain stock investments), and investments you sell at a profit will trigger capital gains tax.

How much time you have to save for your down payment may influence the kind of investment you choose. For example, if your planned purchase is around the corner—say, a year or two away—high-yield savings might be your best bet. But if you have more time to make your move and are okay with some risk, consider a short- or medium-term government bond fund.

Build a college fund

If you have kids (or expect to), it’s never too soon to start funneling funds to higher education. A 529 college savings plan is a great choice. These accounts allow you to invest in a variety of mutual funds or stocks for your children—or even yourself. Any money you earn from the account will be tax-free as long as you use it for “qualified” educational purposes like tuition, books, fees, and room and board. If it goes unused, you can transfer the balance to a sibling’s 529 account; use up to $10,000 to help pay off student loans or private K–12 costs; or, roll it over to a Roth IRA (if you meet certain criteria).

One note: College saving should not take priority over retirement saving. After all, retirement is the one major expense you can’t borrow to cover. Even so, there are ways to put both in your budget.

Treat yourself

You’ve landed your first real job and you’re earning a salary—it’s time to celebrate! Indulging in a small treat is a great way to mark your accomplishment. But don’t let the celebration overwhelm your long-term goals. Earmark a set amount to spend on yourself and let the rest of your money keep working for your future.

To kickstart your financial plan, kick off a budget: Add up all your expenses and compare the total to your new take-home pay. The difference is what you can devote to your bigger financial goals. If you need guidance, talk with a financial advisor.

Rachel Murphy has written about personal finance for Investopedia, Forbes, and Money, among others.

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