Landing your first job, and the consistent paycheck that comes with it, is exciting.
That's why, as soon as you start making money, "the first thing you need to do is pay yourself first," he says, adding: It's "the single most important decision you will make when you get your first job."
Paying yourself first means that, whenever you earn money, you set aside a portion for your future self by putting it in a retirement account, where it can grow over time.
Ideally, you will be able to fund a 401(k) plan, says Bach. It's an employer-sponsored retirement savings vehicle and effective for a few reasons:
- It offers large tax advantages: contributions are made pre-tax, so the more you contribute, the more you reduce your taxable income and, in turn, your tax bill.
- The money is automatically taken from your paycheck before you have the chance to spend it.
- Often, companies offer a match, which is essentially free money. The way it works is, your employer will match whatever contribution you put towards your 401(k) up to a certain amount. For example, if you choose to put 4% of your salary directly into your account, your employer will put that same amount in as well, in effect doubling your contribution.
How much should you aim to set aside? Rather than thinking about that figure as a percentage of income, Bach likes to think about it in terms of hours of your life: Aim to keep "one hour a day of your income," he says. Say you earn $50,000 a year. That's about $1,000 a week, or $25 an hour for a 40-hour week, so you should try to save $25 a day.
If you'd rather think about savings as a percentage, one hour's worth of income comes out to roughly 10% of your gross income, Bach says.
Setting aside at least 10% may sound daunting, but it will be easier to do if you make it automatic — meaning that you have your contributions automatically taken out of your paycheck and sent straight to your retirement account. That way, you won't even have the option of spending it.
If you're one of the many Americans without access to a 401(k), don't stress, and don't use that as an excuse to put off saving for retirement. You have plenty of other options, including a traditional, Roth or SEP IRA; a health savings account (HSA) or a normal investment account. Read up on all of your options, choose an account to fund and start setting aside money for your future today.
The key is to get in the habit of paying yourself first right away, emphasizes Bach. If you start saving from day one of your first job, "you'll do it for the rest of your life."
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.