It’s easy to get excited about the opportunities that come with a new job. The job comes with a paycheck — and sometimes even a much bigger one than you have had before. However, it’s easier than you think to make some financial mistakes when the prospect of a paycheck is right in front of you.
Here are five common financial mistakes that include a few errors I once made myself, but now know better:
1. Immediately making a big purchase.
I remember my first big promotion in my job. It came with a huge chunk of change that I never had before. I was so excited and felt so rich in that moment that I went out and leased myself a pretty cool sports car that came with a hefty monthly payment. However, with the new raise, I figured it would be no problem. It was okay at first but then there were repairs, more expensive auto insurance and extra pricey gas (premium only) that I had not accounted for. Before I knew it, any of the extra income that I had gotten from the promotion was going into that one big purchase, leaving me right back in the same tight spot as before.
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The moral of the story here is — don’t rush out and immediately make a big purchase like a car or a home. Wait and see what that raise means to your monthly income and research all the costs associated with the purchase beyond just the main ticket item to see if you can actually afford it. And here is a novel idea: why not just save this raise for a while — say, six months?
2. Turning to credit.
While it would seem that people would turn to credit when they don’t have enough money, the most common behavior is to go get more credit when starting a new job or getting a raise. It must be the feeling that since they have more money, they can spend more money upfront and pay for it later when that new paycheck comes. However, it’s a huge financial mistake to get caught up in the web of credit card companies that offer you rewards, mileage and points just because you think you can now afford to use credit.
This financial strategy should only be used if you can pay off the item within the same period so as to not incur interest charges or carry a running balance. Don’t turn to credit when you get a new job. Instead, know that you most likely can save up for that item faster with that larger paycheck now on its way.
3. Not saving for retirement and emergencies.
The new job or raise sends some kind of message to your brain that is often a little inaccurate. You think that now you have more money, you’ll be fine should an emergency occur, or you can make up the difference later if you don't put money aside for retirement now. What tends to happen is that no additional money is saved despite having more of it. There is still a short-term mentality in place that deals with only the day-to-day expenses rather than looking at the costs on the horizon. There’s a false sense of security that can really hurt you in the long run.
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I see every new job as an opportunity to put more money aside each month into various savings and retirement accounts. It’s important to have the money there for what is always going to be an uncertain future, including the potential layoff or urge to create your own business. There won’t be any money to catch you or encourage you to leap if you haven't already started setting aside a specific amount of money each month. I recommend personally that you have 12 months of cash set aside that you don't touch.
4. Not assessing any additional tax burden.
Whether it’s a new job or a raise, it’s important to calculate what the additional money means to your income taxes and what you may possibly owe or need to cover in estimated tax payments. You may not realize that there will be extra tax and invoicing expenses related to the rise in income. It’s important to know what you are faced with before your accountant surprises you right before taxes are due in April. This will help you know how much to save each month to cover those additional costs rather than worrying about a strategy to pay Uncle Sam.
5. Not revising your personal budget.
Every time your income changes, you need to revise your personal budget. Or, if you still haven’t made what some consider a death threat, this is the time to get your budget put together. It’s one of the biggest financial mistakes all of us make regardless of whether we got a new job or a raise. We don’t realize that every new cost or income stream dictates a revised budget to stay on target and properly manage our finances. A budget is not a threat — but a gift you give yourself.
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I used to take the approach that I’ll make a budget when I have time but then the budget never got done. Stop what you are doing and put it together right now, so you understand where and how you are spending money. You want to account for all of your money so you understand what expenses can be reduced in order to add to your savings and retirement, or to reveal to you exactly where you can cut your budget in the case of an emergency.
It’s easy to make these financial mistakes when you are sitting on Cloud 9 with that new job or promotion. However, it’s almost as easy to fix those financial mistakes now and not let them get in the way of creating greater personal wealth for yourself and your family.