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Mistakes to avoid when you start earning money

One year into my first job out of school, working as a strategy consultant for McKinsey, I had an epiphany. I was on a project with a retail banking client, and all the guys on my team were discussing their stock investments and other personal finance issues. Suddenly, the EM (project manager) turned around and asked

[quote style="boxed"]Anke, how do you invest your money?[/quote]

It was an embarrassing situation.

[quote style="boxed"]Well, I don’t have any money![/quote]

You can’t blame McKinsey consultants for beating around the bush, so my EM exclaimed:

[quote style="boxed"]How is it possible, Anke? You have been working at McKinsey for a year! How can you not have any money?[/quote]

It was a very valid question. I stuttered something about money I owed to friends and family upon graduation and about how I had had to buy work clothes when I started and how my boyfriend was living in London and I spent a lot of money on weekend trips, but they remained sceptical. Surely, I could have saved up SOME money to invest?

As much as I often complain about my time at McKinsey, I am thankful for learning this valuable lesson one year into my career, not five years on or never, as some of my friends and colleagues. If you are earning a salary for the first time, write this on your forehead: DON’T SPEND YOUR WHOLE SALARY!!

I know it’s hard. All your student years you have no money, getting just enough from your parents to pay for student housing and food, and maybe textbooks, but beyond that, you have nothing. If all of a sudden the balance on your bank account jumps from $0 to $3,000, of course you feel like a millionaire. Maybe you’ve been told that the job you’ve landed is extremely desirable, so you think, surely now I am rich?

Here’s how I spent my first salary:

  • I bought a beautiful gold and silver Maurice Lacroix watch for myself. My old fossil watch had broken down a year earlier, but I had decided I wouldn’t buy a new one until I could buy a nice one, so as soon as I got the salary I went out and bought this one
  • I went to Karen Millen and bought a very nice evening dress and a fancy pullover that I probably wore only five times before throwing it out a couple of years later
  • I spent a couple of weekends with my boyfriend in London. Since he was housed in a student residence sharing his tiny room with another postgraduate student, I booked a five star hotel for both weekends  (which is what I was used to after one month with McKinsey!)

Once I had also paid the rent for my apartment, you can imagine how much of my salary was left. I don’t really regret the money I spent in the first month. It was fun. I still love my Maurice Lacroix watch and don’t think I need to buy another one for the next ten years. I needed to buy some shoes and work clothes. Working hard during the week, I needed to enjoy my weekends with my boyfriend.

The problem starts once you get into a habit of thinking you are rich just because you have a high income, because then you can get used to spending everything you earn, and years of hard work later, you realise you actually have nothing. Make sure you don’t just work a lot, spend a lot and are left with nothing at the end. Make sure you start building up some money to invest as soon as possible so you can start moving into the direction of personal and financial independence. You don’t want to be in a situation where your spending habits are such that you have to stay in a job you don’t enjoy just to finance the expensive lifestyle you have gotten used to.

Here’s is my personal finance battle plan that should provide a compromise between enjoying your income and building up a financial buffer:

the first three months, just have fun! Buy some chique work clothes, take a couple of nice weekend trips, invite your friends for drinks, pay off money you owe to your parents, buy something lasting that will remind you of that first salary (a nice watch or a beautiful piece of jewellery)

after three months, the honeymoon is over! You should have a good wardrobe by now, so it is time to control your spending. Check how much money you have left after paying for rent, phone bills etc. and aim to save half of it. I can’t give you a number because it depends on how much you earn, but if you start your career with a consultancy or bank, you should at least be able to save $200-$300 per month. If you earn somewhat less, still aim to save $100 per month. If we’re talking first job out of the MBA, just double or triple all numbers mentioned here.

after one year: time to invest! You should now have built up between $2,000 – $4,000 and it will be a good time to start moving from savings to investments. It will be a good learning experience to start investing money in stocks. The aim here is not even to have huge returns, but to build up experience in investing money for when you have more money. I really liked the idea explained in the book Rich Dad, Poor Dad that explains how the problem of not having money to invest is not even the lack of returns, but the lack of investment experience people have over many years. If you start investing in your early twenties, you might have ten years of experience investing money in your early 30’s, this will give you a big advantage in the long run!

If you have been working long hours for two or three years and you have no money in the bank, think about what the whole point was? Hopefully you have picked up useful skills and experience, but when will you monetise them? If you don’t have any money left, could you have picked up the same skills or more simply by starting your own business? Trust me, I know a lot of people who work 60-90 hours per week, think they are rich because they are bankers or consultants and if you dig a little deeper they actually have nothing. They will be penniless as soon as they quit their jobs. That’s not what financial independence is about.

I hope after reading this you will be smarter than I was when I started my first job. I am incredibly grateful to my McKinsey colleagues for exposing my stupidity so publicly early on. Over time, it saved me a lot of money. If you have any experience to share related to handling your income during the first years out of school, please leave a comment below. Thanks!

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