It’s the first day of your career. You’re excited, a little scared and probably more than a little focused on that first paycheck and what you’re going to do with it. Consider for a moment what that first paycheck really means. Is it sponsorship money for a celebratory beer bash with your friends (which may not be a bad idea) or is it the first installment of a secure financial future?

The answer is that it can be both. With that first paycheck, you now have the two critical tools to build a solid financial future-money and time. Money is always great, but as you get older, you will realize how valuable time really is to the value of money. Visualize that first paycheck being torn into pieces-a piece goes to everyday expenses, a piece goes to savings, a piece goes to investing, and a piece goes to fun.

The Emergency Fund and Why we Keep Talking About It

Yes, you might have student debt, a need to set up your first apartment, and if you conform to current statistics, some credit card debt. It’s going to be tough to handle all of that without thinking about putting aside three to six months of your income. But you really need to do it.

First of all, the concept of “last hired, first fired” is still very common in today’s workplace, and it happens even in relatively good economic times. Perhaps today’s younger generation understands this better than anyone. The Bureau of Labor Statistics reports that the average American will change his or her career five times in a lifetime, with at least 10-12 employers. All the more reason to set money aside in case some of those job changes are unexpected.

Making the Most of Your 401(K) Options

If your employer has a 401(k) plan, we have the following advice-the minute you can get into the plan, max out. Young people who aren’t married and have no dependents may already have a number of financial responsibilities, but they’re really in the best position to develop savings habits that will last a lifetime. Getting money taken out of your paycheck for retirement savings is a good habit to get into early. Money taken out of your check is out of sight, out of mind.

When it comes to 401(k)s, try to avoid the following mistakes:

Failing to participate. According to the Profit Sharing/401(k) Council of America, 20 to 25 percent of eligible workers don’t participate in available 401(k) plans. This means they are missing out on one of the most tax-effective ways to save for retirement, and could end up depending mostly on Social Security benefits when they retire. Failing to participate is especially costly because over seven in ten employers match up to a certain amount of each employee’s contribution, according to the Council. Consequently, failing to join essentially means passing up free money.

Failing to save while waiting. The majority of 401(k) plans don’t allow you to join the plan until you’ve worked for the employer for a year, and many require you to be at least age 21. If that’s your situation, set aside money each month in a savings account. Then when you join the plan, you can use this extra savings to supplement your cash flow so that you can maximize your regular 401(k) contribution over the next year.

Failing to contribute the maximum possible. Not every employee can afford to contribute the maximum allowed by the plan, but many employees don’t contribute the maximum they can afford to contribute. The average 401(k) participant contributes less than 7 percent of pre-tax salary, according to the Employee Benefit Research Institute, though plans usually allow higher limits of, say, 15 or 20 percent of gross pay (not to exceed $11,000 in 2002). At the very least, contribute enough to maximize the employer’s matching contributions, but put in more if you can. Not adjusting automatic enrollment. An increasing number of 401(k) plans automatically enroll workers, unless they opt out. This increases the participation rate, which is good. However, participants often fail to adjust the enrollment’s initial default choices. Consequently, they probably aren’t contributing as much as they can afford to, and the investment defaults are likely too conservative. Take the time to study what you have and make adjustments as needed. For guidance on this, you may want to bring a financial adviser into the mix.

Poor diversification. In 2005, human resources consultant Hewitt Associates reported that employer stock was the number one holding in company 401(k) plans, with large U.S. equity funds second, and guaranteed investment contract (GIC)/stable value funds coming in third. (A GTC fund invests only in guaranteed investment contracts issued by insurance companies and sold only to pension plans and certain other types of retirement funds.) What’s wrong with this picture? First, an over-investment in company stock opens employees up to incredible risk if their employer’s fortunes go south. An investment in only large U.S. company stock doesn’t typically offer much opportunity for growth as smaller-capitalization companies would. And investment in GICs-while perceived as a stable investment-totally ignores an employee’s potential need for investment growth.

Failing to balance asset allocation with outside investments. Your 401(k) or similar employer-sponsored retirement account is the main investment for most workers (outside of their home). However, you may have other significant investments, such as your spouse’s retirement account, individual retirement accounts, real estate, college savings, and so on. So when choosing retirement plan investments, make investment choices that take into account the outside investments as well. It’s your overall portfolio that needs to be properly balanced for risk and return.

Overinvesting in company stock. After all the publicity about Enron and Global Crossing, this seems like obvious advice. Yet many workers have been quoted as saying they will continue to load up heavily with their particular employer’s stock because they’re confident their employer’s stock will continue to do well. Certified financial planners professionals generally recommend that workers keep no more than 20 percent of company stock in their retirement account.

Borrowing from the plan. It may be financially attractive to borrow from your 401(k). but avoid it unless absolutely necessary. You’re taking money out of the account that otherwise would grow tax-deferred, and if you fail to pay back the money, you could face income taxes and penalties. Instead, build an outside emergency fund you can draw on.

Cashing out plan account. A majority of workers under age 35 cash out their 401(k) accounts’ accumulated value when they switch jobs, according to the 401(k) Association. That money not only can no longer grow tax-deferred, but the withdrawal faces taxes and usually a 10 percent early withdrawal penalty. Avoid this at all costs.

Insurance for Young Adults

Health. According to the National Coalition on Health Care, young adults (18 to 24 years old) remained the least likely of any age group to have health insurance in 2004-31.4 percent of this group did not have health insurance.

Automobile. If you have to buy for yourself, get multiple quotes. Assuming you are single and have no one financially dependent on you, you probably don’t need life insurance. On the other hand, the longer you wait the more expensive it becomes and the greater the risk of becoming uninsurable.

Figuring Out Taxes

Young people tend to do one of two things when it comes to tax with holding. They either do too much or too little. You may want to consult a tax adviser to discuss how your financial goals dovetail with your tax situation and calculate your withholding as part of that process. Generally, you don’t want to overpay the government. Also, if you’re working extra hours to help meet certain financial goals, you will probably be putting yourself in line for a greater tax liability. Just make sure you’re setting aside the right amount.