Finding your way after college is stressful — it’s the start of your career, with new financial responsibilities and endless opportunities. Mistakes happen because you lack the experience and knowledge that comes with age. It doesn’t have to be that way. To help make the transitions as smooth as possible, here are seven financial tips for graduates to start their new lives on the right foot.
1. Start a budget.
Your first financial tip for graduates is the most important because creating a monthly budget is crucial for long-term financial success. It doesn’t have to be complicated. Merely tracking how much money is coming in and how much is going out on a napkin will work.
To begin budgeting, first, add up your monthly net income; in other words, the amount of income that ends up in your checking accounts each month. Next, list out the necessary expenses, also called non-discretionary, such as rent, utilities, groceries, student loans, car loans, etc. What is left is how much you have to spend on discretionary, or the unnecessary expenses, like eating out, streaming services, and vacations.
The goal is to control spending, so there is still money available after you account for the necessary and unnecessary expenses. Put that extra cash towards savings, retirement, your first home, a new car, or additional debt payments.
While you don’t have to track every penny you spend, keeping a rough budget can help you stay out of debt. It’s easy with one of the many free budgeting apps that track spending such as Mint.com and pocketguard.com, or wally.me
2. Establish an emergency fund.
Welcome to the world, where the unexpected happens, usually, when you can least afford it. Whether you lose your job, your car breaks down, or if any other number of unforeseen events occur, having a safety net will provide peace of mind and, here it is again – keep you out of debt.
A perfect example has been the Covid-19 pandemic. The financial shock to so many people has been crippling. Having a six-month emergency fund on hand may not have covered everything due to the length and breadth of economic pain, but it would have helped.
You should target six months of expenses. Begin building your emergency fund in a money market account with monthly deposits. Make it part of your budget. Rome wasn’t built in a day, and neither will your emergency fund.
3. Manage student loans.
Yes, graduates, it’s best to pay off student loans as quickly as possible. However, if you’re paying down student loans while increasing credit card debt, that defeats the purpose.
Begin by determining the following:
- The type of student loans you have – Federal, private, both?
- How much do you owe?
- How many years are left?
- What are the interest rates?
Typically there is a six-month payment grace period, meaning payments won’t come due until six months after you graduate. However, you can, and should, start making payments earlier, because even though payments are not required, interest is still accruing.
What happens when recent graduates are drowning in student loan debt and having difficulty making payments? If you have federal loans, the best option is to apply for an income-driven repayment plan that caps payments at 10% to 20% of your income and forgives the remaining balance after 20 or 25 years. To learn more, go visit the Dept. of Educations Income-Driven Repayment information and application page.
Unfortunately, private student loans aren’t eligible for the income-driven repayment, so if they become difficult to manage, then loan consolidation at a lower rate is the best option.
4. Even recent graduates should plan for retirement.
It’s never too early to start saving. If your employer offers a 401(k) with a match, at a minimum, make sure you contribute enough to get the match. It’s free money. Then as you receive raises or pay off a debt, increase the contribution by 1%. Before you know it, you’ll be maxing out your 401k. It’s important to remember that 401k contributions are pre-tax and excluded from income. When you take distributions in retirement, that’s when you pay income tax.
Another option is to make Roth 401k contributions. Those contributions are considered after-tax and don’t lower your income at the time of contribution. But, all distributions are tax-free in retirement, subject to qualifying rules. Roth contributions may be a more beneficial contribution type at this point in your life. You have a lower-income and are in a lower tax bracket (hopefully) relative to later in your career.
This decision does require a bit more analysis. To help, if you have the Roth 401k option, you should take a gander at our post, Don’t Dismiss Contributing to a Roth 401(k)
What happens if you don’t have an employer-sponsored retirement account? First, you probably should find a job that does. However, if that isn’t an option, open a Traditional or Roth IRA. Not sure which one is right for you? Check out our post, Traditional vs. Roth IRA: how you can get the biggest bang for your retirement bucks
Even if you have an employer-sponsored retirement plan having a Roth IRA is a fantastic retirement planning weapon. It may not seem so important now, but when you’re ready for retirement, you’ll be glad you did it.
You can contribute up to $6,000 ($7,000 if 50+) per year, and your investments will grow tax-free. Please do it now while you can. Life happens – marriage, home, kids, it’s hard to save extra. Also, an increased income may disqualify you from Roth IRA contributions in later years. Do it now while you can.
5. Build and keep a strong credit history.
You need to build a good solid credit rating and keep it. Doing so shows you are a responsible borrower and deserving of loans for major purchases like a home or car. There are only a few basic rules, pay your bills on time and avoid maxing out credit cards.
A credit score higher than 750 will allow you to access the best rates on loans, insurance, and a mortgage. Some employers and landlords check credit, too.
Review your credit report at one of the three free services Equifax, Experian, or TransUnion, to see where you stand. Chances are, you don’t have much of a file, and that’s OK, your credit history will slowly build itself.
6. You’re not invincible.
Accidents and illnesses do occur. Yes, the chances are much lower when you’re in your twenties, but they do happen. Health insurance will help you pay the medical bills.
Hopefully, your employer provides health insurance through the benefits package. If not, you can be insured as a dependent on your parent’s health insurance plan if you’re under 26. Otherwise, you’ll have to purchase health insurance in the marketplace.
Pay attention to the benefits your employer offers. Health insurance is all new, so have your parents analyze it with you if you don’t understand the language or costs. Just don’t blindly pick an insurance plan. Take the time to review prices, options, and restrictions, so if something unforeseen happens, your health expenses will be covered.
If recent graduates can implement these simple financial steps right from the start, you will be setting your self up with sound financial habits that will carry throughout your career and into retirement. Maybe even an early retirement.
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