Earning a college degree is an exciting accomplishment that also brings new beginnings. A first job, a new place to live, and an independent financial life may all be in store. How can you make sure you’re starting out strong? Here are our top financial tips for college graduates.
1. Sharpen Budgeting Skills
The word “budget” carries an austere connotation, but it is not all about skimping and penny-pinching. Instead, a budget is a guide that helps you plan to pay for what you need, and spend and save for what you want.
With a regular paycheck coming in, new costs to cover, and a lot of financial goals on the horizon, it is important to get a clearer sense of how your income aligns with expenses. What’s one flexible way to do this? The 50/30/20 budget approach. At its core, it divides monthly take-home pay into expense allocations like this:
- 50% goes to essentials, such as rent, car payments, and groceries.
- 30% is devoted to wants, such as dining out, entertainment, and vacations.
- 20% is earmarked for savings, reducing debt, or other financial priorities.
While it uses three buckets to divvy up your money, the 50/30/20 budget also is easily adaptable to your unique finances. For instance, say your rent is higher than average and you have to cut back on take-out food. You can shift the percentages however you need, say, 60/20/20, to match your personal circumstances. Or, if you can’t manage to put away 20% in savings right now, that’s OK. Maybe your buckets are 70/20/10. Start wherever you are and build from there.
2. Prepare for the Unexpected
Even with the best money management, surprise expenses hit everyone from time to time, whether it is a car repair or a pet’s vet bill. So, as part of your budget plans, strive to create a rainy day fund to help handle the “what ifs.”
A common guideline is to squirrel away enough savings to cover three to six months’ worth of living expenses. But your “number” may be different. To figure out yours, consider things like job security, the type of industry you are in (some are more sensitive to economic swings than others), or whether other people depend on your income.
A high-yield savings account or money market account with no fees and low or no minimums may be appropriate places to hold this rainy-day reserve so that it is accessible when you need it but still earns interest.
3. Chip Away at High-cost Debt
High-interest debt—say, from credit cards or certain types of loans—will continue to cost you just as you are trying to manage a salary and use your money wisely. So it pays to form a plan to prioritize debt payments in order to knock them out as soon as possible. The higher the interest rate carried by that debt, the sooner you will want to retire it.
For example, save on interest costs by paying down the balance on the credit card with the highest interest rate. Once that card is paid off, apply extra payments to the card with the next highest interest rate, and so on. Tackling high-cost debt first may ultimately save more money because you are reducing the balance on which interest is charged plus shortening the time it takes to pay it off.
Tip: If you have student loans, check with your employer to see if they offer repayment assistance. As part of pandemic relief, employers can provide employees up to $5,250 in student loan repayment benefits tax-free through 2025. This perk applies to federal and private student loans.
Another tip: If you can’t afford it, and don’t need it, don’t buy it. Too many people get stuck with large credit card bills because they buy what they cannot afford.
4. Strengthen Your Credit Score
Your credit history and credit score are widely used by lenders to judge creditworthiness as a borrower and also influence the terms you will be offered when you apply for credit. Whether it’s leasing an apartment, applying for a new car loan, or signing a cellphone contract, that three-digit number is an important financial tool to build and manage. To strengthen and maintain a good credit score, make payments on time and keep your credit balances low.
Checking your credit report regularly helps ensure the information shared with lenders is accurate and up-to-date. You are entitled to a free report weekly from each of the three major reporting companies—Equifax, Experian, and TransUnion—until Dec. 31, 2022, at AnnualCreditReport.com. After that date, a free report is available annually.
5. Spark a Retirement Savings Habit
Time is a saver’s best friend. Why? You guessed it: the power of compounding. The sooner you start stashing money in a retirement fund, the bigger your nest egg will be. Retirement is a long way off for new college grads, it’s true. But there is no better time to think about providing for your future self by saving for retirement. How can you get into the routine?
If your employer offers a retirement plan such as a 401(k), you may be automatically enrolled. You choose how much you want to contribute, up to an annual maximum set by the IRS. That money is deducted from your paycheck but comes with a double tax break: contributions and earnings are tax-free until you withdraw the funds, which are invested in stocks, bonds, mutual funds, and more. Plus, employers often match employee contributions, so make sure you contribute enough to get the full match —that’s free money!
What if you do not have a retirement plan at work, or want to save more? Take the do-it-yourself route by considering opening a traditional IRA or Roth IRA:
- A traditional IRA allows you to contribute money that grows tax-deferred. You can let deposits grow until retirement, when you pay taxes on withdrawals (with some limited exceptions).
- A Roth IRA holds after-tax money you can withdraw tax-free in retirement.
Get more details about traditional IRA and Roth IRA eligibility criteria, contribution limits, tax breaks, and withdrawal rules for 2022 here .
6. Become an Investor
Risk and investing go hand in hand, but the good news is that investing risk comes with the potential for investing reward—which is what makes the whole practice worthwhile.
How you invest will depend on your goals, your age, your time horizon, your income and other resources, and your financial obligations. For instance, a young single person who expects pay to rise steadily and who has few family responsibilities may be able to afford to take more chances than, say, a couple approaching retirement age. The younger you are, the more time you have for investments to recover from market upsets, whereas the older you are, the less time there may be for a recovery from losses.
So, now is a good time to understand the basics of investing. Here are three principles to guide your decisions:
1. Start a portfolio with ease. Choosing investments seems complicated, but starting with mutual funds, exchange-traded funds (ETFs), or target-date funds can take complexity out of the equation.
- A single mutual fund, for example, may own stock (shares of ownership in companies) in hundreds of companies or bonds (term securities with interest and principal payments) issued by the government or corporations.
- ETFs buy stocks, bonds, and other securities that typically mirror holdings of a specific index like the S&P 500.
- A target-date fund, which is based on the year closest to the date you plan to retire, makes all the investing decisions for you. These mutual funds automatically adjust their holdings, investing more aggressively when you’re younger and gradually moving toward more conservative investments as the target date approaches.
2. Never put all your eggs in one basket. The way to accomplish this is through diversification—spreading out savings and investments over multiple asset categories (like stocks, bonds, and cash), with the appropriate mix depending on your time horizon and risk tolerance, in order to minimize the risk posed by ups or downs in any one asset category.
3. Review your mix of investments regularly. Things change, and when they do, your portfolio may need rebalancing. Maybe your risk tolerance or life situation has changed. Or perhaps market performance changed the value of your holdings. It is a good idea to revisit your mix periodically to see if it still matches your goals.
7. Keep Learning
Managing personal finances and investments is not a set-it-and-forget-it undertaking. After all, now that you are earning, your income and spending will likely change and more new money milestones will come into view. With these financial tips in mind, you’ll have the basis of a reliable plan that you can continue to shape and adjust.