July 25th, 2019
As you think back on your years in school, at times it may have felt like graduation day would never arrive, but now in retrospect you may ask yourself – Where did the time go? Many people could say the same thing about their adult financial lives. Without a plan, it’s easy to get caught up in work, life, and all its moments, only to wake up one day near retirement age and realize you’re not nearly as prepared as you thought you would be. Now that college is over, and you’ve got a diploma in hand with your future ahead of you, it’s a good time to create a plan for financial success.
You don’t need to have all the answers as to how your life will unfold, but there are specific steps you can take now to give yourself a solid foundation to build from.
1). Get a job.
Start your career. It’s a possibility that your first job won’t be your dream job, but it is an important place to start. Even if you are unable to obtain employment within your chosen career field, the most entry-level position can equip you with skills that may be valuable later on. As you learn how classroom concepts are applied in action in the workplace, you’ll get much better insight as to the career goals you’ll want to set, all while gaining experience and earning money. Adjustments as to where you work can always be made in the future, but the immediate income will help get you off to a strong start.
Do you love takeout pizza? Or catching the newest releases in the movie theater? Do you crave a daily mocha latte from your favorite barista? You’re young, you work hard, and you want to treat yourself. This is completely understandable. However, now is the time to step back and assess all those “harmless” little expenses and see how quickly they add up, potentially interfering with your ability to pay for more important things. It’s time to get a complete picture of how much you are earning, how much you are spending and how much you are saving. Determine the difference between your needs and your wants. To make a budget, begin by listing your recurring monthly expenses such as rent, utilities and debts, plus your daily expenses like commuting costs and food bills. Think about short-term and long-term financial goals. Do you want to buy a condo? Or a house? You’ll need to save for a down payment. Building up an emergency fund and saving for retirement are also important goals that should be included in your budget. Once you’ve created a plan to cover all of your necessities, you can set aside “fun money” for things like going out to eat. By preparing for this ahead of time, you won’t be struggling to cover your expenses or maintain your savings goals.
3). Build your emergency fund.
After creating your budget, you’ll know what your monthly expenses are. A good rule of thumb is to have enough savings to cover three to six months’ worth of your expenses in case an emergency comes up and you find yourself in an unexpected financial situation. Anything from a big car repair bill to suddenly losing your job can happen without warning, but if you’re prepared in advance with the finances to cover your regular expenses, you can focus on getting right back on track without the added stress of worrying about how you will manage to pay your bills.
4). Develop a plan to pay down your debt.
Student loans may have been necessary for you to obtain your college education. It is important to have a solid payment plan to satisfy these loan obligations. If you have accumulated any credit card debt, it should be paid down as a priority, beginning with the highest-rate cards. By only making minimum payments on credit card debt, it could potentially take years to pay off and will cost you a great deal extra in interest charges.
5). Build your credit.
Your credit scores are numbers that will be used in many different situations. Your payment history, how much credit you have and how much of your credit you use are some of the factors that go into determining these scores. Potential employers, landlords, insurance companies and finance companies offering car loans or mortgages may look at your credit score and history when making decisions about your applications. Although, as a new college graduate you haven’t had a significant amount of time to develop a credit history, there are things you can do to ensure you work toward healthy scores. Having some credit cards and loans is necessary to show that you can manage your finances responsibly. Use your cards sparingly, aiming to use only a small percentage of available credit, and pay your bills on time. If you use the full amount or most of your available funds, even if you pay them back in full each month, this will count against you and it will take longer for you to establish strong credit.
6). Learn about investing.
Compounded interest is your friend. By starting to save and invest early, you will see your money grow. For example, a 22-year-old who saves just $100 per month, assuming a 6% return and quarterly compounding, will have a Quarter-of-a-Million Dollars ($250,000) by the time he/she turns 65. It can be helpful to search for resources to begin learning about the different types of investments available and their corresponding risks, or you can speak with a financial professional who can start you on a path suitable for your specific needs.
7). Start saving for retirement.
Youth is on your side. With retirement likely several decades away, you have time to take advantage of a variety of investment strategies and plans. Take advantage of any employer-sponsored retirement plans, such as a 401(k) or invest in your own IRA. You’ll be able to contribute pre-tax dollars, which will grow tax-deferred, until you withdraw funds during retirement. Some employers will even contribute matching retirement funds up to a pre-determined limit. Also consider saving to a Roth IRA or Roth 401(k) which allow for after-tax dollars to grow tax-free.
8). Understand your insurance needs.
Insurance will help protect you and offset costs, which in some circumstances could be significant. Health, auto, disability, renters, homeowners and life insurance may all be considerations. Evaluate your particular needs and seek sufficient coverage that has limits and deductibles you are comfortable with.
9). Ask questions.
Talk to trusted family members who have been in your shoes before. Find co-workers or mentors who are willing to share their experiences. There are financial professionals available with expert guidance and information. Take advantage of every resource you can access to better understand your options and to make informed decisions.
10). It’s okay to make mistakes.
You will stumble. You might trip. There are very few people who can say they had a perfect path to financial success without a few speed bumps along the way. Make your mistakes, regroup, and do your best to get back on track with your plan.
Long term success is made up of lots of smaller decisions over time. By creating a plan that will serve as a framework for you to grow your financial future on, you’ll be giving yourself a solid start. Make a choice today to prepare for your future, and please contact us if we may provide any assistance.