By Jason Alderman
Getting a grip on finances at the very start of one’s working life can be challenging. Yet that first year out of school offers new grads an opportunity to jump on a lifetime of financial goals.
As the nation’s full retirement age edges closer to 70, it means a 22-year-old college graduate has nearly 50 years to save and invest. That’s why solid money habits built early can make an enormous difference, even for young people who can’t afford to put away more than a few dollars a week at the start.
The first financial task for any new graduate is creating a budget. That’s because it’s difficult for anyone to make effective financial decisions without knowing where every dollar is going. Budgeting is a three-part exercise. Part one involves tracking how every dollar you make is spent, usually for a month, maybe two. The second is analyzing that data so you can cut unnecessary expenses and allocate money toward debt payoff and savings goals. The third involves ongoing tracking of all your spending, saving, and investing decisions so you can stay on budget. Whether you start working immediately in your chosen field or are working part-time while you look, budgeting is a lifetime process that should start immediately.
The first savings goal? An emergency fund that covers four to seven months of everyday expenses if, for example, you lose your job or have to fund an unexpected event like a major repair or health costs not covered by insurance. An emergency fund should be seen as a lifetime reserve that prevents you from taking on debt or draining savings or investments in a pinch. Your emergency fund balance should be reviewed on an annual basis to determine whether it is adequate to cover lost income or sudden bills.
After a working budget and emergency fund are in place, focus on retirement investing as soon as possible. If you’ve been working since your teen years, you’re probably familiar with payroll withholding. The IRS’s Withholding Calculator can help you determine whether you’re setting aside enough money from your weekly paycheck to pay your local, state and federal taxes. From there, evaluate two sets of retirement savings options – those at work and those you’ll need to do on your own. Your employer’s 401(k) or 403(b) plans will allow you to save for retirement tax-free through payroll deduction. You can also program your bank account to funnel a portion of your take-home pay into personal retirement savings vehicles like Traditional or Roth IRAs. Automatic deposits remove any risk to spend that money and for added incentive, saving and investing calculators can give you an idea of how fast your money can grow. Try to read as much as you can about retirement investing, but also consider getting recommendations from friends and family members on trusted financial and tax planners who can offer personalized advice.
Insurance is also a priority for new grads. If you have your own apartment, renter’s insurance is a necessity. It not only covers damaged or stolen property, it also offers emergency and liability protection if someone gets hurt at your place or sues you for certain reasons. If you have a car, you’ll have to budget for auto insurance and under the Affordable Care Act, you’ll be required to buy your own health coverage or have the option to receive coverage through your parents’ health plan if you’re under age 26. Also, young adults should consider disability coverage. If your employer offers coverage, evaluate it and get advice on whether buying additional disability coverage might be a good idea.
Always think carefully about your transportation costs, which can turn into an enormous budget-buster. New grads grappling with student debt don’t always need to take on additional debt to buy a new or used car. Mass transit or carpooling may be the best option your first years out of school and check to see whether your employer offers transportation-related benefits.
Still having trouble making ends meet? If your parents are amenable, move back home for an agreed time period in exchange for rent you can afford. Consider using that savings to create separate investment accounts that can help you pay for major financial goals like a home, a wedding, or graduate school. If you’re working with a financial advisor already, ask them to weigh in with additional ideas.
Finally, get in the habit of tracking your credit reports. Everyone has the right to receive all three of their credit reports for free each year, and it’s good to stagger the dates you receive each to better check for inaccuracies and the risk of identity theft. Also keep in mind that the three credit bureaus – Experian, Equifax and TransUnion – have agreed to streamline their approach to fixing errors on consumers reports as well as how they treat medical debts. It’s good to schedule these report checks on your calendar.
Bottom line: The first year after college graduation is full of new experiences. Setting smart money behaviors early can help maximize spending, savings and investments for a lifetime.
Jason Alderman directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.
A First-Year Money Management Guide for the New College Grad
By Jason Alderman