By Cortney Meng
With the end of another school, a new class of college graduates is entering the workforce. Regardless of where their career paths may take them, they share one constant – they will need to support their chosen lifestyles. It also means starting to prepare for the future, which is likely to include major expenses like home and automobile purchases, raising families of their own, funding children’s college educations and weddings, and even planning for retirement. It’s never too early to start planning for the future – even those students who are still in school.
With the pressures of school, and then finding a job upon graduating, it’s easy to ignore the need for financial responsibility – especially when parents have been footing the bill. Making the transition to the workforce even more challenging for some 44 million Americans is the need to repay student loans. In fact, the Financial Literacy and Education Commission – which including the Treasury Department and Department of Education – recently release a report stating that the current $1.5 trillion student-loan debt is a clear indication that students need better financial education as they head into the workforce.
Indeed, some schools are already teaching basic financial skills within their curricula, but there are a number of basic tips for recent graduates, and all younger members of the workforce, that can help ensure they are setting out on the right path towards financial stability.
Start saving today
Too many young adults enter the workforce with nearly nothing saved, creating challenges when it comes to living on their own and funding necessary expenses – like rent, food, cell phone bills, Internet services, and more. Having nothing saved also makes it harder to accommodate larger expenses that are certain to arise. Not having anything in savings also makes it very easy to build up high credit card debt, which can end up costing hundreds or even thousands of dollars each year in interest and negatively impact credit ratings.
Keep track of spending
This is something that really applies to everyone, but younger earners may not be aware of how important it is to be able to account for spending and how that knowledge can impact their ability to save. For a tech savvy generation, there are many apps available to help track spending. Some are standalone apps, while others can be linked to bank accounts for even more precise accounting. The bottom line is that, in order to save, you first have to know how you’re spending your income, and how much of it is necessary spending and how much is discretionary that you might be able to reduce. Once you know that, you’ll be able to start adding to your savings.
Pay bills on time
If you’ve never had to handle your own bills, it can be a daunting task at first. But, it’s important that you keep up with your bills. By paying them on time, you are able to better understand your monthly spending habits and your financial stability. Setting up automatic payments is an easy way to make sure your regular recurring bills are always paid on time. But, it also means you have to be diligent about tracking your expenses and making sure you aren’t overspending. Also make sure you balance your checkbook every month. It’s easy to fall behind on payments, but once it happens, it’s even harder to get back on track, and you also have to deal with late fees and interest, which reduce your ability to save.
For some 44 million Americans, graduation also means the start of a six-month grace period before they have to start paying back student loans. Averaging almost $30,000 per graduate, student debt has become the second largest source of consumer debt, behind only mortgages. The key is simple: start paying off your student load(s) as soon as possible. You may need to use the grace period to add a little to your savings, but be sure to factor loan payments into your monthly budget. If you’re able to pay more than the minimum payment each month, you may not be able to save quite as much immediately, but you’ll be able to eliminate that debt faster. Remember, student loans don’t disappear and will damage your credit rating if you are regularly late or default on your loan(s). If you have multiple student loans and are only able to make bigger payments towards one, make sure you pay off the higher interest loan first.
Build your credit
Staying current with bills, reducing and paying off loans helps increase your credit worthiness and makes it easier to get lower interest rate loans in the future. While credit cards are useful, limit how many you have – it will help you manage spending better and avoid getting into more debt. However, there are ways to use multiple credit cards to your advantage, such as using low or zero-percent balance transfer offers to pay off higher interest rate debt (including student loans) – just make sure you are able to pay off the amount of the transfer within the introductory period without impacting your ability to pay other bills. Also look for credit card offers with the best benefits. Many issuers today offer points or cash back on purchases, airline miles, or other benefits. Look for benefits that make most sense for you, and try to find ones without annual fees.
Rainy day fund
It’s always good to have an emergency fund. After all, you never know what necessary expenses might arise, or what non-essential spending you may want to be able to afford, including vacations. You also want to be prepared in case you are suddenly out of a job so you are able to continue paying your bills and won’t risk impacting your credit rating. A good target is to have 6-12 months of expenses saved up.
Monitor your credit
Considering the growth of cyber crime and the rate at which consumers’ personal, financial, and other information is stolen, it’s a good idea to regularly monitor your credit report. The Milford Bank offers CreditSense, a financial tool that will help you improve your financial well-being. The FTC also has mandated that everyone is entitled to one free copy of their credit report every 12 months from each of the three nationwide credit reporting agencies. Using just this as a resource, you can check your credit report every four months at no cost.
Maximize your 401k investments
It’s never too soon to start saving for retirement. If your employer offers a 401k plan with an employer match, it’s smart to contribute at least much as the maximum match, if possible. That way, you are not only putting your own money towards your retirement, but are taking full advantage of your employer’s matching contributions. If your budget allows you to contribute even more, that’s never a bad option. You can always adjust your contributions if circumstances change.
Create a reasonable budget
The key to successful financial management is creating a sustainable budget that makes sense for your needs. Take a look at your spending – including what are necessary expenses (rent, loans, utilities, etc.) and what you may be able to cut back on (such as eating out vs. cooking at home) – and create a budget that will allow you to accomplish your goals. You may have to take a hard look at your discretionary spending in order to fit some expenses into your budget initially, such as student loans. But, as you pay off existing debt and your income increases with work experience, you’ll be able to adjust your budget and save more. Don’t set a budget that won’t work for you – and certainly not one that will increase your debt.
Don’t let a lack of information or inexperience put you on the wrong track financially. If you aren’t sure how to effectively manage your finances or are looking for advice on creating a financial strategy that will help you achieve your short-term objectives while moving towards longer-term goals, contact a financial advisor. They have extensive expertise in helping recent grads – and anyone looking for financial advice – cope with the inevitable challenges of entering the professional life.