First of all…congratulations! Your education is a game changer that will have a huge impact on your life and the choices you will be afforded. While that accomplishment dwarfs anything on the list that follows, it also makes these things possible.
So, good job on completing a big step on your life’s journey! Now, let’s build on that momentum by following these tips to leverage your wonderful education.
1. Start saving for retirement…It will sneak up on you!
While retirement is a distant goal for recent college grads, establishing the habit of making consistent savings early in your work life will make achieving the goal of a decent lifestyle in retirement more attainable. A good rule of thumb is to save 15% of your pre-tax income. Sign up for automatic payroll deductions and don’t miss out on any match offered by your employer.
Read: The Power of Habit by Charles Duhigg
2. Think about your priorities…Be mindful of your spending!
Creating a budget can help with this. Once you give each dollar a purpose and ensure you’re meeting essential needs, you can spend on things you value and feel confident that you can afford them.
The 50/30/20 approach is a good starting point.
- Spend 50% on needs like rent, groceries and minimum loan payments.
- Spend 30% on splurges like trips, takeout and concert tickets.
- Spend 20% on savings and extra payments on high-interest debt.
Read: Your Money or Your Life by Vicki Robin
3. Give yourself some breathing room with an emergency fund…this might not be easy!
Start by saving $500 for emergencies in a savings account. This money could help you resist the urge to reach for your credit card when one of life’s small emergencies like replacing your car’s battery happens.
Then, grow your emergency fund over time. Aim for three to six months’ worth of expenses. This could be your “go to hell fund”, giving you an escape hatch from an intolerable boss or work environment and the freedom and confidence to move on to greener pastures.
Read: The Millionaire Next Door by Thomas J. Stanley, PhD and William D. Danko, PhD
4. Understand investing basics…compounding in your friend!
As you embark on what will likely be a decades-long career, resist to temptation to buy individual stocks. It’s a better idea to invest in a retirement account like a 401(k) or Roth IRA.
The money in these accounts is invested in stocks and bonds and grows over time due to compound interest. For example, every $1,000 invested at age 22 becomes nearly $20,000 when you are 72, assuming a 6% rate of return.
Read: I Will Teach You to Be Rich, Ramit Sethi
5. Establish a retirement plan…don’t turn down free money!
So how do you actually start saving for retirement? If your employer offers an account like a 401(k), make a transfer from each paycheck to it. If the employer offers to match your contributions to a certain amount, aim to contribute at least enough to get the full match — it’s free money!
If you don’t have an employer-sponsored retirement account, open an individual retirement account through an online broker or automated financial advisor. A Roth IRA is a tax-friendly option for new graduates.
Read: How to Win Friends and Influence People in the Digital Age by Dale Carnegie & Associates
6. Begin making student loan payments…slow and steady wins the race!
Most student loans have a six-month grace period, meaning payments won’t come due until late fall. But if you can start making payments earlier, you’ll save on interest and establish the habit of paying.
For federal loans, you’ll make payments to your loan servicer, the company the government hires to handle loan repayment. If your monthly payments are too high relative to your earnings, 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. Private student loans aren’t eligible.
Read: The Only Investment Guide You’ll Ever Need by Andrew Tobias.
7. Establish your good credit…but, beware, credit cards can be a trap!
Consistent on-time payments reflect positively on your credit. And a credit score in the high 600s or above is essential to accessing the best rates on loans, insurance and a mortgage. Some employers and landlords check credit, too.
Review your credit report to see where you stand. Chances are, you don’t have much of a file. To start working on your score, apply for a secured credit card or a basic credit card at your bank.
Having a credit card doesn’t mean you have to carry a balance. Instead, pay off your card on time every month and use less than 30% of your available credit. If your card limit is $3,000, for example, limit your balance to $1,000 or less. As your credit improves, you’ll qualify for cards with more benefits like cash back and points or miles.
Read: The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf.