Jun 7, 201609:50 AMOpen Mic
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One more class for new graduates: Personal Finance 101
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A checklist for this year’s college graduates:
- Diploma? Check.
- New job? Likely.
- Cool apartment? Hopefully.
- How about a budget? Credit record? Savings plan? Maybe, or maybe not.
Managing money and saving for retirement might not be a priority for some new graduates (especially when they are still celebrating their academic achievements and experience), but it should be. It’s never too early to start building your financial future.
Here are some tips for college grads to put their best financial foot forward.
Build a budget — If you’ve been living frugally as a student, you might be tempted to splurge once you obtain full-time income. It’s okay to reward yourself occasionally, but it’s best to live below your means whenever possible. When you receive your first paycheck from your post-college job, determine your net monthly income and compare it to your expenses, including rent, food, utilities, phone, insurance, car, and debt. Of the remainder, allocate a percentage for savings (try to save at least 10% each month) and a percentage for discretionary spending such as entertainment, dining out, or travel. If you haven’t moved into your own home or apartment yet, it’s smart to set aside an amount equal to average rent in your desired location and put the money aside until you’re out on your own. The key element of any successful budget is to spend less than you make.
Establish credit — Having a good credit history will help you qualify for mortgage or vehicle loans, apartment rentals, and sometimes even jobs. It might be difficult to obtain credit after graduation because major credit card companies might assume your parents no longer will guarantee payment. Gas or department store credit cards are usually easy to obtain. Check to see that any card you apply for sends reports to the major credit bureaus, to help build your credit history. Another option is to apply for a secured credit card, which requires you to deposit money into a savings account. Deposit minimums vary and interest rates can range from 10% to 25%. Once you have a credit card, pay the balance in full each month. Late payments can damage a credit report for years. Unpaid credit card debt can accumulate and carry high interest rates. And outstanding credit card debt can impact your ability to get other loans in the future. If you have student loans, consolidate them into a single monthly payment and make sure you pay on time. Finally, monitor your credit score with credit bureaus to guard against identity theft and to ensure accurate credit history.
Automate your savings — Payroll deductions not only are a simple way to ensure you save regularly, they are relatively painless — you never “miss” the money because it goes directly into savings. You can set the amount you wish to save based on your monthly budget and then let the savings accumulate over time.
Create an emergency fund — It might seem that between paying off debt, saving money, and contributing to a retirement plan you’re doing enough financial planning. But preparing for the unexpected is a crucial element of your financial wellbeing. An emergency fund can help you cover costs for an unexpected medical bill, car repairs, or lost income if you lose your job without relying on high interest credit card debt. Start by contributing what you can afford after covering all your expenses and retirement contributions, with a goal of reaching enough to cover three to six months of living expenses.
Contribute to a retirement plan — If your employer offers a 401(k) or other retirement savings plan, contribute as much as you can afford, and try for at least as much as the employer match, if there is one. If your employer does not offer a plan, you can open an Individual Retirement Account (IRA). You also can consider opening a Roth IRA, which allows you to contribute up to $5,500 per year. Although contributions are not tax deductible, qualified withdrawals are not taxed.