David J. Perrotto
The Ultimate Financial Cheat Sheet for college grads
In a more perfect world, every college degree would come with a life manual for navigating the world of financial obligations. Financial decisions that you make now, and those that are avoided in your 20's will carry weight for decades. Sadly, this doesn’t happen and most people are not aware of what pitfalls to avoid, and what positive habits they should build to enforce the next 50 years of their lives.
First things first. Start an Emergency Fund. This by far is the most important start to getting ahead. According to Investopedia, an emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense. You should have no less than three months of expenses in a readily available liquid account. Expenses not only mean bills, but food, transportation, and what you need to live daily. This isn’t money that should be invested, it should be easily retrievable and accessible.
Start to pay down your student loans. The average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year. Try to stick with the standard 10-year repayment plan, so you can get rid of this debt and move on to other financial goals sooner than later, such as a home. Set up payments to be automatic so you’re never late, and also so your credit score never gets dinged.
Start saving for your retirement. Now. Today. With the power of compound interest, it is imperative that you start saving for retirement today, and not a year out, 5 years out. Start to adjust your budget any way you can to secure roughly 5% of your income into a retirement vehicle such as a 401K or IRA. I cannot stress the true cost of waiting to save. Every day you wait to start the process, pushes you back in the long run. A 401k will allow you to save more money than an IRA, and if you work for an employer that matches your contribution, it’s almost like getting a raise. Meaning if you have a 5% match, and you put 5% of your income into your 401k, your employer will double what you put in for the year. An easy example of this is, if you saved 300 dollars a month for the entire year, when your employer matches, you would see an extra 3600 dollars, that goes in tax deferred! The next choice you have to make, is if you want to do ROTH or Traditional retirement accounts. A Roth retirement accounts gets funded with AFTER tax dollars, but allows you to take out money when you are over the age of 59 ½ TAX FREE. A traditional retirement account gets funded with BEFORE tax dollars, and allows you to write off what you put in against your taxes every year. You then would pay taxes when you take money out when you retire.
Don’t blow your budget on an expensive car. Saving money boils down to making good choices on the three biggest expenses in your adult life: the house you buy, the car you buy, and how much you pay for college. The average monthly payment in America topped 500 dollars a month for a car in 2016. That is not including insurance. Spend as little as you can at this point on a car. Try to pay cash, and if you can’t pay cash, stick to a three-year plan with a loan. Anything more, and you’re stretching yourself.
Start the 80/20 rule. Start using 80% of your disposable income to pay down any debts you have, while spending 20% on enjoying yourself. You’re going to be getting more money than you had in the past, and you will be finally enjoying the riches of all the work and effort you put into your degree. Sticking with 20% of your disposable income keeps you from getting lifestyle creep.
Get a credit card. At this point, you need to start building credit. It’s the basis of almost every decision you will make as an adult. Car insurance companies use it. Employers use it. The interest rate of your mortgage depends on it. So make sure you apply for a good card, with a low rate, and the ability to continue to grow your limit. Remember to pay off what you put on it every month.
Ideally, this will start reaping benefits and point you in the right direction going forward, so when you are 30, you are better prepared for when you start making real earnings and can start to grow your retirement, buy a house, etc. If you can’t do all this, don’t worry, however it is time to get going so you have some progress to show by the time you turn 30. All of these can be achieved with the help of a licensed financial. So don’t be afraid to reach out, if you don’t have any one of these items on your check list.