Finishing college is one of the most important times in a person’s life. The possibilities of what you can do after college are almost endless. However, for some the start of a new chapter can also be intimidating. All of a sudden you are responsible for personal bills such as rent, utilities, car payments, and groceries, not to mention student loan debt.
You just landed the job of your dreams, so what do you do next? Here are 4 important tasks for recent college graduates to consider to help put you on a successful path toward saving and investing.
Automate Your Savings
Automating deposits into a separate account such as a savings account or investment account is something that can be easily done by post graduates. Think of it like putting your savings on auto-pilot. Also, having money put in automatically is convenient because you can set this up through online banking or your payroll. Automatic funding can help you effortlessly build up emergency fund too. The great fact about this is that one can start with as little as they want and accumulate more over time. You may be surprised how quickly savings can accumulate over time. By saving the money in a separate account – one that you’re not paying bills out of – you set up a barrier that stops, or at least impedes, the temptation of dipping into the funds prematurely. Ideally, your separate savings account should be reserved for emergencies.
Building credit is one of the major issues that comes up after graduating from college. This is because new grads may have no credit history at all. What is credit? Think of credit as your adult GPA. It displays your responsibility as a money-borrower and shows lenders the amount of risk they are taking if they give you a loan. Generally speaking, the higher your credit score, the more likely your loan application will be approved (and at more favorable interest rates). However, it is not an overnight event. A great way to build credit is by applying for a credit card. A credit score between 750-850 is typically considered excellent. But keep in mind, establishing a high credit score will take patience. Responsibly using a credit card can be a great way to jumpstart your credit score goal because it allows for financial stability, while also showing you have independence.
Avoid High-Interest Debt
It can be difficult to not spend money right after college because of the independence you now have. For some college grads, your first job out of college may be the first time you start making “real” money. With any life stage it is important to not live beyond your means, but for new college grads this is especially important because the financial decisions you make today can impact you for years, if not decades.
Practically speaking, this means you should avoid charging something on your credit card that you cannot afford. Oftentimes, new credit card users think they only need to make the minimum payment on their monthly credit card bill. This is a faulty line of thinking: if you only make the minimum payment, you will be charged interest on whatever balance you carry going forward. Credit card debt is often the most costly, highest interest rate debt you can incur.
According to US News, the average credit APR is anywhere from 15.56% to 22.87%. To put that in real world terms, imagine you borrowed $1,000 to buy a bed. If you only paid the minimum payment per month, that would be averaging around $89 in interest. Although, small term it does not seem that much, however with larger items the interest adds up tremendously. It would take you roughly a year to pay off the loan in full. That is a lot of money you could be saving by either paying it in full or making larger payments each month. Emergencies happen but this showcases the importance of the emergency fund so you are not going into debt.
Simply put, getting buried in credit card debt can create a vicious cycle to your budget, especially if you do not have a great credit score to begin with.
Take Advantage of a 401(k) or IRA
A 401(K), and an IRA are tax-advantaged retirement savings accounts. A 401(k) is a type of retirement account set up by your employer. One major benefit of a 401(k) is that it allows you to save money on a tax-advantaged basis – money you contribute to the account is deducted from your taxable wages, and the funds inside the account will grow tax free over time. Money you contribute to a 401(k) will not be taxed until you withdraw it, which ideally is not until retirement or later. The most you can contribute to a 401(k) this year is $19,500 (it goes up a little bit each year). However, you don’t have to contribute that much if you are unable. Do what you can!
Most employers also offer a “matching” contribution to your 401(k). For example, if you contribute 4% of your pay to your 401(k), your employer may match you dollar-for-dollar up to 4%. In other words, a matching contribution is basically free money. How can you say no to that? In the above example, you’re putting 4% of your salary in your 401(k), and your employer puts in another 4% – so in total you’re saving 8% per year! Keep in mind that your employer may have a vesting period on their matching contributions. It depends on company policy. However, your personal contributions are always 100% your money on day one.
An IRA is similar to a 401(k), but it is an individual retirement account. That is, it is set up by you individually, not by your employer. An individual retirement account is a tax-advantaged account that individuals use to save and invest for retirement. There are several types of IRAs—traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Similar to a 401(k), if you withdraw money from an IRA before age 59.5, you are usually subject to an early withdrawal penalty of 10% on top of paying regular income taxes. Each type of IRA has different rules regarding eligibility, taxation, and withdrawals. You can have both a 401(k) and an IRA. Check out our blog on the differences between a Roth IRA and a Traditional IRA.
Adulting can be overwhelming, and it’s okay if you do not have everything figured out. But following these steps can set you up for financial success- and we are here to help. If these 4 tips seem intimidating, check if your employer provides financial planning help. Here at Taylor Hoffman we offer many services to help guide you to a pathway of financial success.
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