Fall graduation is near, and although this year it will be different in many ways, the importance of starting life with a firm set of financial principles is as critical as ever. Earlier this year, I was lucky enough to work with Jared Defaria, an economics student at Johns Hopkins University. I asked him to put together a list of financial tips for college graduates, and he did a fantastic job of writing the article below. (Please ignore the “by David Tuzzolino” that appears above as I spent a half-hour trying to remove my name from the post and was unsuccessful.) Please take a few minutes to read through his work and pass on these financial tips to the new college grads in your life.
Build a Budget
Budgeting your expenses is the first step to ensuring that you are meeting all your needs in an affordable way and not wasting any money. By establishing a monthly budget, you have something concrete to follow. There are dozens of helpful budgeting tools available online, so find one that best suits your needs.
Or, create your own spreadsheet to establish your budget and keep track of your expenses. This will help you avoid eating out too much or forgetting about the 2 or 3 streaming services you’ve been paying for but not using. Always keep an eye on your budget to prevent these unnecessary payments.
Live Within Your Means
In order to start building savings, it is necessary to limit unnecessary spending, especially at this stage in your life. Eating lunches and dinners out and taking trips with your friends seems tempting with your first real paycheck, but it could wreck your budget. There are also ways to avoid certain expenses that may seem necessary, but you can certainly live without.
One example of this is a car. If you can find a way to live near enough to work to avoid spending on a car, your budget will only increase for all your other expenses. Spending a little extra on housing to achieve this could still be beneficial, but make sure you’re someone who can handle those morning strolls to the office.
Create an Emergency Fund
It may seem difficult to put money away in case of something completely unforeseen, but an emergency fund couldn’t be more important. Whether you’re in between jobs, you incur a large medical expense, or a car repair; an emergency fund will give you that extra cushion.
A good rule of thumb is to have savings equal to three to six months of expenses to keep you on your feet. Make sure that you place the money in an account with easy access and a high-interest rate. There are many options for savings accounts that provide a perfect spot for your emergency fund, and dropping a small piece of your paycheck into that account is all it takes.
Understand Investments and Retirement Plans
Before you can determine what retirement plan is right for you, it is first necessary to understand what they are and what they provide. Understand the differences between a 401k and Roth IRA, both of which would be sensible retirement plans for a college graduate.
A 401k is a good option if your employer offers a company match for what you put into the account. Make sure you know if they do and what the match is. Contribute at least up to your employer’s match to maximize the value of your 401k.
A Roth IRA provides a great option for recent college grads. Contributions and earnings from the account can be withdrawn tax-free and without penalty for any reason once the investor reaches age 59 ½ and the account has been open for at least five years.
Quickly Pay Off High-Interest Debt
As a college graduate, there is a good chance you are left with student loans. However, most federal student loans for undergraduates have low, fixed interest rates that don’t need to be paid off quickly. Once you’ve graduated college, you need to focus on paying off all high-interest debt, such as credit card debt, personal loans, and some private student loans.
Much of this debt can be avoided from the start just by following most of the tips we’re discussing now. By always paying your credit card bills on time, creating a budget, and building an emergency fund, you can avoid most high-interest debt. Too much of this debt early on in life can weigh you down.
Establish Good Credit (And Be Smart About It)
It may seem risky to establish credit this early, but many more opportunities will be available to you in doing so. With good credit, banks and other lenders will be much more willing to loan you money and at a much better interest rate.
At this stage, the best way to establish good credit is to start using a credit card (and to always pay your bills on time). By using your credit card for all regular purchases, like getting coffee or going to the movies, benefits will build up, and your credit score will improve (again, as long as you pay your bills on time). Most importantly, make sure to still stick to your budget and avoid any impulse buys.
Understand What Insurance You Need
Insurance is necessary but, for a recent college grad, you can avoid paying hefty premiums for insurance you don’t really need. For example, life insurance is very important once other people become financially dependent on you, but while you are still independent, you can focus on different types of insurance.
Health insurance, car insurance, and renter’s/ homeowner’s insurance are all things to consider at this stage in your life. There is a strong chance that your employer will provide health insurance, and that is something to look into when selecting your first job.
More often than not, you will be renting a home once you graduate rather than owning one, so the next step to focus on is renter’s insurance. Many people make the mistake of thinking that they will be covered under their landlord’s insurance; however, you will definitely need your own insurance. Renter’s insurance is important for any damage you might cause, any injury on the property, and for personal items in case of theft, fire, flood, etc. Make sure to always know exactly what is covered under your insurance plans.
If you get kicked off of your parents’ plan, it will be necessary to purchase car insurance. It’s important to note how to create the most affordable insurance plan, as car insurance can get expensive at this age. You’ll need to consider what kind of car you’ll have, where you’ll be driving, how much you’ll be driving, and your previous record when considering insurance, as those will all be factors in the cost.
Written by Jared Defaria
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David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.