You’ve completed your last paper, crammed for your final exam, and listened to one last boring lecture. You’re now a college graduate. Congratulations! Now, what’s next?
Graduation is an accomplishment. It’s also an introduction to a state of transition. It’s easy to make financial mistakes as you complete your degree and move on to the rest of your life. Here are tips for the recent college graduate.
1. Your first financial priority – the emergency fund.
Hopefully, release from the rigors of college comes with a steady paycheck. There are a lot of ways to use those newly freed up funds and no shortage of advice or temptations.
You might be thinking of investing for your retirement, paying your debts or saving for a car, a wedding, or a house. Before you can take on those goals, it makes sense to take an important first step – establish an emergency fund.
A good rule is to have funds to cover at least three month’s living expenses available when the unexpected occurs.
Here are some tips for establishing a good emergency fund.
- Evaluate the potential for you to be out of work for a period of time. Is your job in an industry that is easily affected by changes in the economy? Are you relatively new on the job and can't be confident of your future in that position? The more uncertainty, the greater the reason to accumulate a longer-term emergency fund.
- Have you received a sudden windfall from graduation presents or tax refunds?Use part or all of those funds to start a short-term savings accounts. Keep these funds in an interest-bearing account and separate from your expense account. But keep them in an account you can withdraw from in an emergency.
- Make minimum payments on your other debt and keep saving until you have accumulated enough funds for a sufficient emergency fund. Having funds available for unfortunate surprises will help you avoid getting into more debt.
- When you have to dip into your emergency funds, take the same steps to replenish it.
The number one cause of financial struggle is sudden and unexpected expenses. The easiest way to avoid these problems is to build an emergency fund - money you will keep set aside to deal with unexpected expenses or interruptions in income.
2. Once you have an emergency fund established, should you pay off debt or save for retirement?
The answer to this question is the ubiquitous “it depends.” What are your short-term goals? What kind of debt do you have?
- If you’re planning to buy a house or car, the best strategy may be to lower your unsecured debt balances as a percent of the total credit available to you. Doing this should get you a better credit score and ensure that you can get cheaper access to credit for these activities.
- If you plan to put off home-buying, then paying off debt and investing may both be useful strategies.
Before paying down your debt, it helps to think about the kind of debt you hold.
- Interest rates on subsidized student loans may be lower than the rate of return you can expect to earn on long-term investments for retirement savings.
- If you have credit card debt, the interest rate is probably in double digits.Paying down this debt could be far more important than saving for retirement in the short run.
Before finalizing this decision, make sure you are considering all the factors of a retirement savings plan.
- Remember, saving for retirement is more about time in the market than the actual amount you save.
- Not participating in a 401(k) with a match is giving up a lot of future security.You need to consider the match amount as a substantial part of the earnings on your retirement investment.
If you’re able, the best approach may be a combined approach of reducing debt and saving for your future. How heavily you weight each strategy depends on your personal situation.
3. Avoid the biggest mistake.
The biggest danger facing new graduates is “lifestyle inflation.”
Every product that’s advertised becomes the solution to life’s disappointments.
A 60-inch television would make your evenings more enjoyable, which is how you justify spending $1,000 on it. You get a measure of happiness for a few weeks, but you then quickly get used to it. Then, something else catches your eye that will make your life better.
The best way to avoid this spending and debt cycle is to make a budget and include room for some luxury expenses. You can spend it every month on dinners out, concerts, or other items. You can also save it for a bigger splurge.
Building space into your budget for this kind of spending helps you stick to a real plan to enjoy life while not overspending.
Make a plan and stick to it.
You likely had a plan for completing your college degree. Now it’s time to plan for financial success. Take these tips and get a great start on the rest of your life.
Genisys Credit Union has multiple savings accounts suitable for an emergency expense fund. OR
Make an appointment with a Genisys Investment Services representative on how to get started with retirement investment.
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