If you (or someone you know) have recently graduated, congratulations! Here are five things that you can start doing today to ensure a solid financial future for yourself.
Hope for the Best, Plan for the Worst
An emergency fund of ready cash can help you feel more secure about your ability to handle the unexpected and be more confident in your other financial decisions. Surprises will come your way and if you’re stuck using a credit card to handle it you could end up paying costly interest and hurt your credit score. You can build a savings account by having a direct deposit from your paycheck sent to a separate account, saving a portion of bonus income, cutting back on unnecessary expenses or selling unused items. A common recommendation is to have three to six months of expenses in an emergency fund. For young adults, a few months may be adequate if you don’t have large fixed expenses like a mortgage or childcare. Read “How Much is Your Emergency Savings Fund?” for more.
An employer may provide you with disability insurance, which is critical to help ensure continued income if you were injured or ill and no longer able to work. Take a look at www.lifehappens.org to evaluate your disability insurance needs. Living on your own may also expose you to new risks, or ones that your parents or school previously took care of for you. Driving a car, renting an apartment or starting your own business could all expose you to liability. In addition to auto insurance, you may need a renter’s insurance policy and additional liability insurance protection. Renters insurance and liability insurance (a personal umbrella policy) are generally affordable and cost much less than auto insurance. Your specific needs will vary with your personal history, where you live or if you have pets, so it will be beneficial to discuss your situation with a professional advisor before purchasing insurance on your own.
Create a Budget
It is hard to expand your net worth without knowing where your money goes. For a new graduate, your net worth may be zero or negative. If you can pay down debt and consistently save, you can improve your financial position. You don’t need to track every penny, but you do need to find out if you are living within your means. A principle that works for many budgets is 50% of net income to essentials (rent, utilities, food), 30% to lifestyle (travel, entertainment) and 20% to savings (funding retirement, paying down debt). Before you commit to leasing a new apartment, buying a car, or relocating to take a job, consider how much you need to allocate to each area of your life without overspending. Finding affordable housing is generally the single biggest and most important item in this equation.
Save for the Future
Once an emergency fund is taken care of, take advantage of employer-sponsored or other retirement plans. Employers may offer matching contributions to a 401(k), which is free money to those who participate. Many 401(k) providers now offer useful online tools, which can be used with your budget data to see if you are on track for retirement savings based on your age and income. A Roth IRA can also make an excellent long-term investment vehicle. To learn more about retirement planning basics, read this.
Invest in Yourself
You may be done with college, but that should not stop you from seeking out new knowledge and experiences. Your skills may be the most valuable item you possess. Over time, your ability to earn a living from those skills, gain trust and confidence from your employer, and increase your earnings potential may be more important to your success than many other financial accomplishments. Some portion of your budget for both money and time should be allocated to self-improvement. You may want to ask peers what they have done successfully to help enhance their careers, and if your employer reimburses particular training or conferences. There are many free courses, like www.edx.org, that you can complete on your own time to develop a subject area or technical skill. Networking sites such as www.linkedin.com can be a means to connect with those you would like to emulate in your field.