Creating a Financial Plan
Leah Rosenblum, 24, is on the right track. A pediatric nurse who graduated from college three years ago, she sets aside 15% of her paycheck for 401(k) contributions and another 10% for savings. While Rosenblum handles nearly all her expenses on her own and pays her credit card bill in full every month, she worries it’s not enough.
“I don’t like the idea of talking about finances. It stresses me out,”Rosenblum admits. “I haven’t looked at how much I’m taking in and how much I’m spending. I think I should be doing something more with my money than putting it in a savings account.” She’s not alone.
Here are six tips to help recent grads focus on their financial future.
1. Make a budget.
If you’re used to having your parents pay for everything, this may require discipline — not to mention trade-offs.
Tally your monthly costs, remembering to include both necessities (rent, food and—very likely—student loans) and desires (entertainment and travel). If you’re barely meeting your expenses, look for ways to cut back on nonessentials. You’d be surprised how much you can save simply by making coffee at home or bringing lunch to work.
Once you’ve established a budget, stick to it. “Get used to the idea that you always need a budget,” says Michelle Perry Higgins, financial planner and author of the book “College Poor No More!” Which would you rather have, she posits, self-respect or a new pair of shoes you’ll feel bad about every time you wear them because you can’t pay the rent?
As you advance in your career, your paycheck will likely increase. So may your spending. In other words, “Beware the ‘lifestyle creep,’” recommends Lucas Casarez, an advisor with Keystone Financial Services. Revisit your budget with every raise to make sure your outflows don’t outpace your salary.
2. Examine your student loans.
Over 70% of recent graduates borrowed to fund their bachelor’s degrees. According to Mark Kantrowitz, publisher of college search website Cappex, the average graduate carries $37,000 in student loan debt. Painful though it may be, you should review your loan obligations to make sure you understand the payment schedule.
“While many loans may grant a six-month grace period, you don’t have to wait,” stresses Erin Lowry, author of “Broke Millennial: Stop Scraping By and Get Your Financial Life Together.” She suggests making payments as soon as you get a job in order to minimize the interest that’s accruing.
If you have federal student loans, look into income-based repayment plans. These plans can calculate an affordable monthly student loan payment that is based on your income and family size, explains Erin Ellis, a financial educator at Philadelphia Federal Credit Union. If you have private loans, which are not eligible for income-based repayment plans, pay off the loans with the highest interest rates first.
3. Build an emergency fund.
Consider this more of a necessity than a tip. However, if you’re not sure how much cash should be in this fund, there are online emergency fund calculators that will help you determine how much you should be putting aside. Higgins recommends saving the equivalent of six months’ worth of living expenses in a separate account. Don’t worry about how quickly you can achieve that goal, just start saving.
“This money will be a lifesaver if you lose your job and can’t immediately find a new one, or you decide to move to a new city to look for work, or your car breaks down and cannot be repaired,” she says.
Not feeling motivated to save? “Think of savings as a bill,” Ellis advises. Consider it a recurring payment you’re obligated to make, rather than a choice. You can make it easier by setting up an automatic transfer from your paycheck into your savings account.
4. Protect your credit.
Know your credit score. This three-digit number could affect how much you’ll pay for loans, your ability to rent an apartment and (possibly) your eligibility for a job.
A credit score represents your creditworthiness and is based on numerous factors, including your payment history and how much you owe. Credit scores generally range from 300 to 850. “Your goal should be a 700-plus score,” Lowry explains.
“You should always pay your credit card bill on time and in full,” she adds. Likewise, stay current on student loans and car payments.
Now is a good time to get in the habit of paying off your entire credit card balance each month. Casarez proposes the following reality check: Look at your statement to find the amount you’ve accrued in interest and fees year-to-date. “It’s just wasted money,” he says.
5. Save for retirement — now.
It’s never too soon to start thinking about retirement. Apparently some young adults, like Rosenblum, are getting the message. Nearly 60% of millennials surveyed in American Funds’ “The Wisdom of Experience” said they began saving for retirement before the age of 25.
It’s hard to think about retirement when you’re starting your first job, but the value of compounding makes contributing to a retirement plan as soon as possible too important to overlook.
Compound interest is like a snowball rolling down a hill. The longer it rolls, the bigger it grows. Interest accrues on investments the same way.
While recommendations vary as to what percentage of your pre-tax income you should be saving, financial advisors agree that you should start the process in your 20s. Lowry warns not to procrastinate when it comes to contributions to an employer-matched retirement fund. “Be sure you’re getting at least the full match your employer is willing to make,” she asserts. If you’re uncertain about how best to get started, she suggests choosing a target date fund — a type of mutual fund where the asset mix slowly shifts over time, focusing on growth-oriented investments when you are young and slowly becoming more conservative as you near retirement age.
6. Invest in your future.
Time is on your side. If you’re sticking to your budget and find yourself with extra cash some months, consider investing that money in a long term investment with growth potential.
“Start investing as soon as possible,” says financial advisor Casarez. Now 30, he began in his early 20s — and has since reaped the benefit of an eight-year bull market. “I’ve seen the power of what markets can do over time,” he says, “and millennials have nothing but time.”
Source: “EBRI/ICI Study Reveals Accumulation Potential of 401(k)s by Looking at Consistent Participants’ Balances.” Employee Benefit Research Institute press release. September 8, 2016.
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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.