By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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For some, this is the season that marks the beginning of a new chapter in life. I’m speaking of recent college graduates, or those that might soon be graduating. Often, this is the first step to true “adulting” for graduates, along with all the responsibilities that come with it. Many of the perks that were part of college life, such as student discounts and frequent guidance from professors is replaced by “full-priced” everything and the intimidating reality of employment in the “real world”. Graduates might be ready to march into the work force armed with degrees and knowledge ranging from computer cyber security to psychology; but how many will possess the skillset to effectively manage their finances and create healthy savings habits?
Establishing and maintaining sound finance and saving skills is a major part of “adulting” and can have significant long-term financial rewards. Although there’s often an abundance of financial advice floating around the internet, below are a few simple and common-sense tips that might help graduates create a good financial foundation:
- The importance of developing good budgeting skills – We cover this skill first because it can serve as a catalyst for developing a lifetime of good financial and savings habits. Until you have some knowledge and control of how much money is coming in and going out, it will be difficult to enact other effective financial strategies. According to a recent survey, a majority of Americans have no idea how much they’ve spent in the last month, including only 23% of Gen Z and 27% of Millennials*. The idea of creating a budget can be a scary thought, and often the biggest challenge for graduates is getting over the stigma of budgeting. Although there are many helpful examples of how to create a budget, individuals new to the budgeting process have found the 50/30/20 approach to be simple and effective. Under this approach individuals look to spend approximately 50% of income on fundamental needs (i.e. housing, groceries, etc.), 30% of income on splurges (i.e. trips, takeout, etc.) and 20% of income on savings. Perhaps the biggest challenge for many graduates is falling victim to “lifestyle inflation” and feeling the urge to buy everything all at once because they’re earning more income now. It may help to think of a budget as a financial roadmap designed to guide spending and saving habits so that you can obtain some of the things you want while also building a sound financial foundation.
- Make saving a priority – Creating a sound financial plan and budget is only the first step to creating a good financial foundation, often the more challenging step is putting the plan in action. According to a recent survey, half of Americans have less than $250 left over each month after accounting for all of their expenses, and 12% have nothing at all**. No matter the size of your income, chances are you can afford to save something. The amount of the savings is less important than building the discipline of saving. Many financial planning experts suggest setting a goal of saving between 3 – 6 months of living expenses as an emergency fund in the event of unexpected financial turbulence, such as significant car repairs or job loss. And graduates don’t have to just limit savings to an emergency fund, they can also have a little fun with savings goals by creating savings accounts designated for specific purposes like a new laptop or a vacation trip.
Additionally, graduates that have access to an employer-sponsored retirement plan, like a 401(k), should strongly consider participating to take advantage of the compounding returns and tax benefits. This may be a difficult concept for many new college graduates to grasp, as many may feel they have plenty of time before they need to contemplate this reality. But retirement programs, like 401(k)s, provide a systematic way to implement savings since employee contributions are deducted directly from the paycheck. For those graduates that don’t have access to an employer-sponsored retirement plan, saving through an IRA (traditional or Roth) can also provide a retirement savings vehicle that benefits from compounding interest and tax advantages.
- Build a strong credit history – It’s important for graduates to be mindful of their credit score and credit history. A graduate’s credit score will be one of the most important components of their financial foundation going forward (either positively or negatively). It can impact a range of key items including approval for a car loan or home mortgage, as well as the interest rate attached to these or other types of loans. Graduates should be diligent in paying their bills on time to build a strong credit score and keep a good credit history. Graduates should consider treating their bill due dates like college assignment deadlines and consider utilizing strategies to ensure timely payment, such as auto-pay services or calendar alerts for key bills. Many graduates will also need to be diligent in factoring student loan repayments in developing their spending budget. Lastly, graduates should be mindful to periodically review their credit score to ensure its accuracy and can request a copy of their credit report through a number of free services such as Experian or Money Tips.
Entering the “real world” as a graduate can be both overwhelming and exciting, but you can set yourself up for a strong financial foundation by learning and implementing some of these key financial strategies now.
Benjamin F. Edwards & Co. does not provide tax advice; therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.
*Intuit. “Survey: 65% of Americans Have No Idea How Much They Spent Last Month”
**The Balance, “Survey: Half of Americans Don’t Have $250 to Spare”