College graduation season is upon us and that means hundreds of thousands of young millennials will be heading into the workforce and juggling a number of responsibilities they may not have faced during their time at school. The start of a promising career and an influx of money from a regular paycheck is an exciting new phase of adulthood. However, there are financial decisions and monetary moves to consider now so recent graduates can set themselves up for success down the line. Here are five important financial post-college to-dos:
Create a Budget & Stick to It
It’s important to understand the need to budget and determine wants versus needs. While a steady paycheck is great, it’s vital to live within your means when starting out. Automate savings as much as possible and use online money management tools, like Mint, to get a visual grasp on where money is going each month. Understand that time is on your side—compounding interest is a huge asset to young investors, so the earlier you can save, the better.
Establish an Emergency Fund
Set aside three to six months of living expenses in a savings account that can be accessed in case of emergency. Money in this account would help cover situations such as a job loss, funding an unexpectedly large purchase, paying down medical bills from an unforeseen illness, etc.
Having a solidly funded emergency account is important as a foundational building block. The account is there as an easy-access way to cover emergency expenses, and it allows you to avoid getting sucked into debt if you would otherwise have to use a credit card in an unfortunate scenario.
Think About Your Future
Funding a 401(k), or other employer-sponsored retirement vehicle, is pivotal throughout one’s career.This is one of the biggest opportunities to save and accumulate wealth over time. The earlier you can begin funding this account, the better—due to the power of compounding interest. Most retirement plans offer an employer match—for example, if you contribute 4 percent of your paycheck to a 401(k), then the company will contribute a 1 percent match—so at a minimum, contribute enough to receive that match. Otherwise, you are giving away free money! Another good rule of thumb is to increase your contribution 1 percent to 2 percent annually or every time you receive a raise.
Don’t Let Debt Drag You Down
Student loan debt is obviously a massive concern. A study recently revealed that the average student loan load was around $37,000 for millennials graduating today. That’s staggering, but it’s something that can be managed with the right strategy and drive to pay it down. There are a few techniques that can help with debt repayment. For example, the snowball technique recommends paying down smaller debts first, gaining momentum to pay down the highest debt last. In addition, identify what loans or debts have the highest interest rate and plan to attack them first and foremost, before working your way down to lower interest rate loans.
Establish Credit History
Creditworthiness plays a huge role in your ability to rent a place to live, make large purchases or possibly get a job. While it’s important to establish a credit history, it’s equally important to do so with a strategy in mind. Some items to consider:
- Never use a credit card on a purchase unless you’d feel comfortable buying that item with cash.
- Never leave a revolving balance on a card unless it’s interest-free; pay it off timely.
- If you have multiple credit cards in your name, you open yourself up to a greater chance of identity theft. Have one to two cards with solid benefits and/or rewards.
- Monitor your credit report annually. This allows you to check and remedy any mistakes and know if your credit score is within a good range—700 or more.
Getting your financial house in order early on in a new career can pay off in the long term and set college grads on a good path toward holistic wealth management, retirement planning and investment management. Grads, set yourself up now for financial success!
BKD Wealth Advisors, LLC is an SEC registered investment adviser offering wealth management services for affluent families and investment consulting services for institutional clients and is a wholly owned subsidiary of BKD, LLP. The views are as of the date of this publication and are subject to change. Different types of investments involve varying risks, and it should not be assumed that future performance of any investment or investment strategy or any noninvestment-related content will equal historical performance level(s), be suitable for your individual situation or prove successful. A copy of BKD Wealth Advisors' current written disclosure statement is available upon request.