Financial to-do List for recent college graduates
College graduation season is now in full swing, and the next class of graduates are transitioning from student life to the workforce. In addition to the mental adjustment of this major life change, there are several financial matters to consider as well. Establish a Savings Plan Although recent grads may feel that they don’t have enough discretionary income to save, it is important to begin saving as early as possible, even in small amounts, as opposed to trying to catch up by saving larger amounts later in life. To put this principle in perspective, if a 22-year-old begins saving just $3,000 per year (assuming she never increases that amount and earns an average of 8% annually), she will have over $1 million saved by age 65. If she delays saving even until age 30, she will have to save twice as much per year to reach the million mark by retirement. If she waits until age 40, she will need to save 5 times as much annually to achieve the same goal.
For a young person starting out, a prudent first step is to accumulate an emergency reserve fund of 3-6 months’ worth of living expenses, which should be kept in cash in a bank account and only used, as the name implies, in case of financial emergency. Once an adequate emergency fund is established, your savings focus can shift towards more long-term financial goals. Saving in an employer retirement plan is a great place to start. When starting a new job, it is important to ask what retirement plans are available, what the eligibility requirements are, and if the employer contributes.
Employer plans are excellent ways to save for retirement, but there are some restrictions on accessing those accounts. It is likely that at some point before retirement, other major financial needs will arise, such as purchasing a home or getting married. Saving in a taxable brokerage account is one way to invest money that will not be needed in next 1-2 years, but that you may need before retirement.
Manage Student Loan Repayment
The first step towards loan repayment is to get online or call your loan provider to discuss the monthly payment amount, the first due date, and any repayment options that may be available. From there, you can determine a plan for paying off your loans systematically. Some individuals find it motivating to put any extra payments towards the smallest balance loan first, so they can see their loans dropping off one by one. Others may prefer to minimize their total interest paid over time by paying down the loans with the highest interest rate first.
Another option to consider is student loan consolidation. This option isn’t for everyone, but it may benefit individuals who have high interest rate loans or who have loans with many different providers. It is important to understand all the terms before making a decision, as consolidation may cause you to lose certain features from the original loans.
Monitor and Build Credit
Credit can be a tricky area for college graduates who often have little to no experience borrowing money. Before you begin utilizing credit, familiarize yourself with how it works and the potential pitfalls. Credit mistakes can take months or even years to repair, so it is crucial to have a system in place to avoid simple mistakes.
As important as it is to build your credit, it is equally crucial to monitor your credit score in a disciplined manner. Recent graduates should take the time to access their credit score online and learn what it means.