Four financial tips for young graduates
Getting your first job after graduating from college is both exciting and nerve-wracking. On one hand, you’re starting the career you’ve worked hard to reach. But what comes with the new career is more responsibilities, particularly financially.
One of the biggest challenges for young graduates is managing their personal finances while creating a road map for prosperity in the future. If you find yourself struggling to get your finances off the ground, we’ve put together some tips with the help of Steve Yerkes, an instructor of finance at UNIBusiness and an associate wealth management adviser at Northwestern Mutual in Cedar Falls.
Create a budget
Many new graduates have a misunderstanding of what a budget is. A budget is a road map for what you want to do with your money, not just a tool for tracking where your money goes.
"A budget is a forward-looking statement with what you’re going to do with your money," Yerkes said. "Then you keep track of it, and you make adjustments. But just knowing where your money goes is not a budget."
There are many websites and apps that can help you with this process. Some people even prefer paper and pencil or making their own spreadsheet on a computer. But the platform you use doesn't matter. As long as you have a road map for how you want to spend your money, it's a step in the right direction.
Paying off debt
Student loans are increasingly becoming a problem in the United States, with the average graduate owing more than $25,000. Some graduates may even have credit card debt, which comes with higher interest rates and more problems.
Many graduates don’t know how much they owe or the interest rates on their loans. The first thing you need to do is educate yourself, then set a plan to pay off the debt.
"Treat debt as a bad habit and pay it off as soon as possible," Yerkes said. "There's minimal tax deductibility, and young graduates aren't making enough money anyway where taxes are a big deal. Ultimately, the debt is just a burden, so being serious about it is important."
Factor debt payments into your budget and go beyond the minimum payments if you can. Even an extra $50 per month can go a long way.
Retirement may seem like a long way, but getting started early can only work in your advantage.
Work-sponsored 401(k) plans are a simple and effective way to do this. And many employers offer a matching contribution, depending on how much you contribute. For example, an employer may match your contribution if you put in 6 percent of your paycheck. Take advantage of this. It's free money.
"In general, do the 401(k) up to the match," Yerkes said. "After that, focus on paying off your debt and maybe focus on a Roth IRA. I’m a huge fan of Roth IRAs, and not enough people take that seriously."
While a 401(k) plan is taken out of our income pretax, a Roth IRA is contributed with post-tax earnings. Be aware of your employer's benefits and try and get the most out of them. It'll be a huge deal when you look back 30 years from now.
Do you have a plan if you lose your source of income? Many people don't, and that's why it's important to build an emergency fund in the case of a drastic life event like job loss or sickness.
The rule of thumb is to have three to six months' worth of living expenses saved. That way you have a cushion to fall back on. Building this can be tricky, but if you set a goal to save 10-20 percent of your monthly income, you can watch your savings grow.
All in all, it's important to be educated. Having knowledge of how to wisely spend your money can affect your finances now and in the future.
"It's a balancing act. You can't do everything," Yerkes said. "How much do you put in your 401(k)? How much do you put in your savings account? How much do you put toward debt? As long as people are educating themselves and taking it seriously, that’s great. And don’t be afraid to ask for advice from a co-worker, parent or older sibling. Just getting different opinions can help."
The purpose of this article is to provide educational value for the public and is not intended to serve as personal or specific advice.