Graduating from college and starting your career is an exciting time in life. And now that you’re earning a bigger paycheck, it’s also an opportunity to start building a solid financial future for yourself.
Through my work with numerous college students and graduates over the years, I’ve found that many struggle with personal financial planning and could use some general guidelines to help them as they start out on their own. Here are some tips I share with them:
1. It’s important to commit to saving right away. The earlier you come up with a plan, the more likely you’ll be to accomplish your goals. Creating a budget should be step one of this process. Determine how much you’ll need to spend on essential living expenses like food and housing, factor in any college loan payments, then decide how much you’ll allocate to savings. Anything left over is discretionary money that can be used for entertainment.
2. As a general rule of thumb, rent should not make up more than 25 percent of your gross salary. Spending less than that will obviously leave more money in your pocket. Keep in mind that rent is money that you will never see again nor have anything to show for. So while renting gives you a lot of freedom, living at home for a year or two can be a good short-term option, especially if student loans are a factor. However, if living on your own is a must, then having roommates can be a great way to share expenses.
3. When you’re just starting your career, retirement seems a million years away. But the earlier you begin planning, the better off you’ll be. Your goal should always be to maximize the amount of money that you can allocate to your 401k. As a new hire, you may not be sure how much you can afford to save. A good number to aim for is putting 10 percent of your pay in your company’s 401k, but at a minimum, put in the amount up to which your company will match.
With each raise and bonus, increase your 401k contribution until you’ve hit the maximum allowed. This strategy is a way to enjoy some of the extra money in your paycheck while also painlessly boosting your savings, because you will never even see that extra 401k contribution coming out of your paycheck.
4. You also should always have liquid emergency savings, whether in a traditional savings account or a money market account. You never know when unexpected expenses will arise – your car could break down, you could lose your job, etc. Recommendations vary from 3-9 months of living expenses, which can be daunting at first. So start with a smaller amount – even if it’s just $50 per paycheck – and have that money automatically deposited into a separate savings account. You’ll be amazed at how quickly your “rainy day fund” will grow over time. You can then adjust your savings amount when you review your annual budget.
5. It will also be critical that you start to establish a strong credit record, as you may ultimately want to make a large purchase like a car or a home. Getting a credit card is one way to accomplish this. However, it is important that you only buy what you actually have the cash to repay. Not paying your bill in full each month is a slippery slope toward getting out of control. The interest charges you pay on credit card debt represent money you’ll never get back, so use your card wisely.
Taking the time to create a budget and allocate money to savings now will put you on a solid path toward a secure financial future. So enjoy all the fun and freedom your new paycheck brings, but be sure to take care of the essential items first!
