The following article from Tim Murphy contains some financial tips specifically for recent college graduates and Millennials, but all of us would do well to abide by this wisdom! Please feel free to pass this along to any young adult just entering the “real world.”
Some 1.8 million students will graduate with a bachelor’s level degree in the U.S. in 2017. That’s a whole lot of Millennials entering, and learning to survive, the real world: earning a living, paying back loans, paying bills and saving for a rainy day, a car, a home and retirement. My hope is that with the following advice—let’s call it a blueprint for early adult financial success—the newly minted graduate that you know can quickly turn surviving into thriving!
A budget isn’t a one-and-done task. Rather, it’s a work in progress that must be adjusted as your financial circumstances change. And believe me, your financial circumstances will always be in flux. Hard work tends to lead to promotions, getting older tends to lead to marriage and kids, improved finances tends to lead to larger purchases and investments, and so on.
The golden rule of budgeting is to always live within your means, and the only way to know you’re doing that—or to alter behavior in order to do that—is to track what’s coming in and what’s going out. If you’ve heard your parents and grandparents say that bit about living within your means, they were right. As you get older, it’s amazing as much smarter your parents and grandparents get!
2. Have an emergency fund. Life is full of surprises. Like broken-down cars, rent increases, lost jobs and worse. Squirrelling away some savings in an emergency fund —3 to 6 months’ worth of expenses — can really save your bacon when life throws you a curve. You don’t want to put unplanned expenses on a credit card if you don’t have to—that’s incurring debt and interest, which is insult to injury after an unexpected expense.
Ally Bank pays 1.05% on balances in savings accounts, by the way. Earning interest on cash is practically unheard of today, so this would be a good home for your emergency fund.
3. Save and invest. Try to save at least 10% of your income in retirement account, be it a traditional or Roth 401(k), a traditional or Roth IRA, or similar account. At a minimum, save enough to get your employer’s full match on your 401(k) plan. Otherwise, you’re leaving free money on the table.
A Roth IRA is a fantastic investment vehicle for almost everyone in their early 20s. That’s because contributions are taxed at your current rate, which is probably low given that’s the start of your career, but earnings and withdrawals at retirement are tax-free. Plus, there is an income limit. So sock some money away in a Roth IRA before you make too much to do so!
No matter the investment vehicle, speak to a financial planner such as myself on how those funds should be invested. See #5 below.
4. Repay your student loans. Graduates with loan debt need evaluate how best to pay back their federal and/or private loans. Visit the Education Department’s website to determine the right repayment plan, how to make payments and what you can do if you can’t afford your payments.
If you’re facing a dilemma on whether to build an emergency fund, invest or pay off loans, my advice is to build an emergency fund first. Then decide whether an investment or loan repayment will likely reward you best. According to the Department of Education, interest rates on federal loans to undergraduates have ranged from 3.4 percent to 6.8 percent over the last decade. When you pay off a student loan, you’re earning a “return on investment” roughly equal to the interest you no longer have to pay. If you expect to exceed that ROI with your 401(k) or other investments, then do that second and pay off loans last. For a benchmark, the S&P 500 has averaged an annual return of about 7 percent since 1950.
5. Hire a financial advisor. You might not think you have enough income or assets, but now’s a good time to begin a relationship with a competent, reputable financial advisor. An advisor doesn’t just help you invest money. He or she can provide guidance on budgeting, managing debt, making insurance decisions—anything related to money and finance.
If you’re parent or grandparent of a recent grad, consider giving a gift that keeps on giving: an hour or two consultation with a good financial advisor.
6. Living for today or saving for tomorrow? If all this financial advice feels like rain on your graduation parade, it’s not. You don’t have to choose between living for today and preparing for tomorrow. You can, and should, do both.
The secret is striking a balance between your consumption decisions and your investment decisions. The former is for your current, short-term quality of life, the latter is for your future, long-term quality of life. You need to develop a strategy and habits that contribute to that strategy for accomplishing both without compromising either.
7. Your reputation is your most valuable asset. Everyone was young once and everyone has made a bad decision, two things that have a strong correlation. The difference today is that your decisions can be captured, recorded and disseminated to the world in an instant through hand-held devices and social media. Consequently, poor judgement can have remarkably quick consequences. So remember, your reputation is always on the line. Make good decisions and refrain from over-sharing via social media.
8. Change is constant; learn how to manage it. There will always be challenges, opportunities and transitions in your life, some good and some bad. To be successful and to be happy, you have to learn to navigate what life throws at you and make good decisions. It’s important to have help, be it family, friends, mentors or faith, to turn to when life begins to feel overwhelming.
Should I consolidate my loans?
The answer depends on your individual circumstances.
- If you currently have federal student loans that are with different loan servicers, consolidation can greatly simplify loan repayment by giving you a single loan with just one monthly bill.
- Consolidation can lower your monthly payment by giving you a longer period of time (up to 30 years) to repay your loans.
- If you consolidate loans other than Direct Loans, it may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness. (Direct Loans are from the William D. Ford Federal Direct Loan Program.)
- You’ll be able to switch any variable-rate loans you have to a fixed interest rate.
- Because consolidation usually increases the period of time you to have to repay your loans, you might make more payments and pay more in interest than would be the case if you don’t consolidate.
- Consolidation may also cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your current loans.
- If you’re paying your current loans under an income-driven repayment plan, or if you’ve made qualifying payments toward Public Service Loan Forgiveness, consolidating your current loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness.