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By Paul Brucker
The average college grad now enters “the real world” with a debt of $33,000 in student loans1 and a credit card balance of $3,200.2 Whether or not you have secured a decent-paying job, it takes money smarts to handle financial challenges and get ahead financially. Here are some pointers to help you on the road to economic well-being.
1) Get real. A common theme among financial experts is that the best favor you can do for yourself now is to live below your means, to keep a frugal student mindset for a couple of years even after you get your first good paying job. Without an endless supply of money, you can’t afford to do everything you want. Meanwhile, you don’t have to be a cheapskate to take advantage of the cheaper things in life such as inexpensive activities and merchant discounts. Comparison shop online and offline to get the best price for any major purchases. Master the art of cooking – it’s a skill that could save you many thousands of dollars over a lifetime. And learn when it’s best to say to yourself – and others – “no, I can’t afford this.”
2) Follow your money flow and get a plan. Before you can develop a workable budget for yourself, you’ve got to track how much you have, how much you owe and how much you spend on everything. Keep a list of all your expenditures for at least a month, including groceries, eating out, rent, utilities, everyday expenses and loan payments. This exercise, in itself, may help you curb expenses. Plus, you’ll be in a position to detect your spending patterns and wisely decide to spend money on what you need, rather than just on what you want. After a month of tracking expenses, you can go back to the drawing board, make smart choices to adjust your spending and create a sustainable budget. As a reward, be sure to include some “fun money” in your budget to use for entertainment and modest purchases.
3) Pay yourself first and establish an emergency fund. A rule of thumb is to save 10% to 15% of what you earn. In the process, you should set aside money for an emergency fund. That means stashing away three-to-six months’ worth of living expenses to have on hand if you face an emergency, such as a job loss or a big repair for your car. You can create a separate supplemental savings account specifically for your financial safety net.
4) Be a credit to yourself. It’s vital to establish good credit early in your career. With a lousy credit score, you pay more for loans and may be denied an apartment lease or job. So it’s best to use your credit card responsibly and sparingly – and pay your bills on time. Don’t fall into the habit of using your credit card for impulse buys and splurges that push you beyond your means. Avoid paying interest and late fees. Get into the habit, as soon as possible, of paying off your full credit card balance on time each month. See article in this issue on how paying the least amount on your credit card hurts your financial future.
5) Pay off student loans. In addition to tackling credit card debt, it’s vital to pay off your student loan debt as soon as you can. Missing a payment may ding your credit score. And it’s best not to shoulder student loan debt longer than you have to.
6) Start planning for retirement – really. The time to start socking money away for retirement is the day you start working. Use part of the 10% to 15% you save from each paycheck as a retirement fund. Investing early has a big long-term impact. When you are in your 20s, your money has decades to reap the benefits of compounding – where the interest you earn on your investment continues to grow at an accelerated rate. If your employer has a 401(k) sponsored retirement plan, participate as soon as you’re eligible. And be sure to contribute at least enough to qualify for the full amount of any employer match to the 401(k). That’s free money for you.
7) Insure yourself and your stuff. The number one cause of bankruptcy in America is unexpected medical emergencies. Make sure you have at least a catastrophic care insurance plan to avoid this, whether with your parents, your employer or on your own. Today’s health care law enables you to be covered on your family’s health insurance plan until you reach age 26 (and age 30 in some states). Car insurance is a must if you have a car and renter’s insurance will replace your belongings if they fall prey to fire, other causes of damage or theft.
8) Develop a Wealth 101 class for yourself. You probably had to work hard to earn your degree. Now, it’s time to master the real world topic of how best to handle your money and build wealth. Consider seeing a financial consultant. Some financial consultants, like those at Alliant, offer complimentary first consultations to new clients, making this an affordable option even for those young people just starting out on their financial journey. Take advantage of all the books, websites and blogs (such the Alliant Blog) created to help you achieve and maintain financial well-being.