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By Suze Orman
Earning a bachelor’s degree, or an associate’s degree, is a major accomplishment in itself. If you’re not heading directly to graduate school—please read this first if you are thinking about grad school —you’re about to launch into full on adulthood. Congrats on the degree, and welcome to being the boss of your future!
But I have to tell you, I am a little bit worried too. My experience is that so many young adults haven’t been schooled in how to nail the key financial moves that are necessary to build security. Too often that leads to a lot of frustration, and financial hardship down the line, when the bill for costly money mistakes comes due. That’s not going to be you. All you need to do is follow my advice.
If you are the parent, aunt, uncle, or good friend of a recent college grad I hope you will share this with them. It’s a free graduation gift that can deliver the huge payoff of financial security gained from smart moves, not costly bad experiences.
Best Financial Decisions You Can Make…Starting Today
What I mean by living “below your means” is to make lifestyle choices that leave you with enough money to start saving money from the get-go. When you live below your means you give yourself the breathing room today to build savings that will help you take care of future you. The money you tuck into an emergency savings account today is the money that helps you avoid putting an emergency expense two years from now on a high-rate credit card. The dollars you start to save in a retirement account today will take the fullest advantage of compound growth, which is really the secret sauce to long-term investing.
The challenge is to make living below your means a habit that becomes second nature. To start building that habit, try to always challenge yourself to see if you can pay less when you are considering a purchase or big-ticket decision.
It’s the decision when you are ready to move out on your own to choose roommates to split costs, rather than a place of your own. It’s choosing a neighborhood that might be 15 minutes away from your dream spot, so the rent will be lower. It’s buying the used car that meets your needs, rather than the new car you want. Better yet, it’s considering whether you need to own a car at all, or can do just fine with public transportation and the occasional rental.
We all know, stuff happens. Expensive, unexpected stuff. If you forced me to pick just one piece of advice to launch yourself, I would tell you to start building a savings account to cover these surprise/emergency expenses. It gives you peace of mind that you are prepared for the “what ifs” that have a nasty habit of cropping without any warning.
Sign up for the Ultimate Opportunity Savings Account to help you reach your emergency savings goal.
Okay, so how much should you have in your emergency savings account? I want you to get to where you have one year of living expenses saved up. Don’t worry, I know that’s not going to happen this year, and maybe not for a few years. The point is to work toward that goal, so you eventually have that big cushion to weather whatever comes your way.
The last step with this goal is to celebrate each month the progress you have made. Each month your savings account keeps growing is a win. You are quite literally on the road to financial freedom. And when we celebrate along the way, it keeps us motivated to continue working toward the end goal.
This is non-negotiable. You must have health insurance. Most employer-based health plans allow children up to the age of 26 to stay on a parent’s plan. If your parents offer this up, please check that it will indeed cover you; especially if you live in another state.
And I still want you to consider having your own coverage. Even if your employer doesn’t offer coverage (or you are starting out with gig work), everyone can qualify for coverage through the Affordable Care Act marketplace, and there’s a very high likelihood you will qualify for subsidies that will pay for the bulk of your monthly premiums.
If you do decide to stay on a parent’s plan, I want you to cover a share of the monthly premium your parent pays. Doesn’t matter if they don’t need the money. You need to stand tall as an adult.
Speaking of parents, I know many of you will choose to live with a parent()s after graduation. That is fantastic. But the minute you have a job I am going to insist that you contribute in some way to the family expenses. Your parents don’t need your help? Again, this isn’t about them. This is about you being an adult. Tell them this is important to you, and you want to agree on a monthly payment. Up to you to decide how much.
And then you will automate that transfer to a parent(s) checking account each month. Because on-time payments are a crucial habit to build.
Honestly, Gen Z already seems to know this. Younger adults are not eager to have credit cards. Amen. It is so smart to use a debit card tied to a checking account. The big upside of a debit card is that it keeps your spending limited to the cash you have in your checking account. That’s protection against overspending.
Yep, you read that right. As much as I love debit cards for everyday spending, I also want you to have a credit card. The way the credit scoring system works these days, having a credit card that you pay off in full each month is going to be a big help in building a strong FICO credit score. It makes no sense, but being a responsible spender who uses a debit card doesn’t help build a credit score.
The key is to just use a credit card for one or two recurring monthly charges, such as a streaming service or your rideshare account. Then log on to your online credit card account and set up automatic bill pay. This will enable the card issuer to pull payment from your checking account, so you are never late with a payment. That’s literally all it takes to give a big boost to building your credit score.
I imagine this sounds sort of ridiculous, given you’ve barely started working full time. Just hear me out. The earlier you start saving for retirement, the more time you will give your money to grow.
Save $5,000 a year starting at age 25, and you will have more than $820,000 by age 65 assuming a 6% annualized rate of return. Over those 40 years you saved $200,000 of your own money. The rest was compound grow.
If you wait until age 40 to start saving and you will have less than $300,000 if you save $5,000 each year. To end up with the same $820,000 or so you would need to save more than $14,000 a year from age 40 to 65. That works out to needing to save at least $350,000 of your own money during that 25-year stretch, which by my math is a whole lot more than the $200,000 needed if you start at age 25.
If you have a workplace retirement plan that offers you a matching contribution, be sure that you are contributing at least enough to earn the maximum matching contribution. And if your workplace plan allows you to do your saving in a Roth account, go for it! No workplace plan? I’ve got you covered. This article tells you all you need to know about Roth IRAS.
And lastly, if you want to get an easy-to-follow customized action plan that highlights what your next financial steps need to be, you can get it here for free.
Alliant has partnered with Suze Orman to offer a high-rate savings account and bonus for new members. Start your savings journey today!
Check out these other blog articles from Suze Orman
Suze Orman is the author of 10 consecutive New York Times bestsellers, a two-time Emmy award winner, and your go-to for honest answers on everything finance. She is the most recognized personal finance expert in America today and host of the Women & Money (and Everyone Smart Enough to Listen) podcast. Suze is excited to be a contributor for Money Mentor.
Suze and Alliant teamed up to help Alliant members make the most of their life by teaching them to make the most of their money. New Alliant members are also eligible for The Ultimate Opportunity Savings Account.
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