Congratulations! You just graduated from college! As you head out into the world you will be faced with many new challenges. The next few years will be an exciting adventure as you figure out what you want to do with your life. One of the best decisions you can make as a young college graduate is to begin thinking about your future financial success. As you head out into the world you’ll face a variety of financial decisions and the choices you make today, like setting up a 401(k) or buying a new car, will have an impact on your path toward financial success.
A great way to make sure you are on the right path is to be proactive with financial decisions. Creating and sticking to your financial plan will give you a good shot at achieving your financial goals. Below are five financial planning tips that will help new college graduates plan for their future.
#1 Build Out A Budget
If you were asked how much money you spent last month would you be able to answer? Would that answer be accurate down to the dollar? Many young people have never thought about their spending habits or built out a monthly budget before and that is a problem for long-term financial planning. What is a budget? A financial budget is a spending plan that is based on your income and expenses. In other words, a budget plan is an estimate of how much money you will make and spend throughout a certain period of time. A properly built budget is the foundation for successful money management. Before you can implement any other finance strategies you must first have an understanding of how much money you earn and spend. The good news is that it isn’t very difficult to become a budget planner.
Creating a budget is fairly simple. First, figure out your total monthly income, including all secondary sources of revenue. Then calculate your monthly expenses, including fixed and variable expenses. Fixed expenses include things that do not change from month to month like rent payments, student loan payments, and your cell phone bill. Variable expenses are the bills that you know you will have to pay each month like groceries, gas, and electricity that change slightly each month. Once you have an idea of what your income and expenses are deduct your expenses from your income. This will show you how much excess money you are left with each month to save, spend, or invest in other things. A general rule of thumb for a good monthly budget template is the 50/30/20 strategy. 50% of your budget should be spent on essentials like food, rent, and insurance. 30% of your budget can be spent on nonessential, variable expenses like travel, shopping, eating out, and leisure. Finally, 20% of your paycheck should be put towards savings, investments, retirement, and an emergency fund. Now, it is easier than ever to keep track of your budget with a budget calculator or another budget app that accurately calculates a budget for you.
#2 Create Your Plan To Pay Off Your Student Loan Debt
Once you have an understanding of what your budget is, the next step for financial planning for your future is to create a financial plan to pay off your student loan debt. Do you know how much you owe on your student loans? According to the Education Data Initiative, the mean average student loan debt for the past decade is $30,000, but the average student loan debt has been increasing over time. There are two types of student loans and each has different properties and considerations to keep in mind when planning to pay off your student loans. The two types of loans are:
- Federal Student Loans- Most federal loans do not require a co-signer or a good credit score. Nearly every student that graduates from high school is eligible to receive federal loans. There are certain situations due to your job or other circumstance where you can qualify for federal student loan forgiveness.
- Private Student Loans- Private loans are given out by a third-party lender. When you apply for a private loan, the lender will usually require proof that you will be able to repay it so they will typically require a good credit score and a co-signer. The most common lenders of private loans are banks, credit unions, or online lenders.
When making a plan for making student loan payments it is important to understand how much you owe in total and what your monthly payments are. Knowing this information, use your budget to determine how much of your monthly income is going towards repaying your student loans.
#3 It’s Never Too Early To Start Saving For Retirement!
Thinking about retiring can be a daunting task, after all, you just recently graduated from school. However, it is important to start thinking ahead and actively saving for retirement. Even though it can be tempting to wait until you are more established to start planning for retirement, the difference between starting at age 22 versus 32 is dramatic and proves that the earlier you can start contributing to retirement plans the better off you will be in the long run. As an example to illustrate just how much of a difference starting at 22 is compared to starting at 32, if you start investing $5,000 annually at 22 you will have almost double the amount of money saved at the age of 67 compared to if you invested the same amount annually starting at 32.
Now that you have an idea of how impactful retirement planning is right out of college you are might be asking, “How much do I need to retire?” There is no one-size-fits-all answer to how much money you need to save to retire but a popular rule of thumb is to aim to save 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. You can also use an online retirement calculator to get an estimate of how much money you should aim to save for retirement. A good way to make progress towards your retirement goals is to take advantage of a 401(k) match program if your company offers it. A match program means that your company will make a matching contribution to your 401(k) up to a certain percentage.
#4 Focus On Building Your Credit Score
The next consideration to make when planning for financial success is to start focusing on building your credit score. What is a credit score? What is a good credit score? A credit score is a numerical rating that financial institutions use to determine how likely you are to pay off debts. There are two models used to determine a credit score, FICO and Vantage, but the FICO credit score is most commonly used. Your credit score is calculated based on your payment history, amounts owed, length of credit history, new credit, and credit mix. The credit score range is from 300-850 with 580-669 considered fair, 670-739 considered good, 740-799 considered very good, and above 800 considered excellent. The average credit score in the United States is 698. A good credit score is essential for many different reasons and can affect your ability to qualify for loans, secure lower interest rates, and get better credit card offers. There are many ways to build your credit score, the most popular being making bill payments on time. There are three major credit bureaus, TransUnion, Equifax, and Experian, and you are eligible for one free credit score report from each credit bureau per year. It is important to keep an eye on your credit score and check to see if your financial plan is helping you build your credit score.
#5 Find A Source For Trusted Financial Advice
Navigating the world after graduating is tough as it is, but the prospect of financial planning can be overwhelming for many young people. Still, it is very important to get a head start on planning for your financial success, that is why it is important to make sure that you have a trusted source looking out for you, and that you can turn to for questions. There are some resources online for new college graduates but everyone’s circumstances are unique and it can often feel like you are trying to fit a square peg into a round hole. Many new employees find it beneficial to seek professional financial services from a trusted strategist. If you are seeking the services of a financial professional it is important to have a clear understanding of how they can help you. We have put together a list of questions that new graduates can ask financial planners and investment strategists to make sure that they are a good fit for you and that you get a better understanding of the benefits of working with them.
- “Is it important to invest early on? Why?”
- “I want to start investing but I don’t have the funds to do so, what’s the best way to start saving my money to that I can one day invest?”
- “What system should I have in place to pay off my student loans in the most effective way possible?”
- “What’s the benefit of having a financial professional if I can simply invest money on my own?”
- “Is having a financial professional expensive? And how much money do I need to have saved to consult one?”
Benefit & Financial Strategies is a comprehensive firm offering business continuity planning, employee benefits, estate analysis, health and medical plans, investment strategies, life insurance planning, and retirement planning. We are dedicated to offering unbiased, objective advice based on sound, up-to-date research. You don’t have to be an established business person to see the benefits our services can provide. We can work with a new graduate who is just starting their careers to come up with a financial plan.
Time To Start Planning For Your Future
Graduating from college and starting a career is an exciting time in every young professional’s life. However, for many young employees, it can be hard to see the big picture when it comes to financial planning and they don’t stop and think about the benefits of creating a long-term financial plan and getting a head start on their investment and retirement planning. Benefit & Financial Strategies has a team with decades of experience and education in many areas of finance and insurance, offering you the opportunity to find a certified financial planner that matches your personal finances, needs, and goals.