By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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By now, the pomp and circumstance of college graduations – along with all the congratulatory dinners and parties – have started to fade and it’s time for graduates to start that steady march into adulthood. For many graduates this transition also marks a new phase of personal financial responsibility and can represent an intimidating reality of “adulting.” Although it makes for a popular expression, it’s probably not true that every decision a person makes in their 20s will have a lasting impact; there certainly are some decisions that will have bigger implications than others. Many of the more impactful decisions will center on making sound financial choices. Graduates are ready to march into the work force armed with knowledge ranging from computer science to psychology, but how many will possess the skillset to effectively manage their finances and create healthy savings habits?
Often, the biggest challenge with graduates is getting them to understand the importance of establishing sound financial and savings habits early in their working careers. Many graduates remember the often-meager financial resources they endured during their college days, so when they receive their first paycheck from an employer, it can feel like a windfall! But creating good personal finance and savings skills is a major part of “adulting” and can have significant long-term financial rewards. Although there’s never a shortage of financial advice floating around, below are hopefully a few simple and common-sense tips that might help graduates create a good financial foundation:
- Get into the budget habit – I’ve listed this strategy first because it can serve as the catalyst for developing a lifetime of good financial and savings habits. Until you have some knowledge and control over how much money is coming in and going out, it will be difficult to enact many effective financial strategies. According to a recent survey, a majority of Americans have no idea how much they’ve spent in the last month, including only 23% of Gen Z and 27% of Millennials. * The idea of creating a budget can be a scary thought, and often the biggest challenge for graduates is getting over the stigma of budgeting. Although there are many helpful examples of how to create a budget, many individuals new to the budgeting process have found the 50/30/20 approach to be simple and effective. Under this approach, individuals look to spend approximately 50% of income on needs (i.e., rent, groceries, etc.), another 30% of income on splurges (i.e. trips, takeout, etc.) and the remaining 20% of income goes to savings. Regardless of the approach implemented, think of a budget as a financial roadmap designed to guide your spending and saving habits so that you can obtain some of the things you want while also building a sound financial foundation.
- Start saving now and make it a priority – Creating a financial and savings budget is only the first step to creating a good financial foundation; often the more challenging part is executing it. According to another recent survey, half of Americans have less than $250 left over each month after accounting for all or their expenses, and 12% have nothing at all. ** No matter the size of your income, chances are you can afford to save something. The amount of the savings is less important than building the discipline of saving. Many financial planning experts suggest setting a goal of saving between three to six months of living expenses as an emergency fund in the event of unexpected financial turbulence, such as significant car repairs or job loss.
Additionally, graduates who have access to an employer-sponsored retirement plan, like a 401(k), should strongly consider participating to take advantage of the compounding returns and tax benefits. This may be a difficult concept for many new college graduates to grasp, as many may feel they have plenty of time before they need to consider this issue. But retirement programs, like 401(k)s, provide a simplistic and systematic way to implement a savings strategy since employee contributions are deducted directly from the paycheck. For those graduates that don’t have access to an employer-sponsored retirement plan, saving through an IRA (traditional or Roth) can also provide a retirement savings vehicle that benefits from compounding interest and tax advantages.
- Build a strong credit history – It’s important for graduates to be mindful of their credit score and credit history. Like the other financial foundation concepts mentioned previously, a graduate’s credit score will be one of the most important components of their financial foundation (either positively or negatively) going forward. It will impact items including approval for a car loan and home mortgage, as well as the interest rate attached to these or other types of loans. Graduates should be diligent in paying their bills on time to build a strong credit score and keep a good credit history. They should also remember to periodically review their credit score to ensure its accuracy and can request a copy of their credit report through a number of free services (i.e. Experian, Money Tips, etc.).
Entering the “real world” as a graduate can be both overwhelming and exciting, but you can set yourself up for a strong financial foundation by learning and implementing some very basic financial strategies now.
Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.
*Intuit. “Survey: 65% of Americans Have No Idea How Much They Spent Last Month”
**The Balance, “Survey: Half of Americans Don’t Have $250 to Spare”