By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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For many new college graduates, the anticipation of receiving a steady paycheck can be just as exciting as receiving the actual college degree. This is a big step for most graduates, marking their official transition into adulthood. However, this monumental period in the lives of new college graduates can also present challenges as they attempt to develop the skillset to effectively manage their finances and create healthy savings habits.
Establishing and maintaining sound personal finance strategies is a major part of “adulting” and can be beneficial in helping new graduates launch their financial futures. Although the amount of financial advice offered by “experts” can often seem overwhelming, below are a few simple and common-sense tips that might help graduates create a good financial foundation:
1. Incorporate budgeting into your financial habits – This is probably the cornerstone to developing healthy and effective financial skills for most new college graduates. Until you have some knowledge and control of how much money is coming in and going out, it will be difficult to truly manage your financial affairs. Unfortunately, the idea of budgeting is a difficult concept for many people to embrace because it’s associated with depriving yourself of something; similar to dieting or fasting. Per 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 simply getting over the stigma of budgeting. Perhaps the biggest challenge for many graduates is falling victim to “lifestyle inflation” and feeling the urge to buy everything all at once because they’re finally earning some income. Instead of associating budgeting with restricting yourself, it may help to think of a budget as a financial roadmap designed to guide spending and saving habits so that you can do some of the fun things you want while also building a sound financial foundation.
2. Become a consistent saver – Another key component for new college graduates is becoming a consistent and serial saver. 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 and six months of living expenses as an emergency fund in the event of unexpected financial turbulence, such as car repairs or job loss. And similar to budgeting, good savings habits don’t always have to be tied to only preparing for emergency expenses, but can also be associated with fun goals like a new laptop or a vacation trip.
Adding to the consistent saver theme, 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 focus on retirement savings. But retirement programs like 401(k)s provide a seamless and systematic way to save, as employee contributions are deducted directly from their paycheck. Additionally, some employers will offer a matching or profit-sharing contribution that can boost the overall savings potential. For those graduates who 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 tax deferral and other tax advantages.
3. Protect your credit history – It’s important for graduates to be mindful of their credit score and credit history. A graduate’s credit score will be one of the most important components of their financial foundation going forward (either positively or negatively). It can impact a range of key items, including approval for a car loan or 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. Considering strategies to ensure timely payment, such as auto-pay services or calendar alerts for key bills can be helpful. New graduates will also need to be diligent in factoring student loan repayments in not only developing their spending budget, but also in protecting their credit score and history. Lastly, graduates should be mindful to periodically review their credit score to ensure its accuracy. A copy of their credit report can be requested through a number of free services, including Experian and Money Tips.
As new college graduates make the transition from students to working adults, implementing some of these strategies can help them jumpstart their financial futures and contribute to a strong financial foundation.
*Intuit. “Survey: 65% of Americans Have No Idea How Much They Spent Last Month”
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.