Money. It’s a word that is bound to strike fear into any new college grad—especially one who has never really been on their own before. But with that hard-earned degree comes a whole new set of responsibilities. One of the most important things to tackle right away (aside from actually getting a real job!) is building a financial plan that helps you put the right foot forward from day one and can help keep you in the green straight through to retirement.
The great news is that now is the perfect time to start. You have time on your side, and by making smart decisions today you can build financial security with relative ease. Of course, that also means that poor decisions can make your financial future much more challenging than it needs to be. The key is to make a plan—and to stick to it. Here are five simple steps to begin building a lifetime of financial security:
- Make a budget. What you spend must equal less than what you earn. It’s that simple. Making that happen, however, takes some planning. A great place to start is with Dave Ramsey’s Monthly Cash Flow Plan. As you fill out your plan, it’s pretty likely that your three biggest expense categories are going to be housing, food, and transportation. Luckily, these are three areas that are in your control to keep pretty low. Just make choices that match your budget. When I started my first job, instead of renting a place by myself, I moved into a house with roommates. And instead of paying $800+/month for a tiny apartment, I paid $400/month to share an entire house. Not only did I save a bundle, but I also made some lifelong friends in the process. Plus, I saved on food costs by simply buying groceries and cooking for myself. Sure, it’s easier to grab Starbucks for breakfast, eat fast food for lunch, and head over to happy hour for dinner, but cooking your own meals can save you a ton. Don’t believe me? Read this great article from the Boston Globe to see the research. And when budgeting for transportation, don’t buy that shiny new car!! At least not until you can really afford it. I’m a financial planner, but you’d never know it from the truck I drive. That’s mine on the left. The truck on the right will stay right where it belongs—in my dreams—until my budget says it’s mine.
- Start building an emergency fund. Having a budget is great, but let’s face it: sometimes life happens. The first time you get in a fender bender (in your reliable old truck!), that $500 insurance deductible can put a major dent in your bank account. What you need is a real emergency fund (no, a credit card doesn’t count) to be sure you have cash on hand to cover true emergencies. Learn all about emergency funds in this great blog post from my buddy Jared Defore.
- Begin paying down debt. If you’re swimming in student loans, you’re not alone. According to the Consumer Financial Protection Bureau, 37% of Americans under age 40 are saddled with an average student loan debt of $40,000. If that’s not bad enough, navigating the maze of payment schedules can be deceiving, costing you even more money. Be sure you’re paying the most costly loans first, and use the snowball method to pay all your loans off as quickly as possible. And beware of grace periods! I have a good friend who opted to delay his first payment but didn’t realize that interest was accruing the whole time. It was a tough lesson, but it could have been even worse if he’d made the same mistake by paying the minimum amount due on his credit card at a much higher interest rate. Regardless of the type of debt, if you have it, do everything you can to get rid of it. This article from Money.com outlines five simple steps to start wiping out debt today.
- Get disability insurance. You’re young and healthy, so why do you need disability insurance? Because, again, life happens. According to the Social Security Administration, more than 1 in 4 twenty-somethings just like you will become disabled before they reach retirement age. When will that happen? No one knows. But this is exactly the time in your life when you don’t have excess savings to pay your bills if you do become disabled and can’t work. If you can get disability coverage—or DI—through work, do it. If your work doesn’t provide it, many professional organizations offer group plans to members (I have mine through the Financial Planning Association), or work with an insurance broker or financial advisor. To learn more about DI, check out this article from NerdWallet.
- Start saving for retirement now. Retirement probably seems like it’s a world away, and the good news is that it is! If you start saving and investing even a little bit now, you’ll be amazed at how fast your nest egg will grow—and how much you’ll have to help fund the retirement of your dreams. If you have access to a 401(k), contribute as much as you can and take full advantage of any employer match program. If you’re self-employed, open your own IRA. And if you have excess money in your budget at the end of the month, consider opening a Roth IRA (learn what makes a Roth IRA such a great savings tool in this recent Forbes article). A good rule of thumb for a recent college graduate is to save 10% of your total earnings (not your paycheck), but it’s always best to work with an advisor to be sure your plan is right for you.
You’ve finally tossed your cap in the air. Now it’s time to take this whole “adulting” thing seriously and align your money habits with your new financial reality. With some smart planning and wise decisions, your goals will be within reach before you know it.
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