With many graduates facing a new world right now, I often get asked “what are some things that will start a young person off on the right foot financially?”
If you are graduating from high school, you may be planning on working or starting college.
If you are beginning college, realize that what you do next can alter the next 30 odd years of your life — no pressure.
I am not talking merely about the major you choose (according to 2013 statistics, only 27 percent of college graduates work in a field close to or in their major) but about the expenses you incur.
The average 2015 college graduate is burdened with $35,000 in student loan debt, making the Class of 2015 the most indebted graduates ever. Finding ways to limit that while in college is a tremendous way to start out on the right foot.
Even if it means working, living at home or not going to the most expensive school of your dreams, a lower debt load will make the financial path after college much easier. Consider that $35,000 is easily a year or two in rent, a house down payment or two nice cars.
My suggestion to those graduating with large debt loads is to organize and identify your debt. Write down amounts, the date loans are due, to whom and the interest rate. Knowing what you have to tackle is a large part of putting a plan into place.
Money will usually be tight when you are starting out so plan how to make the first payment on each of your loans. Covering a large debt may require help. This could mean living with family, having several roommates or commuting on a bike or public transport rather than your own car.
The key is to realize the debt is there and it’s real. Try to pay more than the minimum on the loans so you can get the monkey off your back earlier. What if your income doesn’t provide sufficient excess to cover your loan payments? Call your lenders, as there are programs available to extend the terms of the loan and thus lower payments.
This is not something to pursue if it is not a case of extenuating circumstances. Extending the term of the loans leaves you in debt longer and increases the interest you pay for the life of the loan.
After graduating, something that people of all ages forget is to set aside emergency savings. When you get your first job, try to put a little away in a savings account or money market. The general rule is to keep three to six months of expenses in an easily accessible place where you can get at it without penalty.
The easiest way to do this is also the best way to put any money away: make it happen automatically. Technology has made the process for moving money easy so make sure that a portion of your monthly income goes into an emergency savings and it begins to build. You never know when an emergency will hit. That’s why having this set aside throughout your life is an excellent way to avoid building up high-interest credit card debt in an emergency.
Congratulations, you have your first real job in a career you love. One of the first things they give you on day one is a benefits package with information about the retirement plan or 401k. With everything else that you have to deal with on your first day, you decide it can wait.
When it comes to saving, don’t wait until later. This is particularly true if your employer is generous enough to provide a match. Starting young in saving for retirement will pay huge, compounded dividends.
For instance, if you start at age 24 investing $100 a month for ten years into a retirement account and the investment returned 8 percent, you would have $201,399 at age 64.
Now, suppose you waited ten years, and at age 34, you begin putting $100 per month into the same retirement account with a return of 8 percent but continued putting the $100 away until you retired (30 years later). At age 64, you would have $150,303. In the first scenario, you only invested $12,000 and in the second you invested $36,000.
The power of time can make a large difference in your later retirement. It may seem too far away to worry about it, but actual time until retirement is the key.
Also, given the length of time until retirement and starting wages, the Roth IRA option inside a retirement account can be very advantageous for a person just starting out.
Sometimes it is a stretch to reach these objectives; however, taking small steps and building your finances each year is a worthwhile goal.
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