From securing a job and addressing student loans to working toward being financially independent from their parents, college grads have no shortage of challenges.
It is more important than ever for new graduates to begin to lay a solid financial foundation for their future. The financial moves noted below may help new graduates get off to solid start.
Live below your means
When it comes to personal financial management, too often the goal is to avoid living above your means. Instead, the goal should be to live below your means.
This entails spending less than you bring in. While this may be easier said than done, college grads need to look at savings as any other expense. They should consider establishing small financial goals and build a budget geared toward their achievement.
Remember, financial discipline should be learned and practiced early in order to improve the chance of success — and budgeting is the cornerstone of this process.
Establish savings plan
Accumulating cash reserves for emergencies or funds for a first-time home purchase are often a focus for new graduates. When choosing where to establish a savings account, college graduates should consider avoiding banking institutions that charge fees for a debit card, checking account or money market account.
Young people often fail to read the fine print and learn later that they are paying significant fees which ultimately eat away at savings. As an alternative to the traditional brick and mortar bank, online banks or direct banks often provide higher rates of interest and lower fees than other institutions while still maintaining FDIC insurance. Consider visiting www.bankrate.com for a listing of the highest yielding, low-fee banks available for cash reserve purposes.
Address student loans
More and more students exit college with student loans. According to the Chronicle of Higher Education, of the nearly 20 million Americans attending college each year, close to 12 million, or 60 percent, borrow annually to help cover college costs. The cumulative effects of these high levels of borrowing have added up to nearly $1 trillion of student loan debt.
New graduates must have a game plan that addresses the payment of these loans. Attending an exit counseling session held by the financial aid office of the college or university can help. Graduates can discuss payment options and get questions answered so they have clarity on their responsibility after school.
Graduates should also assess the pros and cons of consolidating their debt. While consolidation can simplify the payment process by refinancing multiple loans into one, it could also have negative consequences such as extending the payment schedule, leading to higher overall costs. Consider visiting www.finaid.org for more information on financial aid and the payment process.
Building credit responsibly
Credit is an important tool that is often misused by college graduates. However, a lack of credit can hold graduates back from the accomplishment of goals, such as the eventual purchase of a home. For this reason, extra time and care needs to be spent on a responsible approach to building credit. One way to accomplish this is through the use of secured credit cards which require a deposit at the financial institution in the amount of the credit line they are extending. For example, a $500 deposit will be required in order to have a credit limit of $500. This can be an effective way of learning how to build credit responsibly.
However, be careful to only select cards with low fees and no other strings attached. Also visit www.bankrate.com for a list of secured and unsecured card offers.
Start retirement planning
Retirement is often the last thing a new graduate is thinking about. After all, they are just beginning their career. However, few workers today have the availability of a pension and will be forced to rely on their own savings in plans such as a 401(k).
If a new graduate is fortunate enough to have 401(k) plan that offers a match, they should be quick to take advantage. Remember, no matter how young you are, a match is still free money.
In addition, since those just starting their career are often in a lower tax bracket, college grads also may want to consider utilizing a Roth IRA. While you do not receive a tax deduction for the Roth contribution, the principal investment along with earnings can be withdrawn tax-free after 59½, assuming the IRA has been open for at least five years. In addition, with the availability of withdrawals of principal and a $10,000 first-time home purchase exemption, the Roth IRA may provide additional flexibility to younger workers who need to access their funds before retirement.
While there are numerous challenges that new graduates face, a disciplined financial game-plan can help to ensure that they stay on-track. Since everyone’s situation is unique, consider speaking to your tax, legal and financial adviser to determine the best approach for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner and Wealth Advisor. He can be reached for questions at (732) 280-7550 and kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.