Congratulations, class of 2013.
For those of you graduating from college and moving into the working world, here are 10 financial tips to get you started on the right track.
1. Start saving for retirement the moment you have an income. As soon as you land your first job, start contributing to your company retirement plan. Even if you can only afford $25, $50 or $75 a month, there are several benefits to starting right away. Most importantly, you're starting a behavior pattern. Beyond that, the benefits of compounding could turn your small monthly investment into a decent nest egg as time passes. Even if you put $50 a month into your plan during your first year of employment, that $600 in contributions alone could grow into $13,952.08 over 40 years.* And that's just the beginning. Plan to increase your contributions as you get older, but for now, contribute as much as you can as soon as you can.
2. Invest your savings in a way that takes into account the 40+ years you have between today and retirement. If you're a little nervous about investing, that's understandable. Risk is an inherent element of investing, so it's wise to be cautious. However, plunking your savings in a bank account or putting it all in conservative bonds -- and relying on that for retirement -- will let inflation eat away at the value of your money. Instead, devise a strategy incorporating several different types of investments that allows you to diversify in order to reduce risk. Now is the time to be more aggressive. You can gradually reduce the risk level of your investments as you approach retirement.
3. Create a budget and stick to it. You can use budgeting software or online programs to create a monthly budget, which makes it easier to track spending. Be sure to include all monthly expenses, and know that it's wise to save monthly for larger annual expenses. Learning to budget now will save you a lot of headaches as you get older and your finances become more complicated.
4. Pay down those student loans. If you have student loans (and most students do) pay them down at a rate faster than you're obligated. Putting extra money toward your student loans while you can, before you take on other large financial obligations, will be invaluable down the road.
5. Work two jobs while you're young and able. You may not be able to make the big bucks at your entry-level day job, but you can still try to get a part-time gig on nights or weekends to bring in extra income. As a recent graduate, you have more time and energy now than you will in later years, so take advantage of that!
6. Carefully consider any real estate purchases. Some of the 20- and 30-somethings who came before you were caught in a frenzy to buy real estate, and many ended up regretting that decision. Real estate can be an excellent investment, but you need to be sure you have a viable plan to cover common eventualities. You're young, and you never know when you'll decide to relocate to a new city, start a family or need to lower your monthly expenses. So, can the place be rented easily if you decide to move but you're unable to sell it? Can you accommodate roommates if you need a little help paying the mortgage?
7. Start saving an emergency fund now. As with retirement savings, you should begin building an emergency fund as soon as you have income. You can start by saving enough to cover your living expenses for one month and then gradually increase toward an amount that could sustain you for a year of unemployment if such an event occurs.
8. Adjust your standard of living. If your parents helped pay for college and living expenses - and maybe even more - you may be used to a relatively high standard of living. Once you're paying your own way without your parents' support, you may need to live in a cheaper house, take mass transit, cook more often and eat out less, buy fewer clothes and find other places to trim your lifestyle to help you focus on important financial goals.
9. Be strategic in your career choices. Avoid becoming a job hopper because it can become more and more difficult to find a job as time goes on. Though new graduates can't be too picky, you should ensure the job you accept is something you can stick with for at least two or three years. Most working adults have career paths that are constantly evolving, but most people don't change jobs every year.
10. Be informed. Focus on keeping up with a few reputable newspapers, news magazines and blogs that focus on financial planning. You don't have to spend hours each day. Just browse the financial news a few times per week so you're informed about major economic news and trends. Whether you're a self-planner or you enlist the help of a financial adviser, you'll feel more comfortable having a basic level of financial knowledge. After all, your finances are your livelihood, so pay attention.
*Calculation is for illustrative purposes only and assumes an 8% return/year (compounded monthly), 1 year of contributions - $50/mo, 39 additional years of growth after the year of contributions. Carefully consider the risks before investing in any security.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
- Personal Budgeting