4 Financial Tips for Recent Grads
by Angelo DeCandia
Congratulations! You’re out of school and hopefully, all that hard work has paid off with a job. But now there’s another set of challenges because that income needs to be managed. And the more there is, the more it needs managing. Here are a few suggestions to help you start off on the right foot:
1. Start a budget — if you haven’t already done so as a student, you must do it now. You want to know where your money goes. It’s something like dieting. If you know what you’re eating, you’ll think twice before putting it in your mouth. Maybe you’ll still eat it, but perhaps not as often. You’re in control and if you cut back a little, you still get to eat what you want and won’t feel like you’re being deprived. Your expenses work that way too. That $5 latte (with tip) every workday adds up to $5 x 20 = $100. Per month. Okay, maybe you can’t live without a latte every morning, but at least know what a chunk it’s taking out of your pocket. When you start thinking like this, you may be able to eliminate half or a quarter of the lattes, and it’ll be your choice. Once you get the hang of this it can be applied to dinners, clothes, music, tickets and just about any other non-essential expense you have. No one’s saying don’t enjoy life. Just do it with a little forethought.
2. Reduce unnecessary debt — there’s good debt (necessary) and bad debt (unnecessary). Obviously, student debt is the borrowing that helped you get an education and find a career (hopefully). If you are able to purchase a home at some point in the future, mortgage debt is good as well. But credit card debt has the potential to become bad debt, especially when used to fuel a consumer lifestyle beyond your means. However, credit card debt managed well will help you to establish your credit and boost your credit score. So be sure to pay those bills on time each month and don’t leave any balances.
3. Take the time to understand your medical insurance — yes we know, you’re twenty-something, never get sick and you’re pretty much invincible. But life has a way of somehow throwing us a curve ball and you should have the proper medical insurance for whatever may happen. Especially since the passage of the Affordable Care Act, knowing what care you may need will help you to decide what’s necessary without over-paying. Not to be a downer, but serious illness can be financially catastrophic and you must be prepared.
4. Sign up for 401k/403b/IRA deductions — the first things most college graduates say is “I can’t afford to save any money.” The truth is, however, they can’t afford not to. Remember that $100 a month in lattes? Here’s what it could produce if put to better use:
a. $100 per month invested at 6% over 40 years will produce at retirement almost $200,000 ($199,149)
b. That $100 per month ($1,200 per year) may earn a tax deduction. When you move into the 33% bracket, that’s $400 per tax savings. That means we ultimately only need to save $800. We can even enjoy a latte once in a while.
c. Under most 401k/403b plans your employer may match a certain percent of your savings. Every plan is different, every employer is different. What it means is that not only is Uncle Sam helping you to save, but so is your employer.
d. And of course we’re free to contribute more than $1,200 a month. (the actual limit is subject to tax law) Limits may change from year to year, but they are currently at $18,000 for those under the age of 50 and $24,000 for those over the age of 50. (Clearly the government is worried about our future, or at least the future of Social Security…)
As the singer John Legend sings, “The future started yesterday and we’re already late.”
Angelo DeCandia is professor of business at Touro College