3 Personal Finance Tips for College Grads
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Walking across the stage to get your college diploma might be the proudest moment of your life, but it's also just the beginning of your adult life. Tripping up financially might not be as initially embarrassing as stumbling on stage, but it can be more devastating long-term. Having a plan for how you're going to manage your finances can turn your money into an ally.
Taking control of your finances can open almost as many doors as your diploma.
Preparing for Financial Success
Before you can be successful in building wealth, your first order of business after graduation should be to create a budget, according to Tim Massie, a certified financial planner based in Vancouver and Spokane, Washington. "I've found there is an unmistakable direct relationship between how well people are doing financially and how diligent they are with maintaining a regular budget system and process," says Massie. Your money will go somewhere, and if you don't have a plan for it, you can find yourself wondering where it all went.
Tip 1: Don't Spend Money You Don't Have
After graduation, replacing your tuition costs with a paying job can make you feel like the sultan of Brunei because you're taking out a five-figure expense and replacing it with a new salary. However, Massie cautions not to spend money that you're "going" to be making, as he's seen it trip up countless grads. He says, "A new business wardrobe may feel necessary, but buy it and other items over time with actual earned income." Taking on consumer debt can hamstring your financial freedom later on.
Tip 2: Build an Emergency Fund
Regardless of how secure you feel at your first job, it's wise to start building up a rainy day fund as soon as you can in case hard times come, whether that's a job loss, illness or other unexpected financial emergency. Different financial planners offer different suggestions on how many months of expenses you should stash, ranging from three months to a full year. It might seem like a daunting goal, but once you've accomplished it you'll sleep better at night. When you're stashing away the money, make sure it's somewhere safe, such as a savings account or money market deposit account at bank protected by the Federal Deposit Insurance Corp. That way, even if the bank goes under, you'll still get your money back.
Tip 3: Save for Retirement
Retirement? You want to talk about retirement? You bet. When you start your first job, the end of the workday might seem an eternity away, much less your retirement years. However, starting your retirement savings early can mean big benefits over time. "If you start out deferring income right away, you will be used to the paycheck you receive," Massie says. "The power of compounding will reward even the smaller amount you can defer while you are young." Compounding refers to how the returns you earn on your investments earn additional returns the the following year. For example, if you invest $1,000 this year and it grows by 10 percent, you have $1,100 invested the following year.
Using either an individual retirement account or an employer's plan, like a 401(k) or 403(b), allows your money to compound tax-free in the account. Plus, if you use a Roth IRA account, the earnings will come out tax-free at retirement. Massie says, "Ask any older person at your first job what they think. I'll bet they insist you start today and not make the mistake they did by waiting!"