Top Tips for New Grads
Graduating from a university can be an invigorating yet overwhelming transition, and understandably so. In those four years of college, students experience so many “firsts” – living on their own, learning in a classroom with 100+ other students, and personal self among other things. The uncertainty of how your life will change post-graduation, especially your financial situation (student loans, a new salary, etc.), can be unnerving to say the least. To help calm these nerves, we offer a few tips for graduates in the hopes that we think can help set the tone for advantageous financial habits now and down the road.
TIP #1: Be Intentional About Saving for Retirement
Take advantage of your company’s retirement plans
If your employer offers a 401(k) plan, or an equivalent plan that allows your savings to grow tax-free until you withdraw the money at retirement, contribute as much as you can – or at least enough to get the maximum employer match now, and then increase your contributions as you become more comfortable. Otherwise, you’re essentially leaving free money on the table and giving yourself a pay cut.
Additionally, it’s best to start contributing the moment you are eligible to participate in the employer-provided plan. Your age is your superpower! The younger you are when you start, the more time you’ll have to maximize the power of compound interest – when the interest you’ve earned starts earning interest itself.
Utilize individual retirement accounts like IRAs and Roth IRAs
First, let’s review the rules and definition for each of these types of accounts…
Traditional IRA: A retirement account that is funded with pre-tax income; the funds are taxed when you withdraw them from your account. While it may seem like a lifetime away for a college grad, there are two prevalent age-related rules to be aware of for this type of account:
- 59 ½ – The age you can withdraw funds without an early withdrawal penalty tax.
- 72 – The age you must begin taking withdrawals from the account, otherwise known as required minimum distributions (RMDs). Once you reach the year in which you turn 72 you are no longer eligible to make contributions.
Roth IRA: A retirement account that is funded with after-tax income; future qualified withdrawals are tax-free. Unlike a traditional IRA, there is no age limit for contributions and there are no required minimum distributions. These saving vehicles make the most sense if you expect your tax rate in retirement to be higher than your current tax rate.
There are considerable withdrawal exceptions that are specific to Roth IRAs, including the ability to tap into the earnings tax- and penalty-free if the funds are used to purchase your first home in an amount up to $10,000.
It’s also important to know that there is no minimum age limit for traditional or Roth IRA contributions, but you must have earned income in an amount that equals or exceeds the amount of your contribution. Between your traditional IRA and Roth IRA accounts, you can contribute up to a combined total of $6,000 per year (for individuals under 50 in the 2021 tax year).
When it comes to your risk level, invest with retirement in mind
As you start to invest your money, it’s important to be mindful of the level of risk you are willing to take (your risk tolerance). Risk tolerance is the amount of market risk, such as volatility (aka the market’s ups and downs), that an investor can stomach. If you are willing to take more risk for a potentially higher return, you are a “risk tolerant” investor. If you prefer not to take a risk over a certain threshold, even at the expense of losing out on potentially higher returns, you are a more “risk averse” investor.
When you graduate from college and you’re in your 20s, you have a long investment horizon. In other words, you have more time to handle the ups and downs of the market and, to the extent that you’re willing to accept the risk, it’s beneficial to invest more aggressively – this means building your portfolio to include a high percentage of stocks (more volatile)/low percentage of bonds (less volatile) so that you can capitalize on a higher potential return.
The standard portfolio model that Yeske Buie uses for recent graduates in their 20s is either 100% stocks/0% bonds, or 90% stocks/10% bonds. Once the years go by and you get closer to retirement, you can gradually move more of your assets into less volatile investments like bonds (e.g., 80% stocks/20% bonds).
TIP #2: Establish Your Credit
While the burden of potential student loans and credit card debt can feel overwhelming, it’s also an opportunity to help you establish good credit habits. For example, paying off debt diligently and as soon as possible, and focusing on the loans with the highest interest rates first are good practices. This not only helps to build your credit score, but it will also free up funds to put towards larger financial obligations that you may encounter (like an unexpected move or medical expenses), or that you want to work towards (like a vacation, home, or a new car).
Use it wisely
Other methods that can be utilized to build a positive payment history include:
- Paying your bills on time (monthly car payments, rent and utilities, etc.)
- Carry credit card balances responsibly
- Borrow only what you can afford to pay back
- Be careful about opening credit cards – every time you open a new account, your credit score takes a hit; do your research when considering your options (for example, look for one with low interest rates and an advantageous rewards program)
Monitor your profile
It’s a good habit to check your credit reports at least once a year: the shocking and unfortunate reality is that some of the most prone individuals that fall victim to identity theft are college students (since they normally have a substantial online profile). Everyone is entitled to request a free copy of their credit report once every 12 months from each of the three nationwide consumer companies.
For additional protection, consider purchasing a membership with an identity theft protection company. We’ve partnered with IdentityForce to provide discounts on memberships which provide access to ongoing credit and banking monitoring, rapid alerts, and recovery services to help protect against identity theft.
TIP #3: Set Money Aside to Build Your Savings and Emergency Fund
Start Saving Today
As is the same recommendation for funding your retirement plans, starting to save now is much more beneficial than not saving anything – start small and save often. It can also be helpful to establish clear savings and financial goals (daily, monthly, annually) to help you meet your immediate and future wants and needs. For example, you may choose to set a goal to have at least three to six months’ worth of expenses in savings for emergencies.
The guidelines for how much to save each month are wide-ranging and dependent on your current situation, but a good starting point for college graduates is to aim to save at least 10% of your income. And to make saving a little easier, consider putting it on autopilot! Setting up payroll deductions, automatic transfers from your bank account into your savings account, or even throwing extra change in a jar can take away the temptation to spend rather than save.
TIP #4: Create a Budget and Stick to It
Knowledge is Power
Learning to budget as a recent graduate going into the “real world” will be an imperative skill (and save you a lot of headaches) as you get older and your finances become more complicated. Spending time early on to create a personal budget and keep track of it on a consistent basis will help you to stay organized and motivate you to save more. Mint is a well-known app you can use to track your expenses and create/manage a plan for your budget.
Focus on Minimizing Your Biggest Expenses
The expenses that come with your new lifestyle, such as the cost of commuting, housing, and entertainment, can often come as a shock the first months and years post-college. When it comes to housing, it is important to consider your options and their respective costs, and to compare the pros and cons of renting vs. buying vs. living at home.
Related to commuting expenses, these are often overlooked and yet also inevitable and can add up fairly quickly. The good news is that there are a number of potential options to reduce transportation costs, including Uber/Lyft, public transportation, or carpooling with roommates or coworkers. Some employers also offer pre-tax transit commuting and parking benefits (up to $270/month for qualified parking expenses, and up to another $270/month for qualified commuting expenses in 2021).
We hope you have found these tips helpful, and we would love to meet with you to discuss other helpful tips in more detail, and review policy-based recommendations for the months and years following graduation. Whether you have already graduated or are preparing to graduate in the upcoming years, we look forward to working with you to establish a framework for thinking about the kinds of personal finance decisions you’ll be facing in this exciting next-chapter of your life.