Monthly cash flow is king. Developing both short-term and long-term strategies within that balance will develop money habits that can lead to long-term success in life.
Budgeting software can be very helpful. But as with retirement calculators, budgeting tools are only as accurate as the inputs and assumptions you plug in.
It’s never too early to start saving for retirement.
As the old saying goes: “Give a hungry person a fish and you’ll feed them for a day. Teach them how to fish and you’ll feed them for a lifetime.”
Recent grads are transitioning from student life to the workforce, from being focused on their education to focusing on their careers. Every student’s financial situation is different. Here are some tips that young people can use to get their financial lives off to a great start.
The facts are frightening:
For today’s college grads, average student debt is almost $40,000.
Too many people are on the path to running out of money well before they die.
More than half of U.S. adults (including the wealthy) don’t have up-to-date financial, estate and gift plans to protect themselves and their families.
This lack of financial knowledge places a HUGE amount of pressure on the individual, their families and friends, employers, nonprofits; as well as on the ultimate safety net of the state and federal government.
Don't let you or your loved ones become one of these alarming statistics! Here are seven fundamental financial tips to help the recent grads in your life get off to a good start:
1. Create a “grown up” budget. One of the most important transitions for most new college graduates is taking responsibility for their finances—all their finances. With the financial freedom of a new job, it may seem they don’t need to manage their money. But with new expenses, such as rent, utilities and car payments, plus your student loan bills, it can be easy to overspend. A good budget not only gives them a snapshot of income versus regular bills--it provides peace of mind knowing when they can afford a night out or an impulse buy. Software programs such as Mint or You Need a Budget can be a big help.
NOTE: Like the retirement calculators you see online—budgeting tools are only as good as the information and assumptions plugged into them. Encourage the young adults in your life to consult with a qualified financial advisor to help them plug in the right inputs and assumptions.
2. Deal with your debt. Whether it is from student loans or credit cards, it is important to focus on reducing your debt. Graduating with debt can be debilitating, but having a plan to pay off debt can help grads get back in control of their finances. Focus on paying off debt with higher interest rates first, like credit cards. When possible, make extra payments. Paying off debt early will lower interest charges and can save money over the life of the loan.
3. Retirement planning starts now. It may seem odd to think about retirement when you are just starting out in the workforce, but in many ways, the first contributions are the most important. Encourage new grads to take advantage of their employer’s 401(k) as soon as they are eligible. Waiting just one year to contribute to your 401(k) could lower the retirement nest egg by up to $100,000. Waiting 10 years could drop their 401(k) by half.
4. Save for emergencies. While often neglected, planning for emergencies should be a priority. Having an emergency fund can help with anything from an unexpected car repair to high medical bills to major household repair to job loss. Always keep three to six months’ worth of normal living expenses on hand. Creating an emergency fund is as simple as setting up a direct deposit from one’s paycheck to a savings account.
5. Upgrade your accounts. Graduation is a good time to reevaluate your bank and credit card accounts. As young adults join the workforce and become responsible renters or homeowners, financial needs will change—A LOT! The checking account they were eligible for as a student may not provide the flexibility or benefits they need now. Check what other account options the bank offers. Be sure to shop around to make sure they have the right accounts, and the right bank, for their new financial situation.
6. Upgrade credit cards. Used correctly, credit cards are an essential tool to establish good credit history. Good credit can lower the interest rate on auto loans and home loans. The credit cards that students are eligible for are generally entry-level cards that have a higher interest rate and fewer rewards and benefits. New grads should look for credit cards that give the most rewards for their normal spending habits and financial goals. If they think they may occasionally carry a balance, they should look for a card with a low interest rate. If their goal is to travel, look for a card that offers plenty of mileage rewards.
7. Hire a financial planner/mentor. New grads might not think they have enough income or assets to use a professional financial advisor, but they’d be surprised to see what they own, what they owe and what they’ll need going forward. Among other things, a planner can help them decide whether to consolidate student loans, whether to save for retirement using a Roth 401(k) or traditional 401(k), how to invest their money, how much life insurance to buy, and so much more.
Note to parents and grandparents: A great graduation gift would be a one or two-hour consultation with a qualified and competent financial planner.
Life is full of transitions. Some will be good, others will be a challenge. Having a network of family, friends and financial advisors in your corner will make it substantially easier for new grads to roll with the punches and adjust to their ever-changing life circumstances. As always, I’m here to help if you have concerns about your tuition financial plans.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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