After years of work, you’ve finally received your diploma and you’re ready to head out into the work force. Once you have that first job, you’ll need to start laying the foundations for a healthy financial life. The decisions you make now could lead to a lifetime of financial health or years of struggle. Here’s what you need to know about saving for retirement, paying off your student loans and building a good credit history.
Start Saving for Retirement Right Away
When you get your first job right out of college, saving for retirement might not seem like a priority. Retirement is decades away; if you’re like most young people, you can’t even imagine ever being so old. But with any luck, you will be, so it’s important to begin saving money for your old age as soon as you have money coming in.
Like many new college grads, you might be tempted to put off starting your retirement fund until you’re making more money and you’re more financially stable. Don’t be. The sooner you start investing for your retirement, the longer your money has to grow. If you start saving when you’re in your 20s, you’ll be able to get away with putting aside less money from each paycheck and still end up with more money in the end than someone who started saving in his or her 30s or 40s.
For instance, let’s say you contribute just $50 a week to a retirement plan that earns an annual return of eight percent on average. Over 35 years, your retirement fund will grow to about $446,645. If you did that over 25 years, however, you’d end up with only $189,491.
Build an Emergency Fund
Saving money can be difficult when you’re just starting out, especially when you’re paying off student loans, settling into your first apartment and perhaps even buying your first car. It’s nevertheless vital that you start an emergency fund with your very first paycheck; that way, if you have an emergency, you’ll be able to cover the expenses without going into debt.
Use a “pay yourself first” savings plan to build up your emergency fund. Set aside five to 10 percent of each paycheck against a rainy day. If your parents are willing, you might choose to move back in with them for a few months after graduation, so you can save emergency money more quickly and work on paying off your student debt to boot. Shoot for a three to six-month cushion to fall back on if necessary.
Pay Off Debts As Soon You Can
If you’re like most new college grads, you’ve got a lot of student debt. Make it a priority to pay off that debt as fast as possible. Don’t just make the minimum payments. When you pay more than the minimum payment each month, you’re saving yourself money in interest over the long term. The sooner you’re out of debt, the more financial freedom you’ll have — freedom to take a pay cut in the name of your dream job, freedom to start your own business or freedom to leave work and stay home with the kids, for example.
Apply this strategy to any debts you incur, like car loans and mortgage payments. But when it comes to borrowing money, take it easy. Avoid going into debt unless you absolutely must. Don’t use credit cards to finance a lifestyle you can’t afford. The high interest rates mean you could be saddled with a lifetime of overwhelming debt.
Create a Budget
Nothing will help you get a handle on your finances like a budget. As soon as you know how much you’re going to be earning, sit down and make a list of your fixed expenses — rent, car payment, student loans, utility bills, retirement savings, emergency fund, etc. Then figure out how much you need for food, clothes, travel, entertainment and other items. If you’re not sure, keep track of your spending for three months. This will tell you not only how much you need to live comfortably, but where you can stand to tighten the belt.
Once you have your budget, stick to it as much as possible. Never spend more than you earn.
Build a Good Credit Score
Good credit means you’ll qualify for the best interest rates when you need to borrow money, and that’ll save you tens of thousands of dollars over the course of your life. It’ll also help you get the best job offers — employers check credit reports when they decide who to hire. Build good credit by paying all your bills on time and paying off loans early. Get a credit card, and use it for a few daily purchases, but pay the bill in full each month. A history of recent credit card payments looks good on your credit report.