5 Financial Tips for New College Graduates

Beyond landing a job in the COVID-19 era, few things are more important coming out of college than establishing good financial habits. Getting a firm grasp on money matters early on bodes well for success in your career, leisure time and retirement.

As you get started, it may be useful – and quite possibly entertaining – to ask a parent or older acquaintance if they have any regrets to share about how they mishandled their personal finances when younger. (Raises hand.)

Mea culpa. As a 20-something, I lived alone in overpriced, above-my-means rentals instead of having roommates to cut costs; borrowed from my parents to extend my overseas wanderings; saved little, and all but ignored investing until my 30s. Only then did I reform my ways, embracing best practices with the zeal of an ex-smoker on an anti-cigarette crusade and eventually becoming a personal finance writer for a global news agency. As I tell my young-adult children, listen to what I say, not what I did!

Even those fortunate enough to come from a family of wealth can save themselves a lot of money and angst by adopting smart financial habits and sticking to them. The following five tips are aimed at steering new college graduates, or anyone else beginning their working life, in the right financial direction.

1. Control your credit: Track your spending, pay every bill on time and attack any debt.

Resolve to manage your finances and not let them manage you. Get an immediate handle on your monthly spending habits and payment obligations.

You should stay on top of your bank balance, expenses and upcoming payments. A personal finance app or website can simplify such tasks. Mint provides your complete financial picture in one place; YNAB also receives good reviews.

Pay all your bills on time and avoid carrying a balance on a credit card if at all possible. The high interest-rate costs on credit cards can be enormous over time and balances, like late bill payments, will hurt your credit score, which is key to your future loan rates and financial options.

2. Live below your means.

Living below your means helps eliminate debt and build wealth over the long term. It doesn’t require subsisting on ramen or wearing holey socks (although you can if you want to). A good target to shoot for is to live on at least 15% less than the amount of take-home pay you earn.

Setting up a budget through a personal finance app is an effective way to help you reach financial goals. But budgets are too often like New Year’s resolutions, quickly broken, so come up with a plan you will stick to. Consider trying the simple 50/30/20 approach. This rule only requires you to divide your expenses into three main categories, spending 50% of your after-tax income on needs (e.g. housing, groceries, transportation, health care, minimum loan payments), no more than 30% on wants (dining out, internet, memberships, vacations) and 20% on savings or extra debt payments.

Go frugal on the big stuff. Some potential ways to do it: Live with your parents, learn to cook, shop for lightly used clothing in secondhand stores, look for free activities, and go easy on restaurant meals, Ubers and expensive exercise classes.

3. Take advantage of your employer’s retirement plan.

Retirement may be four decades or more away, but your future self will thank you if you make it a top priority now. Begin setting aside money for the last quarter, or third, of your life.

“How can I save for retirement when I barely make enough to meet my needs?” This is a fair question I got recently from one of my sons. Well, you can lock a small ongoing retirement contribution into place and increase the amount when you are able to. Automatic contributions are the key – you’ll save for the future without thinking about it.

Automate your savings so a portion of each paycheck goes directly into a savings account. If your employer offers a 401(k) or similar account, contribute enough to get any company match – free money. Whenever you get a raise, bump up your contribution by a like amount, or at least 1%.

Your goal should be to contribute 10% to 15% of your pre-tax income to retirement every year. And resolve to one day max out your annual 401(k) contributions, even if that is many raises away. Currently the maximum is $19,500 per year, not counting the catch-up contribution of up to $6,500 for those age 50 and older.

4. Get started on investing.

Only about half of Americans own stocks; surveys have found that many of the rest find the process too scary or intimidating. Historically, however, buying stocks or mutual funds has been the best way to make your money grow. New investors in their early 20s have the added advantage of decades of compounding to work in their favor.

If you’ve signed up for a 401(k), congratulations – that’s a good start. If you don’t have access to an employee-sponsored retirement account, and even if you do, you may want to open an individual retirement account.

A Roth IRA is a particularly terrific option for new graduates to build their investments; it is tax-friendly and benefits from long-term compounding. You contribute with after-tax money but pay no taxes on withdrawals, meaning all growth is tax-free. Contributing the $6,000 annual maximum may not be feasible for you yet, but small amounts are fine too. Even a few hundred dollars can snowball into significant money by retirement time, especially once you’ve set up the account and made it easier to save in future years.

You will have to decide how aggressively to invest in stocks. As you do, consider this advice that Jonathan Clements, the long-time personal finance columnist for The Wall Street Journal, had for 20-something investors recently: “Thirty years from now, you’ll wish you’d invested more in stocks. Yes, over five or even 10 years, there’s some chance you’ll lose money in the stock market. But over 30 years? It’s highly likely you’ll notch handsome gains, especially if you’re broadly diversified and regularly adding new money to your portfolio in good times and bad.”

5. Maintain an emergency fund.

When an emergency happens, you don’t want to have to resort to piling sudden and potentially large expenses onto a credit card. You should be prepared with an emergency fund – more so than ever amid COVID-19-era uncertainty.

This fund should serve as protection from the unexpected: major car repairs, a job loss, a health issue. Start by setting aside perhaps $1,000 in a money market or bank savings account. Then keep contributing a little from each paycheck until you have three to six months’ expenses. Some advise even saving a year’s worth.

And remember: This fund is for emergencies only.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.