Earlier this week, we shared a few basic ideas that you can use to build a healthy foundation for your personal finances after college. Today, let’s look at some specific things you can do and goals to work towards to get your finances off on the right foot.
Create a budget
On the surface, a budget is simply a system that you create to manage your money. However, it also encourages healthy financial habits. By keeping a budget, you regularly track your cash flow, monitor your spending, and set limits and rules for your money. These are all important skills to learn and exercise.
There isn’t one correct way to budget. The right budget for you is the one that you’ll stick to and one that moves you closer to your financial goals as efficiently as possible. For ideas and tips, check out our previous articles on creating a budget.
Review student loan details (and improve your credit)
Not all student loans are the same. They can have different interest rates, monthly payments, grace periods, payment options, due dates, and more. You are responsible for understanding the details of your student loans and paying at least the minimum amount due on time every month.
Paying your student loans on time can go a long way in improving your credit. Even if you’re not planning on opening a credit card or taking out a loan, it’s still important to maintain a good credit history. Firstly, making late payments can become a bad and costly habit. Secondly, employers may require a credit check when you apply for a job. Thirdly, even if you decide to rent a home instead of buy, you’ll likely have to pass a credit screening. Lastly, while your goal should be to avoid additional debt, you never know when you’ll need to take out a loan in the future. If and when that time comes, a good credit history can save you a lot of money on interest.
Save for retirement
Retirement may be a long ways away but start saving for it as soon as possible. By investing in an IRA, 401(k) or some other retirement savings vehicle now, you can take advantage of all the time you have before retiring.
Remember, when it comes to investing, time is your friend: compound interest makes your money work for you and the more time it has to work, the more money you can make. If you start putting $50 a month into an IRA at the age of 22 and get a 6% return on your investments, you’ll have over $98,400 by the time you are 62. If you wait until you are 32, you’ll have just over $50,000.
Take a look at these retirement statistics from Statistic Brain:
At the top, you can see that the average savings of a 50 year old is just over $44,000. At the bottom, you can see that in order to withdraw $1,000 a month from your savings for 20 years, a person will have to have over $166,000 invested. This means that if the average 50 year old wants to (or has to) retire at the average retirement age, he will have to quadruple his savings in 12 years just to be able to withdraw $1,000 a month during retirement – and that amount that probably won’t even be enough to live on.
Clearly, you need to save a lot of money to retire comfortably. By starting your retirement savings early and saving for retirement regularly throughout your career, you will have a much better chance at being able to retire comfortably.
Start an emergency fund
John Lennon wrote: “life is what happens while you’re busy making other plans.” You can’t plan to have an emergency but you can have a plan for when they arise. This includes starting an emergency fund to cover unexpected but necessary expenses – medical bills, car repairs, house repairs, etc. Just remember: the emergency fund is for emergencies only! Decide ahead of time what constitutes an emergency and only use money in the fund for those things. Be honest and realistic: “not enough money to watch a movie” is not an emergency. Also be open to updating your list as changes in your life occur.
How much should you save for your emergency fund? Financial experts will suggest anywhere between three to nine months-worth of expenses. But the right number for you will depend on a variety of personal factors. Read our article, “How big should your emergency fund be?” for more information.
Just the beginning
Remember: these are tips to help you get started. A healthy financial lifestyle doesn’t happen overnight. It requires a smart, personalized plan and dedication to see it through until you reach your goals.
If you would like more information, please leave a comment below or send us a message. Whether you’re just starting your financial journey, near the end, or anywhere in-between, we have materials and services that can help you plan for and reach your financial goals.