Money tips for college graduates

Graduating from college and starting a new career can be an exhilarating time but also a challenging one because most new graduates have a lot of competing financial demands to juggle. Here are a few tips to help you get started on the right track to becoming financially independent.

1. Take the time to understand your employer’s benefit package. Benefits may include health, disability and life insurance, traditional and Roth retirement plan options, and tuition assistance programs. These perks can easily be worth more than thirty percent of your overall compensation package, totaling several thousand dollars per year and carry important tax advantages. Discuss these options with your organization’s benefits specialist and a knowledgeable family member or friend to ensure you select the ones that are right for you.

2. Calculate your net income after federal and state taxes and estimate your living expenses. Spending less than you earn and saving and investing the rest will likely be the single most important wealth building strategy you can employ. This is true regardless of your age or income level. Start by constructing a simple cash flow statement (you can download a copy from our website at http://www.sentryfinancialplanning.com) which compares what you earn with what you spend. Try to reduce your expenses as much as possible without depriving yourself of a reasonable lifestyle. The lower your expenses the more savings you can put to work. In other words, while you are earning your salary, your money is earning money. This is known as the power of compounding which occurs when investment earnings themselves generate earnings. Compounding creates a powerful snowball effect that in turn has an incredible wealth building effect. The earlier you start saving and the more aggressively you save the more wealth you will build in a shorter period of time. As a young adult you have a unique opportunity to build your financial independence.

3. Make use of tax-advantaged accounts. This is like turbo-charging the power of compounding (or the growth of your savings) because these accounts receive favorable tax treatment and grow without the drag of taxes. If you have an employer plan such as a 401(k) or 403(b) that offers matching contributions, contribute at least the amount your employer will match. This is "free" money and it will grow tax deferred. You won’t get a better deal anywhere.

4. Pay down high interest debt. The power of compounding works against you when you owe money because unpaid interest and finance charges are continuously added to your balance. This creates a negative snowball effect that is very difficult to get ahead of. After an employer match, eliminating this debt may be the best return on your investment you’ll find.

5. Start building your credit history and improving your credit score. In today’s world a credit card is almost a necessity. By using one responsibly, you can build a strong credit history and credit score which can save you hundreds of thousands of dollars in interest savings, insurance premiums, and other costs over your lifetime. Don’t be fooled by sophisticated credit and debt strategies that claim to build your credit score. The smart way to use credit prudently is to pay the balance each month and avoid paying interest and finance charges.

6. Build an emergency fund.  Try to set aside enough money to cover three to six months of nondiscretionary expenses (e.g. transportation, rent, groceries, and health insurance) in the event of a job loss or other unexpected event. Keep these funds in a savings account or money market fund so you can be confident the money will be there if you need it.

7. Establish an IRA.  If you still have additional savings, you may want to add to your IRA. These often provide you better and lower-cost investment options than most employer plans. Whether you choose a traditional or Roth IRA will depend on your individual circumstances. If you are unsure about which IRA is best for you, then split your contributions between the two.

8. Continue contributing to your employer plan. If you're fortunate to still have savings left over, you should add the maximum allowable to your employer retirement plan.

9. Enjoy yourself. This is a special time in your life where, perhaps for the first time, you have the money and the time to do the things that you haven’t been able to do before. It’s important to think about the future so you have the freedom and flexibility to work in a field you love and enjoy the lifestyle that makes you happy.

Balance your future plans while making the most out of today’s experiences. Remember, money isn’t the most important thing in the world, but it does let you do some amazing things.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.