Practical money matters by Jason Alderman
THE FIRST months out of college are about personal freedom and finding one’s path as an adult. Building solid money habits is a big part of that.
Most university graduates are managing money alone for the first time – finding work, places to live and, if they’re in the majority, figuring out how to pay off college loans.
For many, these are daunting challenges. If you are a young adult – or know one – here are some of the best routines to adopt from the start.
Budgeting is the first important step in financial planning because it is difficult to make effective financial decisions without knowing where every dollar is actually going. It’s a three-part exercise – tracking spending, analyzing where that money has gone and finding ways to direct it more effectively toward saving, investing and extinguishing debt.
Even if a new grad is looking for work or waiting to find a job, budgeting is a lifetime process that should start immediately.
A graduate’s first savings goal should be an emergency fund to cover everyday expenses such as the loss of a job or a major repair. The ultimate purpose of an emergency fund is to avoid additional debt or draining savings or investments. Emergency funds should cover at least four to seven months of living expenses.
Retirement may seem a distant spot on the horizon immediately after graduation but success depends on saving and investing as soon as possible.
New grads can benefit from the IRS withholding calculator – irs.gov/Individuals/IRS-Withholding-Calculator – to determine that the right amount of tax is being withheld from their weekly paychecks. From there, they can evaluate personal retirement-savings options and employer plans – both will be necessary to retire effectively.
Signing up for automatic deposits into retirement accounts and personal savings allows money to grow without the temptation of spending it first.
Insurance is crucial.
Renter’s insurance is important not only to cover personal belongings that are lost, stolen or damaged but because most policies cover living expenses in an emergency and offer liability and medical coverage if someone is hurt at one’s apartment.
Auto insurance is the law in many states and, even though disability coverage may be available at work, it is important to determine whether additional individual coverage should be purchased.
Finally, the federal Affordable Care Act has made health coverage a must for young adults. New graduates may stay on a parent’s plan until the age of 26, even if they have the option for health coverage at work.
After age 26, health insurance can be bought privately or through federal and state exchanges.
Young adults should get into the habit of tracking their credit reports from the beginning. By law, everyone has the right to receive all three of their credit reports free each year – visit annualcreditreport.com – and it is important to stagger requests from the three credit bureaus, Experian, Equifax and TransUnion, to better check for inaccuracies and potential identity theft.
Finally, for any new grad still having trouble making ends meet, moving back home for a limited time could be an option. They should negotiate an affordable rent on a fixed timetable and use the savings to create investment accounts that can pay for major goals like their own home, a wedding or graduate school. If you’re working with a financial adviser already, ask him or her to weigh in with additional ideas.
Bottom line: The first year out of college, embracing budgeting, saving and investing is crucial, even with the smallest amount of financial resources.
Jason Alderman directs Visa’s Practical Money Skills For Life financial education programs. Follow him on Twitter at twitter.com/PracticalMoney. His articles are intended to provide general information and should not be considered legal, tax or financial advice. Always consult a tax or financial adviser for information on how the law applies to your individual financial circumstances.