Recent college graduates and young professionals are in a unique financial situation. One advantage of being young is that you can begin to set good financial habits now, and plan wisely for your future. At the same time, if you are living on your own for the first time, you may feel like you have a lot to learn, between your first salary, bills to pay, and decisions to make. These guiding principles will help set you on a responsible financial path.
Spend less money than you make
If you are fresh out of college and working your first full-time job, you are probably very excited to be making a salary. And rightfully so. Congratulations! You may be tempted to spend your money on some of the trappings of adulthood—a bigger apartment, a new car, a luxury vacation—but be careful. Don’t let your expenses run away from your income, and don’t forget to start saving money! A big part of personal finance is knowing your priorities and acting accordingly. Spending less than you make while you’re young will allow you to save money for financial goals as you get older. Which leads us to the next tip…
Set financial goals
What is important to you? The answer will be different for everyone, so take the time to figure it out for yourself. Do you want to own a home by the time you are 28? Save enough money to retire comfortably at 60? Take an annual trip to Europe? All of these goals must be planned for; they are not likely to happen accidentally. Make a list of goals for three different categories. First, short-term goals. What would you like to do financially, this year? Next, mid-term goals: where do you envision yourself in 5-10 years? Finally, what are your long-term goals, for 20 or 30 years from now? Once you have these goals written down on paper, go through each one and ask yourself if there is something you can, or should, do now in order to make that goal a reality.
Start saving money for retirement
As Stacy Rapacon writes on Kiplinger.com, “The biggest financial advantage of our youth is having time on our side. With enough years to grow, any pittance can become plentiful” If you are lucky enough to land a job that offers you a retirement fund, like a 401(k) or a 403(b), take it! Sign up! If you are even luckier to have an employer that will match the amount of money you put into this retirement fund, you should absolutely take advantage of that benefit, and contribute the maximum percentage of your income that you’re able to. For example, if you put 10% of your monthly salary into your retirement fund, and your employer matches you, then you’ve put 20% in, and that will pay off greatly as your funds invest and grow. Yes, it’s free money!
If you don’t know which investments to choose, many financial institutions will have a pre-set fund that is based on your expected retirement year, designed to be higher-risk now and then automatically taper to more conservative funds as you near retirement. This can be a good way to begin investing before you’ve done research on funds, though you should really learn about what you are investing your money in, eventually. The most important part is to start investing now. Retirement may seem like a distant concern to you, and all this retirement saving business can be confusing, but starting to save now is one of the best things you can do to lay the foundation for a strong financial future. You will thank yourself later. Start at CNNMoney.com’s Retirement Guide to get a handle on basic retirement savings questions and terminology.
Build good credit
It is crucial to build good credit, and the way to do so is to have a credit card, use it every month, and pay off the balance every month. Some sources even say to not use more than 1/3 of your credit line in order to keep the best credit possible. Do some research online to find a highly-reputed credit card that matches your situation. If you have never had a credit card before, you may have insufficient credit history to get a credit card now. One way around this dilemma is to get a secured card. For a secured card, the financial institution will ask that you put down a deposit in exchange for a card. A secured credit card will likely have a small credit line, say, $500. But if you use this card wisely—frequently, and always paying off the balance—for a year or two, you will be able to apply for a higher credit line. One way to use such a card is to use it each month for a fixed cost; say, your cable/internet bill.
Another key part of building good credit is getting out of debt. Students these days are graduating from college with more debt and loans than ever, and the most important thing is to know how and when you’re going to pay off that debt. Tackle it head on.