Graduating from college opens a world of possibilities. Once out of school, graduates get to put their knowledge and skills to the true test. While they won’t be graded, they will face challenges, and as they move from the classroom to their first ‘career’ jobs, starting off on the right foot financially can help them meet future challenges with confidence.
Financial advisors agree that setting up a budget is key to managing income. While it is tempting to start buying things when your income increases as you start a career, resisting that temptation goes a long way toward a secure financial future.
Start with a Budget
Cathy Lueers of My 4-Year Plan, a professional college planner, stresses the importance of focusing on the population she’s working with when giving advice. Each generation has unique traits that define how they choose to live which, of course, affects their use of money.
“This year’s college grads are Generation Z,” explained Lueers. “They tend to live a subscription-based lifestyle, using services like Hello Fresh for meals, without realizing how much money they actually spend. When you advise them to set up a budget, you need to also suggest a method that works for them. For example, a budgeting app like Mint which offers customized spending tracking and subscription monitoring.”
A tech-savvy and social media generation, Gen Z’ers may also benefit from joining a social media group focused on budgeting and money management, with people of a similar age, since being part of a community creates accountability.
Student loan debt presents one of the toughest challenges to graduates as they move into the working world, though it is often unavoidable. Making the repayment of loans a priority at the beginning of one’s career will free up finances for future purchases like a first home.
“My first piece of advice to college grads is to live within your means,” said Bill Yanicko of BKY Financial. “They are likely going to come out of school with student loans. By focusing on the high interest ones first, and paying those off more quickly, they’ll save a lot of money in the long run.”
When that first paycheck arrives, it’s tempting to start buying new things, which can quickly lead to more debt.
“My first advice to a new college grad is to not bury yourself under an avalanche of debt,” said Douglas Glenn of North Hills Financial. “Don’t go out and buy a new car right away. It’s okay to use credit cards as a tool to build your credit, but make sure to pay your balance off entirely each month.”
Keeping with the focus on Generation Z, Lueers takes a unique approach. “Instead of counseling my clients to eliminate debt, I talk to them about Z-liminating debt,” she explained. “To counsel Gen Z students out of debt, you need to focus on how they live, how they act and how they spend their money.”
Plan for the Future
In your twenties, retirement seems like a lifetime away, but the importance of taking that into consideration cannot be stressed enough when working with recent college grads.
“My second piece of advice is when you do land that first job, if a 401K or other savings plan is offered, start investing in it from day one,” said Glenn.
Yanicko echoed that sentiment. “If your employer offers an employer-sponsored plan, contribute at least what they’re matching. If the employer matches 5 percent, that would be the minimum I would recommend contributing,” he said. “If there’s a wait period for eligibility, start a personal IRA.”
Advisors agree that recent graduates need to become familiar with and take advantage of the power of compounding interest.
“The most powerful investment component out there is time,” said Glenn, providing the example of ‘Mr. Early’ and ‘Mr. Late.’
• Mr. Early started saving $5,500 a year when he was 25. He stopped at age 34.
• Mr. Late started saving $5,500 a year when he was 35 and continued for 30 years.
• Assuming a rate of return of 8 percent every year, at the end of 30 years, Mr. Early had $935,165 and Mr. Late had $726,734.
Yanicko added that grads should think about their older selves while they’re still young. “The smart things I did when I was 25, my 65-year-old self will thank me for,” he advised.