Recent graduates: Welcome to financial ‘Adulting’
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Transitioning from school to the workforce often comes with significant shifts in financial responsibilities. Are you ready to take the reins of your financial future?
Whether you are graduating high school or finishing up your college career, this may be the first time you are responsible for yourself financially. It can be overwhelming, but you don’t need to have everything figured out on day 1!
The important concept is establishing habits that will set you up for financial success moving forward. So let’s focus on some simple strategies that will help you get started on the right track.
Saving: Early and Often
As you begin your professional career, your first year of wages is often your lowest, making it difficult to save a lot initially. However, saving today can have a big impact on your future wealth.
A helpful exercise is to take note of your fixed expenses that will eat up a significant chunk of your pay every month: rent, utilities, internet, student loan payments, car payments, insurance premiums, transportation costs, etc.
Add savings as a part of those “fixed” outflows from your income every month or pay period. This is an important habit to establish early.
As your pay increases, bump up the amount you’re saving. Take advantage of automated savings, including 401k or 403b payroll deductions.
Types of Savings
Saving of any kind is a positive habit to build. It’s also important to be intentional about where you’re saving and why. Figuring out the “why” is the first step, and it requires some thought about your financial goals, both short-term and long-term.
Short-Term Savings
Emergency Fund
- This is the foundation of any investment plan. Unexpected expenses will come up, such as a car breakdown or medical bills. You could also lose your job and income for a short time. Building up 3 to 6 months of living expenses in an accessible cash savings account provides a cushion that helps avoid using high-interest debt or pulling from your long-term savings to pay for these unexpected expenses.
Specific Purpose Savings
- Separating your savings can help you visualize your progress. For example, you may have aspirations of buying a home, in which case you will want to start saving cash for a down payment. You can direct these savings to a separate savings account or open a brokerage account for investing.
It is important to understand the appropriate risk to take for short vs. long-term goals when investing. Goals with a short time horizon, five years or less, should take lower risk and avoid the riskier investments.
Protecting the principal of your savings becomes more important as you get closer to the time the funds are needed.
Long-Term Savings
Employer Retirement Plans
- Your first employer might offer a company-sponsored retirement plan like a 401(k). This is a great way to start your automated long-term savings, as most plans allow you to direct a percentage of your paycheck toward the retirement plan. Be sure to get the full benefit of any free company match. Your pre-tax 401(k) savings, along with any company match, grow tax-deferred. The funds are only taxed when withdrawn during retirement at your then current tax rate.
Roth IRAs
- I can’t discuss long-term savings without mentioning the Roth IRA. It is arguably the most powerful tool young savers have at their disposal. You contribute after-tax money that can grow tax-deferred throughout your career and be withdrawn tax-free during retirement.
Summary
As a young investor, you have a wonderful opportunity to give yourself a great start. Start saving now and seek advice from your investment advisor.
Best of luck as you start your post-grad life!
Anthony Harcourt,CIMA® is a Portfolio Manager at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Anthony at aharcourt@bedelfinancial.com.