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6 Financial Planning Tips for Grads; a.k.a. What You Wish You Knew at 23!


Financial planning tips for grads: Start here, finish rich.Last week we featured some of the best financial advisors for 20-somethings who want to get a jump start on their financial plan. Today’s guest author, Sophia Bera, CFP® is one of our featured advisors.

After working as a financial planner for LearnVest, Sophia founded Gen Y Planning, a practice devoted to the specific needs of today’s 20- and 30-somethings. Here, she offers a few financial planning tips for grads. If you’ve been in the workforce a while already, use it as a quiz to check your fiscal progress. -David

You might have just graduated from college, or you might be 10 years out of college, but regardless, these are 6 steps that can help you build a solid financial foundation so that you can attain long term wealth.

1. Read your benefits package

If you’re fortunate enough to land a job right out of college, it’s time to figure out all the perks offered to you by your new employer.  In order to do this, you need to read your benefits package. This might sound obvious, but there are a lot of benefits that people don’t know about so it’s important to know what’s being offered.

Here are some typical benefits: health insurance, term life insurance, disability insurance, and a 401(k) match.

However, there are other benefits that can be overlooked such as a gym membership reimbursement through your health insurance provider if you go a certain number of times per month. Another benefit that some employers offer is the ability to use pre-tax dollars to purchase a monthly public transportation pass (i.e. metro card, bus pass or train pass) through your paychecks.

Once you’ve read through your benefits package, make an appointment with your HR person to answer any questions that you have. They may be able to help you analyze the health insurance options and let you know when you’re eligible to participate in your 401(k) program. Some companies have really unique benefits such as paid volunteer days off, discounts at restaurants or stores, and group rates on other services. Your HR person should be able to point out these perks to you.

2. Sign up for your 401(k) or other plan

One of the most important things you’ll find in your benefits package is if your company offers a 401(k) match and when you’ll become eligible for this benefit. This really varies from company to company so make sure to find out.

(If you don’t have a 401(k) but you have another employer sponsored retirement plan such as a 403(b) or a SIMPLE IRA, make sure you get the details on whatever plan is offered).

You’ll need to decide how much to contribute to your 401(k). The most important thing is that you sign up to contribute at least enough to get your full company match. For example, if your company will match 50 percent up to 6 percent, you should contribute at least 6 percent so that you receive the full 3 percent company match, for a total of 9 percent.  If your company matches 100 percent up to 5 percent of your income, you want to sign up to contribute at least 5 percent so you receive the full 5 percent company match for a total of 10 percent.  This is a chance to get FREE MONEY and that opportunity doesn’t come around very often, so take advantage of it while you can. 

3. Start a Roth IRA

If you don’t have a company match on your employer sponsored retirement plan or if you have more money you’d like to allocate towards retirement savings each month, then I highly recommend that you set up a Roth IRA.  The maximum contribution you can make to a Roth IRA is $5,500 per year in 2013.

You can set up a Roth IRA at any discount brokerage firm. Often times these companies will waive the initial account minimum if you set up monthly contributions from your checking account to your Roth IRA. Once you’ve taken that step, don’t forget to set up an automatic investing plan otherwise your investment will be sitting in cash.

4. Build your emergency fund before student loans kick in

If you recently graduated from college, you likely have student loans (if you don’t, congrats!).

Most student loans have a six-month grace period before you have to start paying them back. This is a great time to start aggressively building your emergency savings.

Let’s say you know that your student loan payment is going to be $350. If you can save $500 a month before your student loans kick in, you’ll have $3,000 in emergency savings in 6 months and you can keep saving $150 a month even after your student loan payments start.

You’ll eventually want to have between 3 and 6 months of net pay saved for emergencies, but the most important thing is to start saving. Set a goal of getting to $1,000 and then keep increasing your savings from there. Set up an automatic savings plan for each month, or change your direct deposit so that at least 10 percent goes into your emergency savings every time you get paid.

Emergency funds are critical so that you’re not living paycheck to paycheck. Life happens, but don’t let a small, unexpected event (like a car repair) throw you into credit card debt. 

5. Create a spending plan

You know what your monthly bills are, so it’s time to add them up. Then add in post tax retirement contributions and retirement savings. Subtract this amount from your monthly income and divide by four. The amount that is left is how much you have in discretionary income each week. In my opinion, this is the easiest way to not overspend each month.

Here’s an example. Let’s pretend that these are your monthly bills:

  • Rent $700
  • Transportation $100
  • Cell Phone $90
  • Gym Membership $50
  • Netflix $20
  • Student Loans $340
  • Total = $1,300

Next, add in savings and retirement:

  • Emergency Savings $100
  • Roth IRA $100
  • Total = $1,500

Then take your net income ($2,000) and subtract total bills and savings ($1,500). The result is $500.

Divide this number by 4 to get your weekly spending amount of $125. Basically, this is how much you have to spend on groceries, eating out, shopping and any other incidentals.

6. Eliminate credit card debt

If you’re one of the many college grads who is carrying credit card debt, then you’ll want to make a plan to pay it off ASAP. Credit card debt is one of the worst kinds of debt because of the high interest rates. The first step is to stop using your credit cards and the next step is to set up a monthly spending plan. Next, you’ll be able to figure out how much you can afford to pay towards your credit cards each month. The two most popular methods of getting out of credit card debt are:

  1. Paying off the highest interest rate card first OR
  2. Paying off the smallest balance credit card.

Whichever method you choose is fine, just commit to paying the same amount towards your credit cards each month. Focus on putting as much as you can towards one card while paying the minimums on all the other cards.

These are 6 steps that can help you to build a solid financial foundation and put you in a better financial position than many of your peers. I think that by focusing on these things first, you’ll be able to add other savings goals like travel, a down payment, or a wedding, etc. without sacrificing basic financial security. As your career and income grow, you can increase your retirement contributions, savings amounts, and pay down your debt faster. This is how long term wealth is built month after month.

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About Sophia Bera, CFP®

Sophia Bera, CFP® is the founder of Gen-Y Financial Planning, a national fee-only financial planning practice specializing in money management for clients in their 20s and 30s. Sophia serves as Chair of the Financial Education Committee for the Financial Planning Association of Minnesota.

Comments

  1. While a ROTH IRA might be a good option for many coming right out of school, it is still important to estimate what your current tax bracket will be (granted for most this probably will not apply). For those lucky enough to have salaries that put them in a 30% tax bracket after graduation a ROTH IRA might actually be disadvantageous compared to a traditional IRA.

    • Hi Andrew,

      Great point! The phase out limits for Roth IRAs for 2013 are as follows: $178,000 – $188,000 for Married Filing Jointly. $112,000 – $127,000 for Single. $0 – $10,000 if you are Married Filing Separately. If you make below the phase out limit you can make a full contribution to your Roth IRA, if you’re somewhere in between those ranges, you can make a partial Roth IRA contribution. If your AGI for 2013 is above the phase out limit that you do not qualify to make Roth IRA contribution for 2013. If you think you may be close to these limits, be sure to consult with your tax accountant or CPA to see where your AGI falls. (I am not a tax accountant and therefore cannot give tax advice). I hope this helps clarify!