Basic Financial Advice for the Class of 2016
This month millions of students will graduate high school while millions more receive degrees from colleges. As they prepare to enter the workforce and the “real world” there is still a lot to be learned, not the least of which is personal finance. So what, above all else, should new graduates know about money?
Time to start saving for retirement
To answer your first question, yes — already. It may seem strange to think about retiring when you’ve barely just graduated but there are many benefits to starting early. By getting a jump start on saving for retirement you’ll not only amass more in contributions but more importantly the returns you get from interest and investments can be exponentially higher than you will receive if you put off saving due to the effect of compounding interest.
Setting yourself up for retirement financially doesn’t have to be painful if you know how to take advantage of a good offer. If your job offers a 401(k) you should absolutely max out the percentage your employer is willing to match or partial match (e.g., if they match half of what you contribute up to 4%, you should put in 8% in order to receive that full amount). This is free money! Additionally, if you want to go above and beyond, look into a Roth IRA where you can pay the taxes now but take out the money when you reach retirement age tax-free.
Hope for the best, plan for the worst
Getting by and being financially stable are not the same thing. It’s sad to say that your car won’t run forever, accidents will happen, and you never know what hardship will be waiting around that corner. That’s why it’s important to provide yourself with a safety net in the form of an emergency fund. In fact it may be smart to have a rainy day fund and an emergency fund — one for unexpected expenses like costly car repairs and the other just in case you lose your job and need to live off of savings for a while. Again, make this as painless as possible by tricking yourself into saving money so you won’t even miss the cash you set aside.
Build up credit but beware of debt
In order to make major purchases in your life such as a new car or a house you’ll need to build credit. However having access to instant credit can be a dangerous thing and can lead to a mountain of debt if you’re not careful. That’s why it’s best to only put charges on your credit card that you can pay in full when the statement arrives. Also be sure to pay your bills on time as cell phone carriers, utility companies, and others may report late payments to credit agencies. Keep in mind your payment history will make up 35% of your FICO score. Having a strong credit score will save you a lot of money in the long run as you’ll be able to borrow at a much lower interest rate.
Graduation – whether from high school or college — is an exciting time. Unfortunately it can also be when many of us begin to make decisions that are slightly less than financially sound. The class of 2016 can be different if they follow these tips and learn to be smart with their money.