Financial To-Do List for Recent College Graduates

Written by: Harmony Wagner

College graduation season is now in full swing, and the next class of graduates is preparing to celebrate the accomplishment of earning a college degree. Once the excitement of graduation dies down, many recent graduates (along with their parents) are left wondering what the next season of life holds and how to transition successfully from student life to the workforce. In addition to the mental adjustment of this major life change, there are many financial elements to consider as well.

Establish a Savings Plan

The ability to save for the future, especially early on in adulthood, is a discipline that will serve college graduates well throughout their entire lives. The power of compounding cannot be understated. Although recent grads may feel that they don’t have enough discretionary income to save, it is substantially more advantageous to begin saving as early as possible, even in small amounts, as opposed to trying to catch up by saving larger amounts later in life. To put this principle in perspective, if a 22-year-old begins saving just $3,000 per year (assuming she never increases that amount and earns an average of 8% annually), she will have over $1 million saved by age 65. If she delays saving even just until age 30, she will have to save twice as much per year to reach the million mark by retirement. If she waits until age 40, she will need to save 5 times as much annually to achieve the same goal.

            For a young person starting out, a prudent first step is to accumulate an emergency reserve fund of 3-6 months’ worth of living expenses, which should be kept in cash in a bank account and only used, as the name implies, in case of financial emergency. Once an adequate emergency fund is established, your savings focus can shift towards more long-term financial goals. Saving in an employer retirement plan is a great place to start. When starting a new job, it is important to ask what retirement plans are available, what the eligibility requirements are, and if the employer contributes in any manner. Having this information will ensure that you can begin contributing as soon as you are eligible, and that you are taking full advantage of any employer match.

401(k)s and other employer retirement plans are excellent ways to save for retirement, but there are some restrictions on how those assets can be withdrawn. It is likely that at some point before retirement, other major financial needs will arise, such as purchasing a vehicle or a home, getting married, or starting a family. Saving in a taxable brokerage account is one way to invest money that will not be needed in next 1-2 years, but that you may want to access before retirement.

Another option is a Roth IRA, which is available to anyone who has earned income and does not make over a certain income threshold ($135,000 AGI for a single taxpayer in 2019). Roth IRAs are retirement accounts that allow you to save after-tax dollars, which grow tax-free and are withdrawn tax-free in retirement. Not only do these accounts offer substantial tax benefits, particularly for young investors, but they also allow some portions of the account to be withdrawn penalty-free prior to retirement if a qualifying circumstance exists. For example, up to $10,000 can be withdrawn from a Roth IRA for a first-time home purchase, provided the account has been open for at least 5 years.

Having a plan in place before beginning one’s career is a great way to make savings a priority from the very first paycheck. The general guideline is to save 10-15% of gross income, but depending on the situation, individuals may be able to save much more, or may have to start small. Whatever savings level you choose, make it your goal to increase it by 1 to 2% each year or each time you receive a raise.

Manage Student Loan Repayment

Many college graduates find that the reality of student loans sets in shortly after graduation. The Institute for College Access and Success reported that 65% of college seniors in 2017 graduated with student loan debt.₁ The good news is that most student loans have a grace period, a set timeframe (often 6 months) after graduation before payments begin. This grace period gives recent grads time to get a grasp on what their responsibilities will be for repaying their student loans.

For recent grads, the first step is to get online or call your loan provider to discuss the amount of your monthly payment, the due date for the first payment, and the different repayment options that may be available to you. Many loan servicers offer different repayment schedules, such as gradually increasing payments or Pay-As-You-Earn plans. From there, you can determine a plan for paying off your loans systematically. Some individuals find it motivating to put any extra payments towards the smallest balance loan first, so they can see their loans dropping off one by one. Others may prefer to minimize their total interest paid over time by paying down the loans with the highest interest rate first. Whatever your strategy, having a plan in place for systematically reducing debt will help keep you on top of your repayment process.

Another option to consider is student loan consolidation. This option isn’t for everyone, but it may benefit individuals who have high interest rate loans and can consolidate at a lower rate, or individuals who have loans at many different providers and can simplify by moving all loans to one or two companies. It is important to understand all the terms before making a decision, as consolidation may cause you to lose certain features from the original loans.

Monitor and Build Credit

Credit can be a tricky area for college graduates who often have little to no experience borrowing money. However, good credit is an important factor when it comes to buying a vehicle, qualifying for a mortgage, etc. Before you begin utilizing credit, familiarize yourself with how it works and the potential pitfalls. Credit mistakes can take months or even years to repair, so it is crucial to have a system in place to pay off any bills and outstanding credit card balances without allowing them to roll over to the next billing cycle. Student loans, housing utility bills, and even unpaid parking tickets all affect your credit score, so be sure you are aware of their due dates and pay them on time every month.

As important as it is to build your credit, it is equally crucial to monitor your credit score in a disciplined manner. Recent graduates should take the time to access their credit score online and be familiar with it. Monitoring your credit at least annually will help you quickly recognize if you have been a victim of identity theft.

College graduates have worked hard to earn their degrees and have demonstrated discipline and initiative. The skills that helped them succeed throughout their education will also help them succeed financially as adults. The three major financial topics discussed above provide some guidelines for recent college graduates, as well as for the parents and mentors who are helping them navigate the next phase of life.

₁Statistics regarding student loan debt located at https://ticas.org/posd/home

This article was also featured in the Saratogian and Troy Record.