Although the 2020 school year didn’t end up as any of us had hoped, high school and college students in Iowa and across the country are graduating nonetheless. As grads move on to their next phase in life, now is a great time to encourage them to establish good financial habits.
These tips will help start the conversation. (And if the graduates in your life haven’t yet realized that you actually know what you’re talking about, just share this blog post with them.)
Pay yourself first
The best time to save money is before you even see it. Set up regular automatic transfers from your checking account (through your bank) or from your paycheck (through your employer) to a high-yield savings account. (See bankrate.com for top FDIC-insured savings, checking and money market rates.) If you start this habit right away, you won’t even miss the money—and you’ll take an important step toward building life-long financial security.
Overall, your goal should be to never have debt that’s not a home mortgage or a car loan. Those are big-ticket expenses for which you can usually get good financing. But beyond that, if you can’t pay for it, don’t buy it. Which brings us to our next point—about credit card debt.
Avoid credit card debt like the plague
Credit card debt is one of the biggest threats to your short- and long-term financial security. If you choose to use a credit card, pay it off every month IN FULL—no exceptions. Credit card interest can snowball quickly, and that can limit your ability to invest for the future and buy the things you need today.
Set up an emergency fund
One of your first financial goals should be building an emergency fund. Think of this as your “Oh shoot” fund. (As in, “Oh shoot, my car needs a new transmission.” Or “Oh shoot, my roommate just moved out, and I have to pay all the rent myself.” Or even worse, “Oh shoot, I just lost my job.”)
This financial cushion will help you avoid turning to a credit card in the event of unexpected costs. And if you do lose your job, it will give you time to look for a new job you want—instead of jumping at the first offer just to start bringing in an income. The ultimate goal for this fund is six months’ worth of living expenses. However, even a month or two of living expenses is a great start.
If your employer offers free money, TAKE IT
Hopefully, your first job comes with a retirement plan, such as a 401(k) or 403(b) plan. The great thing about these plans—in addition to the fact that you don’t pay taxes on money you put into the plan until you take it out at retirement—is that they often include an employer match.
An employer match is a way for your company to help you save for retirement—by contributing money into your retirement plan. But you usually have to contribute some as well.
Let’s say your employer matches 100% of the first 4% of your pay that you contribute into the plan. If your gross pay for a pay period is $1,500 and you contribute 4% of that (or $60) into the plan, your employer will then pitch in another $60. That’s like an instant 100% return on your investment!
Consider a Roth IRA or Roth 401(k)
Another tax-smart way to save for retirement when you’re young is through a Roth IRA or Roth 401(k). With a Roth, you still pay income tax on the amount you contribute. The assets grow tax-free during your life like other retirement plans.
But the key difference is that you don’t pay income tax when you withdraw the money in retirement. You get the funds tax-free! Since you’re probably going to be in a much higher tax bracket by the time you retire, this is going to be something you’ll really appreciate in the years to come.
Build a good credit rating
When you eventually want to buy a car or a home, you’ll probably need to get a loan. And before you get a loan, lenders will look at your credit history.
To build a good credit history, it’s critical to pay all of your bills (not just your credit cards) on time—every single month. Another way to build your credit rating and increase your credit score is to get a credit card. Look for one that has no annual fee and offers rewards.
Whatever credit card you choose, you must pay it off in full every month. (We know we said this before, but it bears repeating.) Only paying the minimum payment, making payments late or missing payments altogether is a big red flag for lenders.
Learn the art of financial compromise
Careful spending doesn’t necessarily require all-or-nothing decisions. You can still enjoy life and invest for the future through small compromises. Here are a few ideas:
- Buy a used car instead of a new one.
- Wait for sales.
- Bring your lunch a few days a week instead of eating out every day.
- Buy a pair of good running shoes and catch exercise classes online instead of joining a health club.
- When going out with friends, rotate who hosts pre-dinner drinks before catching your dinner reservations. (Think about your last restaurant bill—it’s easy to have beverages represent 30-50% of total ticket!!)
Choose investments carefully
When selecting investments, consider when you’ll need the money. Any money you think you’ll need within, say, four years should be in a high-yield savings account.
Only start investing in the stock market (preferably through mutual funds or exchange-traded funds —not individual stocks) if you won’t need the money for at least four years. Of course, you won’t need any retirement savings (such as your employer’s retirement plan) for many years. So it’s OK to invest that in an equity mutual fund.
Consider help from an expert
Here’s one last bit of advice. If managing money isn’t your forte, consider working with a financial professional. At Generations Wealth Management, we help families in the Des Moines, Iowa, area and across the country maximize their wealth by providing integrated tax, investment and estate advice. And it appears we named our firm appropriately in 2009, because in many instances we work with three to four generations of the same family!
Financial guidance from an expert can give you the one-on-one help you need to form a strong financial foundation—one that will continue to pay off throughout your life. To start the conversation, contact us today.