Last month we discussed the first six of twelve financial tips for new graduates. If you missed that post, please check it out. These tips were developed through our interactions with CSU students who come in to establish a financial vision and to jumpstart their savings program. This month we’ll go over tips seven through twelve.
- Automate your savings. If you have hard time putting money away, you can have it done for you. You just have your employer take out a percentage or fixed amount of your income from each paycheck and automatically have it placed into one of your savings vehicles such as your Roth IRA, traditional IRA, or just your bank savings account. Alternatively, you can simply set up your bank account so that a fixed amount is automatically transferred to another account at whatever frequency you would like. This is an effective method that quickly gets you used to living without that money, prevents you from deciding that you “need” it this month and it requires minimal maintenance or oversight from your end.
- Adjust your standard of living. A large portion of graduates received financial assistance from their parents in regards to their living situation. This means you are probably used to a relatively high standard of living. Once you are no longer receiving assistance with your expenses, you may find that it is more of a stretch to do all things you were previously able to in college. You have to get used to spending less than you make, otherwise it’s going to create a slew of financial problems in the future. Simply put, if you spend more than you make, you’ll find yourself in a very difficult situation moving forward.
- Tax Planning. Although taxes can take a huge bite out of your paycheck, there are two great ways to decrease your tax liability and contribute to your retirement savings. First, you can avoid any taxes on up to $18,000 (2017 per-person contribution limit) by placing it into a 401(k) plan. Such investments are not taxed until withdrawal which usually occurs in your 60s or 70s when you might well have a lower taxable income. Second, making such 401(k) contributions can help lower your effective tax rate. For example, if your earned income just advanced you to a higher tax bracket, you can pull back down into a lower bracket by putting money into your 401(k). And, any money you can sock away for retirement will lead to a brighter future!
- Insurance. You really need health insurance. Yes, you’re in great shape now, but health insurance protects you and your savings when the unexpected occurs. Now this doesn’t mean that you need to go out and get the most expensive policy that covers everything under the sun. You simply need to set yourself up with basic coverage. Most companies will pay for a portion of your health insurance premiums. Life insurance is not quite as clear cut. If you’re not making much money to begin with, paying for those premiums may or may not be worth it. If your spouse or partner also works, there’s no pressing need to have life insurance to protect them. However, if you’re planning on having kids soon, then you should definitely consider getting life insurance for both parents. If anything were to happen to either one of you, it might be very difficult for the remaining spouse or partner to raise children with a single income.
- Beware of payment plans! Payment plans can look so attractive when you’re getting something you really want for only a couple bucks a month. One thing you need to consider before you get all those micro subscriptions is your budget. Of course, it seems like $15/month isn’t going to stretch your discretionary budget too much. However, taking on multiple plans just might. Cell phone plans today are upwards of $70 for just one person plus most people have car payments, rent/mortgage, cable/internet, and utilities. Odds are that you already have substantial monthly payments. On top of all that, you’re going to have student loans to start paying back as well. Before adding to your monthly payments, consider taking a look at your budget and make sure you’re not stretching yourself too thin. Remember, you’re supposed to be reducing your debt not adding to it. Payment plans are a promise to pay, so you are obligated to pay the agreed amount. If you realize you can’t pay for something anymore, you’ll have to default on it, or be sent to a collection agency, depending on the product or service. Either way it is going to be a nightmare for your credit score. If it’s something that you feel you really want in your life, consider saving up for it so you can buy it outright. At least, at that point, you’re putting away money at your own rate and are not obligated to pay anything if a particular month is rough on the budget.
- Don’t be afraid to seek advice. At some point in your life you are more than likely going to need some advice on your finances. Nobody has all the answers, but meeting with a fee-only hourly planner can help guide you in the right direction. Odds are you are going to end up paying for advice at some point or another regardless; it’s just a matter of how many mistakes you have made before seeking the help of a financial professional. Developing a financial plan early on will help you avoid costly mistakes down the road. This is not to say that just because you have an advisor that nothing will ever go wrong; because many things will, but it’s nice to have a plan for when they do. A planner can help you cover many of the areas covered in this article. If you think you will struggle with any of the above topics, than you should seriously consider speaking to a fee-only planner who can get you started on the right track with good spending habits. If you don’t want to seek outside help, than I would recommend helping yourself and maybe taking some courses on personal finances.
We know a lot of this is new to many of you. We’d be happy to help you apply these ideas to your personal situation (or talk about any other financial matters) in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.