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| The Basics | 10 steps to financial success for new grads
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Establishing a home, a career and a budget in a few short months is daunting, but few things in life pay off like having a plan.
By Terry Savage
Youve survived college and an inspiring commencement speech. Whether you graduated with honors or barely slipped by, the slate is wiped clean. Its time to start your real life. And the decisions you make in the coming months will have a big impact on the direction of your life.
Thats particularly true of financial decisions. Here are 10 steps to take to make sure youre headed in the right direction.
Take a good look at your finances
Youre about to take on your first job, and your starting salary will probably lift you into a different lifestyle. This is the first time youll be given the complete challenge of matching your cash income and outflow. Even though you may start out with student loans, or perhaps credit card debt, you essentially have a clean slate in establishing your presence in the world.
List all the money you owe. List all the expenses you expect. List all the income you expect. Make a budget based on that information. Find a way to save, even a little. It helps to have a rainy day or emergency fund. And it puts you in the habit of saving regularly for the future. The secret of true wealth-building is to spend less than you earn -- and then invest your savings wisely.
Dont forget to think in terms of your net take-home pay. Your paycheck will be reduced not only by taxes, but perhaps deductions for retirement plan contributions and health benefits.
Start a money management system
Once you get the big picture of your new balance sheet, the next step is to set up a system for tracking your finances. A good investment is buying money management software, such as Microsoft Money or Quicken. (Editor's note: Microsoft owns and publishes MSN Money.)
When you set up your new bank account, be sure you can download your bank account information into your money management program. If you can, pay your bills online. You can also pay online via MSN Bill Pay) Then you can easily categorize and track your expenditures. Use a debit card for small purchases so cash doesnt escape your spending plan. Those debits will show up when you download your checking activity and can be easily categorized and tracked.
Its not necessary to set up a formal budget, although software makes that easy. It is important, however, to track where youre spending every penny. That helps you see where you can spend more efficiently and waste less. Its equally important to set financial goals now. Money or Quicken can help you determine how much youll have to set aside each month to reach your goal -- whether its paying cash for a new car or saving enough money for a down payment on that first home. And use your money software to set repayment goals for any debt you have.
Be careful -- very careful -- with credit cards
I dont doubt youll need a credit card or two. The trick is to use them wisely. Carrying credit card debt can bury you in interest charges. Its rare that a card doesnt charge you 18% interest. And the way some companies calculate the minimum monthly payments, you could be repaying todays purchases over the next 30 years -- and paying four times the amount you originally charged in interest. Doubling those monthly minimum payments can get you out of debt in less than three years.
All of your spending patterns will be tracked by the three major national credit bureaus: Equifax, Experian and TransUnion. In fact, this would be a good time to download your credit report and credit score to see where you stand from your college years. You can order one of these reports on MSN Money or go to one of the credit bureaus sites. (See links at left.)
Remember, you have to use credit to develop a credit history. So make your payments on time. That way, you can build a good enough track record to qualify for the lowest mortgage rates by the time youre ready to make that down payment.
Start saving for retirement
It may be only your first day on the job, but that is the very best day to start thinking of your future. Sign up for the company 40l(k) retirement plan -- or 403(b) plan, if you work for a nonprofit organization. You won't miss cash you dont see in your paycheck. And if your company matches your contribution, its like getting free money -- as well as a lower tax bill. It doesnt make much difference to me how much you save, although the more you save, the better. But if the idea of saving makes you freeze up, start small. Start with 1% of gross pay. Then, as you get used to the automatic deductions, boost them to 2%, then 3% and so on so that you can start to build the kind of nest egg you want for a secure retirement.
Time is on your side if you start investing when youre in your twenties. Diversify your investments outside your companys stock. And if youre just starting out, invest for the long run. Dont buy just risk-free investments. If your plan offers solid, diversified stock mutual funds, put about 80% of your 401(k) money in those. Over time, the nations growth will move your investments ahead on even the bumpiest road. To check a funds record, check our Mutual Fund section.
Get health insurance
When you graduate and are no longer a full-time student, youre probably disqualified from your parents health insurance plan. If youre starting a new job right away, youll probably be covered by your employers plan. But if you plan to travel, go to graduate school or just take time off, check out temporary health insurance plans. Or check out the cost of joining a local health maintenance organization (HMO) offered by one of the major hospitals in your area.
Take the life insurance at work; skip the rest for now
Most employers offer a low-cost term life policy as a benefit. If youre just starting out and arent married, thatll do for now. When you marry and start to think about buying a home or having children, thatll be the time to have a more serious discussion on insurance.
Set up a strategy to pay off student loans
Many young people graduate from college with student loans. Now is the time to figure out how to pay them off. Step one is finding out how much you owe. If youve lost track of your student loan providers, use the free Loan Locator service of the National Student Loan Clearinghouse (see link at left) to gather this information. Dont be shocked by the interest that built up while you were in school if you had an unsubsidized loan.
Next, figure out how much you can afford to pay on your student loan each month. Education lenders generally recommend that student-loan payments not exceed 8% to 10% of the borrowers gross monthly income. Graduates earning $25,000 a year may be able to afford monthly payments of $167 to $208, according to USA Funds, the largest student loan guarantor.
Go to one of the online Web sites such as Wired Scholar, Mapping YourFuture or USA Funds (see links at left) to calculate what your monthly payments would be under the standard 10-year payment option, which is used by 90% of students. Also, you can explore the effects of loan consolidation at these Web sites. A hint: Signing up for an automatic monthly deduction from your checking account may reduce your interest rate by as much as one-quarter of a percentage point and pay off your loan early. Then contact your lender or loan servicer to set up a plan, and make sure the lender has your new address.
Decide where to live
You have to live somewhere, and your new job will dictate your housing choices. Housing will likely to be your largest monthly expense. And if youre paying rent, it is truly money down the drain. Though you may value your independence, consider finding a roommate to share the costs. (This may be a necessity in a high-cost market like New York or Los Angeles.) Or even consider the dreaded alternative (dreaded by both graduates and parents) of moving back home to save on rent. Those savings could be put into a down payment on a condo or home where your monthly payments will go toward building equity. If you rent, dont forget to buy renters insurance for your belongings.
Do you need a car?
Probably the first major purchase by most graduates is a car -- new or used. But remember, its not only the purchase price and monthly payments that affect your budget. As a single in your 20s, youve moved into the highest-priced car insurance category. That could put a big dent in your monthly budget -- unless you can figure out a way to have your car insured on your parents policy for a while. And repairs can put an unexpected hole in your budget. If you live in a city with good public transportation, use that first.
Start reading important stuff
Now that you have a job, and an address, and a budget and insurance, start thinking about taking care of your mind. Its a sure thing that youll sign up for cable when you move into your new place, but also consider the reading youll want to be doing on a regular basis. Whether you subscribe to the local newspaper, The Wall Street Journal, or any other national newspaper, its good to get in the habit right away. The same goes for monthly magazines that can impact your career. Its way too easy to get out of the habit of regular reading and study once you get out of school. Start building the habit of regularly expanding your mind even though your learning is not being tested every semester.
Look ahead; set goals
Every successful businessperson Ive interviewed has told me they never imagined exactly where their career would wind up. But successful people do set goals -- both short term and long term. No matter what your choice of employment, youll need to measure your achievements along the way.
Dont become too rigid in your choices. And always be ready to take appropriate risk in your career. Your original goals may change along the way -- as you achieve some or discard others. But instead of wandering along the path of life, attempt to follow a plan. Most of all, share your goals with others who have succeeded and may be willing to mentor you along the way. Nothing makes a successful person feel more satisfied than helping someone who is just starting out.
If you follow these 10 steps as you start your career, you may one day look back and realize how important it was to start out right. But you only get one chance to do it right the first time.
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