Graduating college and starting the first full time job brings many changes. Adulting can be hard, they say. But also very exciting. The first full time job comes with many decisions: health care benefits, retirement plan benefits and paying bills on your own¾to name a few.
When it comes to finances, there are several items to consider. How one handles the following key items can make a huge difference in future financial success: Debt, Savings Goals and Where to Save.
Debt. Debt is often a reality for most graduates in some form or fashion. Student loans are prevalent and a reliable car is often a necessity. Key goals when considering debt:
- Credit Cards. Avoid high interest credit card debt at all times. Use a credit card to build credit, earn points or cash back. But pay off the balance every month. High interest and fees can easily get out of control and difficult to reign in.
- Interest Rates. The level of interest rate matters. Keep track of all debt along with the interest rate associated with it. Aim to pay off the highest interest rate loans first.
- Long-Term Goals
- No debt aside from a mortgage as soon as possible. This includes car debt. The sooner you can start buying cars with cash the better. Don’t be enticed to buy a fancier car than necessary just because someone tells you that you can afford it. When you don’t have a car payment, avoid buying a new car. Save the money instead, until you can trade in with cash. I’m not a huge fan of leasing cars.
- Pay off your mortgage before retirement.
Savings Goals. It’s tempting to blow that first big paycheck on something fun. But, keeping needs versus wants in check early on will give you the freedom to afford more fun things in the future. Build a budget and stick to it. Key large items to save for include:
- Car. If you don’t have a car payment yet, start setting funds aside for your new car. How lucky would you be if you could never have car debt?! Cars don’t last forever. There will likely come a time within the next five years when you will need to face this purchase.
- House. Owning versus renting is a fantastic way to build wealth. Rent can never be recaptured. Once you pay it, that money is gone. Building savings for a down payment on a home is crucial. It is very possible to take on a mortgage that may be close to the same cost as rent, once you pay the down payment.
- The average first time homebuyer puts 7% down, according to the National Association of Realtors. This equates to $14,000 on a $200,000 home.
- Don’t forget to factor in insurance and taxes when considering how much your monthly payment will be.
- Retirement. Maximizing retirement savings early will help provide flexibility sooner. Please see the example with Bob and Jeff in every Schenkelberg Investments newsletter print version illustrating the benefits of saving early.
Where to Save. You may be completely on board with targeting the savings goals above but wondering how to start. Once you have met needs (not wants), target these savings:
- Bare Minimum Saver. Don’t skimp on these savings vehicles. Do these while paying the minimum on debt. Your budget should be based on take home pay after these savings are met.
- 401k Match. Most employers offer a match for funds invested in the 401k. Make sure to save at least enough to capture the match. This is “free money” so to speak.
- Emergency Savings. Open a savings account where you keep at least $2,000. This amount will vary based on everyone’s situation.
- Good Saver. Start targeting the goals above. Balance paying higher than minimum payments on debt while targeting these savings. Consider lower cost living expenses, if possible, to meet these savings goals.
- Roth IRA. $6,500 per year. Single tax payers making less than $138,000 per year can put up to $6,500 into a Roth IRA each year. Take advantage of this while you can! Any funds deposited into this account can be withdrawn without tax or penalty; however, earnings do have some stipulations.
- Add to Savings Account. Accumulate savings in the bank for the car and/or house referenced above.
- Excellent Saver. Pay off debt with interest before targeting these savings. Once debt is paid off put those monthly payments toward these goals.
- Maximize 401k savings. For 2023, a single taxpayer can save up to $22,500 in 401k accounts. If there is a Roth option, seek to save half as Roth and half as Traditional.
- Open a taxable investment account. Save any additional excess here.
Early on these goals may seem insurmountable. However, being diligent and doing what you can with these goals will get you there before you know it. Reward yourself occasionally as you go. However, if small luxuries are sacrificed now, the long-term rewards are more than you can imagine.