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As the Class of 2021 heads out into the world, they’ll be facing a variety of financial decisions big and small 一 from renting an apartment to purchasing a new car to opening a checking account.
The choices you make right after graduation, like setting up a 401(k) or creating a plan for repaying student loans, can help set you up on a path toward financial success.
Your credit score, budgeting skills and retirement savings will all play a role in when (and whether) you can achieve certain financial milestones, like putting a down payment on a house or fully paying off your student debt. Below, CNBC Select shares five personal finance tips that will help new graduates (or adults of any age) who are learning how to manage their money.
The 50/30/20 strategy is rough guide for how you should spend your money. Start creating a budget by writing down your income and expenses. Calculate your fixed costs (rent, student loans, utilities, food, transportation, etc.) and variable costs (dining out, vacations, shopping, etc.) and make sure that your expenses are not greater than your income.
Aim to spend 50% of your budget on essentials such as rent or mortgage payments, student loan debt, food, utilities, health insurance and car payments or other commuting costs.
You should try to put 20% of your paycheck toward savings and investments such as contributions to your 401(k) and an emergency fund. An emergency fund is cash savings you have on hand in case you have an unexpected expense, such as if your car breaks down or you need to replace your laptop. Ideally, new graduates should work to create an emergency savings account with at least three to six months’ worth of living expenses, but even an extra $200 or so can be a good place to start.
The last 30% of your budget can go toward spending on nonessential expenses like travel, eating out and shopping.
Once you have a basic outline, you can adjust depending on your expenses and income.
Many 2021 college graduates will have some student loans to pay off. For the Class of 2021, the average student loan debt is $36,900, and the average monthly student loan payment is $433. Creating a plan to pay off your student debt is one of the first big financial decisions you’ll need to make.
For new graduates with federal student loans, you won’t have to worry about paying off your federal student loans immediately: There’s a six- or nine-month grace period on your student loans after you graduate. During a normal grace period, most federal student loans (except for federal direct subsidized loans) will accrue interest. However, because of the student loan payment pause, all federal student loans won’t start accruing interest until Oct. 1.
Before the grace period ends, people should update their information with their loan servicer because it’s important that your student loan servicer has up-to-date information like your address and email when your payments begin, said Mark Kantrowitz, an expert in financing higher education.
When it comes to making a plan for paying off your student loans, take time to look at the budget you created to determine how much of your income is going toward your debt payments. If you have extra money in your budget and you want to prioritize loan repayment, you might want to consider trying the avalanche method for paying off your debt. With this plan, you start by paying off the debt with the highest interest rates, like private student loans, and then work your way down to debt with lower interest rates, like federal student loans. (You should still pay your regular monthly student loan payments on all your loans each month to make sure they stay in good standing.)
Individuals who have student loans with high interest rate may want to consider refinancing them to get a lower APR, says Kantrowitz.
Another way to get in the habit of paying off your student loans every month is by enrolling in an autopay program through your loan service provider. Many offer a 0.25% interest rate reduction with autopay, so you’ll also save a few extra bucks each month.
If you’re dealing with financial hardships and think you won’t be able to commit to a monthly repayment plan on your student loan debt, Kantrowitz suggests requesting deferment and forbearance or opting for an income-driven repayment plan.
Deferment and forbearance both allow you to stop student loan payments temporarily. The major difference between forbearance and deferment is that with forbearance, interest will continue accrue on your debt. In deferment, no interest will accrue.
“Deferments and forbearances suspend the payment obligation,” Kantrowitz says. “Interest may continue to accrue and will be added to the loan balance if unpaid during the deferment or forbearance. Examples include the unemployment deferment, economic hardship deferment and general forbearances.”
If you qualify for an income-driven repayment plan, you’ll only have to pay a certain percentage of your income, which could make your monthly payments more manageable.
Regardless of whether you have federal or private student loans, it’s important to take the time to understand how much you owe in total as well as your monthly payments. Knowing this information, can help you feel confident in making sure your repayment plan fits within your budget.
Saving for retirement straight out of college may seem like a daunting task when you have piles of debt or are still seeking a job. However, getting started at age 22 versus 32 can make a dramatic difference 一 a 22-year-old who starts investing $5,000 annually into a retirement account will have nearly twice the amount of money saved by 67 than an individual who starts investing at 32.
While experts recommend investing 12% to 15% of your income into your retirement account, it’s best to start off with any amount and work toward increasing the percentage as you earn more.
New grads looking to invest for their retirement have a few options. They can invest through their employer or through individual accounts.
A 401(k) is a retirement plan offered through your employer (nonprofits offer a 403(B)) that is typically deducted straight from your paycheck. If your employer offers matching contributions on your 401(k), make sure to take advantage of the offer because it’s essentially free money. Typical 401(k) contributions lower your taxable income now and can grow tax free, but you’re taxed in the future when you make withdrawals in retirement.
There are two big reasons why you should start saving for retirement straight out of college: 1) to take advantage of your employer’s retirement match program, and 2) to create a routine, says Michelle Perry Higgins, a principal and financial planner of California Financial Advisors.
“Many employers offer a company match to their 401(k)-plan based on your contribution amount. This is free money that you’re turning away if you fail to participate into the plan,” Higgins says. “I have never met an employee that would turn away a bonus so why turn away from a 401(k) match? However, roughly 20% of employees fail to maximize their match.”
People should opt for their 401(k) contributions to automatically be withdrawn from their paychecks, says Higgins, so they’ll be less tempted to spend money that’s meant to be allocated to retirement goals.
If your employer doesn’t offer matching contributions, you can open a traditional individual retirement account (IRA) or a Roth IRA. These retirement accounts allow you to invest in a combination of stocks, bonds, mutual funds and other financial assets.
There are a few things to keep in mind when deciding between a Roth and a traditional IRA. For a traditional IRA, your money is not taxed until it’s withdrawn at retirement. On the other hand, a Roth IRA is funded with money that’s already been taxed, so you won’t be charged income tax in retirement.
A Roth IRA is a good option for young people who are early in their careers and have lower salaries because they’re likely in a lower lower tax bracket than they will be when they reach retirement age. There are also income limits on who can contribute to a Roth IRA (up to $140,000 for individuals and up to $208,000 for married couples).
With a traditional IRA, you’ll be hit with a 10% penalty fee if you withdraw the money before the age of 59 and a half. But if you have a Roth IRA account, you’ll only be penalized if you try to withdraw the investment gains you’ve earned before you turn 59 and a half. Of course, you should avoid withdrawing any money before retirement, but it can be good to know you’ve got savings you can access in case of an emergency.
Having a good credit score is essential for many of the financial tasks you’ll need to tackle as a new grad, whether you’re renting an apartment or opening a new credit card. A credit score is a rating that financial institutions look at to determine how likely you are to pay off your debts. There are two major credit scoring models, FICO and Vantage, but FICO is more commonly used.
Your FICO credit score is determined by five factors:
- Payment history (35%): Whether you’ve paid past credit accounts on time
- Amounts owed (30%): The total amount of credit and loans you’re using compared to your total credit limit, also known as your utilization rate
- Length of credit history (15%): The length of time you’ve had credit
- New credit (10%): How often you apply for and open new accounts
- Credit mix (10%): The variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans and so on
If you don’t yet have a good score, there are many ways to start building your credit. A good credit score can help you secure lower interest rates on loans and better credit card offers, which can help make your life more affordable.
If you have no credit history, you can start by either opening a secured card or becoming an authorized user on someone else’s credit card. Getting a secured card doesn’t require a credit history, but you have to put down a security deposit, usually equal to the amount of the monthly credit limit (typically around $200). The security deposit acts as collateral, so if you’re able to make all of your credit payments, you’ll recoup the initial deposit.
There are a few credit cards that are geared toward consumers who are building credit that don’t require you to have a security deposit. The Petal® 2 “Cash Back, No Fees” Visa® Credit Card is a good choice for new graduates who don’t have a credit history, offering credit limits from $500 to $10,000. There’s also no annual fee, 1% cash back on eligible purchases right away, and 1.5% cash back after you’ve made 12 on-time monthly payments.
1% cash back on eligible purchases right away and up to 1.5% cash back after making 12 on-time monthly payments; 2% to 10% cash back from select merchants
12.99% to 26.99% variable
Balance transfer fee
Foreign transaction fee
Becoming an authorized user on someone else’s credit card is another way to increase your credit score. The primary cardholder is responsible for making the payments, so if they have good credit habits, it can boost the authorized user’s credit score as well.
However, make sure you have a clear agreement with the primary cardholder so that you’re repaying them for anything you charge each month. You don’t want to put their credit score — or yours — at risk by not paying off the balance on time each month.
If you’re a Gen-Zer on TikTok or YouTube, you’ve probably seen videos of people discussing the merits of investing in cryptocurrency or talking about their own experiences paying off substantial amounts of debt. Be careful what advice you follow: A significant chunk of the personal finance advice found on TikTok is false (one in seven videos from personal finance TikTokers was found to be misleading).
That said, some of the advice found on TikTok can be useful to young people who don’t feel comfortable talking about money with their friends and family. When searching for sound money advice on social media, make sure to check the qualifications of those who are claiming to be experts. You might want to start out by looking for people who are registered certified financial advisors (CFA), certified public accountants (CPA) or registered investment advisors (RIAs).
Of course, social media isn’t the only place to look for financial advice. There are podcasts, books and blogs that you can follow or read.
Podcasts are a great way to learn more about money: NPR’s “Planet Money” podcast doesn’t strictly focus on personal finance but tackles interesting, complex financial topics like the subminimum wage and the GameStop short squeeze. For a podcast more focused on personal finance, “Future Rich” is a hosted by CFP Barbara Ginty who gives advice about everything from handling money in a marriage to making your side hustle take off.
If you’re more of a reader, consider checking out “Broke Millennial” by Erin Lowry, which is catered toward young adults who are clueless about personal finance. “Nudge: Improving Decisions About Health, Wealth, and Happiness” by Harvard Law School professor Cass Sunstein and Nobel Prize winner Richard Thaler, is another good choice. The scholars write about how our choices in personal finance and in life are influenced by human biases.
For new graduates, navigating the real world and new financial responsibilities can be challenging. You may find yourself facing questions about how much to spend on rent or how to invest your savings, and being unsure where to find answers. Don’t be afraid to do the work.
The decisions you make now will shape your financial future for years to come. By starting as soon as you graduate from college and learning the basics of personal finance, you’ll kick off your adult life on more sound financial footing. With this solid foundation, you can start working toward the milestones you want to achieve later in life, whatever they may be.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.