Congratulations! You’ve just passed through one of modern life’s great rites of passage: college graduation. If you’re like many of your cohort, you have a lot of weighty decisions to make in the next few months. Fortunately, these decisions are a lot like college: show up, do the homework and more than likely, you’ll do just fine.
1. Should you move back home? This is as much a big personal decision as it is a big money decision. And for many recent grads — 45 percent of them, according to a 2013 report from the Pew Research Center — moving back home is not a decision but a fact of life. The slow economic recovery and historically high levels of student loan debt mean it’s difficult for recent grads to strike out on their own. Moving back in with mom and dad is an opportunity to get a handle on debt and begin to lay the foundation for a strong financial future. Without the burden of rent and other living expenses, boomerang grads can tackle other pressing financial needs. Make the most of it.
2. Should you consolidate your loans? If you have more than one student loan, consolidating your loans into a single loan can make repayment more convenient. You’ll write one check each month instead of two or three or more, and you become eligible for several repayment plans that can reduce your monthly payments. What consolidation will not do is lower your interest rate.
Before 2006, when student loan interest rates were variable, it was possible to consolidate when rates were low and thereby lock in a low fixed rate. Loans issued after July 2006, when the law was changed, are fixed-rate loans from the beginning. When you consolidate today, your servicer calculates your new interest rate by weighting the interest rates of your loans and averaging. The new single rate is effectively the same as the previous mishmash of higher and lower rates among several loans. In your consolidation loan, your high-rate loans go down while your low-rate loans go up.
Add it all up, and reduced monthly payments and convenience are paid for with longer loan repayment periods (as long as 30 years), which means more interest paid over time.
3. Should you repay debt or save? Recent grads should both save aggressively and work on eliminating student loan and consumer debt. Many financial experts suggest building up a comfortable emergency fund first, and then focus on repaying debt, starting with the highest interest-rate debt. While the money in your emergency fund won’t grow much in a savings account, it will provide a cushion against life’s little tragedies, which you’d otherwise pay for with credit cards or other borrowing.
4. Should you start saving for retirement before paying off debt? Compound interest is a wonderful thing, and to fully take advantage of it, you must begin saving (and investing) as early as possible. For example, if you were to invest $5,000 per year for 30 years in a fund that earned 8 percent interest (which matches the previous 10-year performance of the Standard & Poor’s 500 index), your savings would balloon to $611,729. Waiting 10 years to start the same savings plan ($5,000 per year at 8 percent for 20 years) lets some of the air out of the balloon — a lot of air, in fact — reducing your take to $247,115.
One interesting savings vehicle for young adults is a Roth IRA. Unlike traditional IRAs, you can withdraw the money you’ve contributed to the fund without penalty (interest earned cannot be withdrawn penalty-free until retirement). That alone makes a Roth a good place to stuff your emergency fund — close enough if you really need it, but far enough away that you won’t be tempted to spend it on an “emergency” trip to Las Vegas or a new pair of sunglasses.
As for your debt, compound interest works against you, too, increasing the amount you owe the longer the debt is unpaid. Eliminate your high-interest debt as quickly as you can, and you’ll have more money to plow into savings.
5. Should you contribute to a 401(k)? If your employer offers a 401(k) and matches your contribution (or more likely, a percentage of your contribution), then, yes, you must contribute, at least up to the employer match. That’s free money. And as with the Roth IRA suggestion above, compound interest and your relative youth will turn that free money into something substantial by the time you retire. Your future self will thank you.
More from U.S. News
10 Things New Grads Can Do Right Now to Get a Job
12 Simple Ways to Raise Your Credit Score
10 Ways Millennials Are Changing Homebuying
The 5 Biggest Money Decisions New Grads Face originally appeared on usnews.com
