Congratulations! Four years have come and gone, you’ve successfully completed your degree and even more importantly, you navigated the rigors of entry-level job interviews to secure your first post-graduate paycheck.
Now what?
While it’s good to take a moment to celebrate, it’s important to think about how those first paychecks can be used to build a solid foundation for your financial future. Living in the moment is part of being a young adult. But this is also the best time to start thinking about how you want to treat yourself 20, 30 or even 40 years from now.
Here are a few helpful tips to get you focused on the big picture.
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Lay out a financial plan and establish a budget. In order to help plan for your future, laying out a roadmap is essential. To get started, go through the process of writing out your near and long-term financial goals. This includes identifying your daily needs, such as rent, groceries, student loan payments and commuting requirements. Some of your longer-term goals may include paying for a wedding, purchasing a new car or eventually a home.
The next important step is to create a comprehensive budget so you can see what it takes to achieve these goals as you balance the demands of covering your living expenses.
While going through this process may sound simple, according to the Voya Retire Ready Index, only 17 percent of working Americans have taken the time to develop a written financial plan. The good news is there are a number of useful online planning and budgeting resources today to help you do this, at no cost. For example, Voya’s myOrangeMoney retirement planner and its monthly home budget and savings calculator can help you get started.
Control your debt. As you plan and budget for life with your new steady stream of working income, this is also the time to properly get a handle on debt. Perhaps you have a goal of paying off your student debt within five years of being in the workforce. To help get you there faster, re-evaluate the remaining balance on your loans on a quarterly basis to track your progress of meeting that goal. If you receive a raise or change jobs, you might want to consider allocating more of your income to paying off that debt.
Like many young professionals, you may also be using your own credit card for the first time. Proper debt management means not getting behind the eight ball with credit cards. If you find you have accumulated significant credit card debt, set a financial plan to dig yourself out. Find the card with the highest interest rate and pay as much as you can above the minimum payment each month, still making minimum payments on other cards. Once the first card is paid off, divert those payments to the next most expensive card.
Keep in mind, holding and properly managing a certain amount of debt can be good for your credit score. For example, paying off credit card balances each month and demonstrating a positive track record on financed items, such as a car, can help down the road if you’re looking for other loan assistance, such as a mortgage. Just make sure debt doesn’t get the best of you.
Start saving now so you can spend later. Once you have a sound budget in place, the next critical financial item is saving for your retirement. Many employers offer workplace retirement savings plans, such as a 401(k). These are one of the easiest and most effective ways for younger workers to jump-start the savings process — they let you automatically contribute some of your paycheck directly into an account on a tax-deferred basis and employers may even kick in a company match as an incentive to save up to a certain amount.
Younger people may think they don’t make enough to save, or they consider any money being diverted out of their paycheck as a “penalty.” It’s important to switch this paradigm and recognize that saving more now means your money has a longer time to potentially grow tax-free. In turn, this may translate into something very positive — more retirement savings to spend later in life!
If your employer doesn’t offer a 401(k), don’t worry. There are other options to save for retirement. Consider opening an individual retirement account and explore how different strategies can help you save.
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For example, many people at the start of their career may benefit from a Roth IRA. This is when individuals are likely earning lower salaries and fall within a lower tax bracket. While contributions to a Roth IRA are not tax deductible, for the most part, withdrawing these funds in retirement are 100 percent tax-free. Simply put, you pay fewer taxes now on those contributions in order to be tax-free later.
Keep in mind you can always talk to a professional, or try online tools like a Roth IRA calculator to help you better understand what makes the best sense.
Make adjustments when necessary. Throughout life you’ll encounter a number of major financial changes. Some of these might occur sooner than later. For example, as you start working and paying off your debt you could be eliminating your student loans, or perhaps you’re taking out a loan for a new car, or even buying your first place.
These life changes are a good opportunity for you to revisit your financial plans, ensuring that your long-term goals stay top of mind. It’s a good idea to review your plan once or twice a year, revising it along the way and staying disciplined. As you move up in your career, don’t let your retirement plan fall behind pace.
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While you may just be starting out, remember that life moves quickly. If you take time to get organized early on, your future self will thank you later.
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4 Financial Planning Tips for a Post-Grad World originally appeared on usnews.com
