Yet every college graduate, no matter how much they owe, possesses the most valuable asset any adult has when it comes to money, and that’s time – lots of it. The average 22-year-old college graduate has 43 years to plan for retirement at age 65. And if they decide to work until age 70 (the starting date many experts now recommend) that span goes to 48 years. Those years can allow for plenty of time to set goals, make decisions, correct problems and accumulate assets.
With that in mind, smart grads might consider the following once they grab that diploma:
1. Start by talking to a financial planning professional: A visit with a financial planner is a great “clean slate” move. A one or two-hour meeting with a CFP® professional can you examine your current finances including college debt and what it will cost to live independently. You’ll also get the chance to establish and start a plan for all your long-term goals leading up to retirement – that would include travel, buying real estate, planning for a family or even a trip back to graduate school. The best planners are also a great sounding board for job decisions as they can help you evaluate how a potential employer’s pay and benefits offerings fit into your overall plan. You can find a planner in your area by visiting www.PlannerSearch.org.
2. Start saving for retirement immediately: You might not have $5 to your name after graduation. Or you might have gotten a nice little pile of graduation money that’s burning a hole in your pocket. Save some of it for celebration, but give some thought to investing in your first IRA and plan to start contributing to it on a regular basis over time, even if it’s only in small amounts for now. The 2010 contribution limit for taxpayers under 50 years of age to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for the year. The amount can be split between a traditional or Roth IRA, but the combined limit is $5,000. And the moment you qualify for an employer 401(k) plan, contribute the maximum, particularly if your employer matches.
3. Think used: The Great Recession has reset the consumer mindset considerably over the past couple of years. There are reasons to spend money for higher quality items that make sense – a good suit to impress a future employer or clients, for example. But there’s no reason why a well-maintained used car can’t work for a few years (unless there’s a good mass transit option) or your first apartment can’t be furnished at garage sales, auction sites and thrift shops. Of all the things you might need or want, ask yourself: Do you really need to buy new? If so, hit the dollar store.
4. Track that spending: Ongoing budgeting is crucial for a lifetime, not just the first few years after graduation. Whether you have a paper-and-file-based system or you go with paid or free online options (like Mint.com), make it a policy to do weekly tracking of spending, saving and investing.
5. Even though you’re young, you need insurance: If you’re single, it’s not time for life insurance, but you must have auto, rental insurance and yes, disability insurance. As for health insurance, there’s some good news if your employer won’t cover you immediately – under the new federal health care reform law, you’ll be able to stay on your parents’ health care family coverage until age 26. If you’re driving an older car, determine whether you need to keep collision coverage on it. Don’t forget renter’s insurance because a break-in can cost you thousands of dollars. If you’re driving a used car, you may not need to keep as much collision insurance on your car. Don’t forget to insure the contents of your apartment – one break-in can cost you thousands of dollars you don’t have. And check your employer’s disability coverage – it might be a good idea to buy separate disability coverage that you can raise the limit on over time. Think of how losing a paycheck for six months or more would hurt your finances.
6. Start an emergency fund: Everyone should have money set aside in a safe place to cover up to six months of basic living expenses if you become ill or lose your job. If you have to start the fund by cutting back on coffee and after-work drinks, do it – then put that money in an interest-bearing account you promise not to touch in case there is a genuine emergency.
7. Get some tax help: Some folks are really good doing their own taxes, particularly if their finances are very simple. But over time, it’s a good idea to get qualified tax help because these professionals, like financial planners, can not only help you spot opportunities to save money, but ways to save and invest that might leave you with more money in the long run.
8. Stagger your credit reports – and make sure they’re free: You have the right to receive a free credit report from the three main credit reporting agencies once a year to check for inaccuracies and the risk of I.D. theft. Keep in mind there is really only one place you can truly do this for free and the web address is www.annualcreditreport.com. This website is sponsored by the three credit reporting agencies, TransUnion, Experian and Equifax, so you won’t be asked for a credit card number. Also, don’t order all three reports at one time – stagger them throughout the year so you’ll be able to catch any threats or inaccuracies that pop up.
9. Learn to check those investments: Many workers choose specific funds or fund categories in an IRA or 401(k) plan and go to sleep for a bunch of years. Don’t let that be you. That’s one of the great reasons to have access to a financial planner because you can examine all of your investment choices on an annual basis and determine whether they still fit your age and goals.
10. Read: Learning about investing is personal. While planners and tax professionals can be an enormous help to your financial future, their work doesn’t take the place of the investigation all investors need to do before making financial decisions. With the Internet, it is easier to learn about the economy and investment and savings news than ever. Set aside a portion of time each day to do so.
April 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.
The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.
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