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By Jackie Waters
Special to the Financial Independence Hub
Graduating from college is a huge milestone. You’re now ready to start your career, and you’re excited about getting a house or apartment, a car, a new work wardrobe, and more. But all of those things cost money. And don’t forget repaying student loan debt, insurance premiums, utility bills, food costs, and a long list of other expenses. Since you’re facing these new expenses, it’s essential to create a solid financial plan.
Make a budget and manage your debt
Experts recommend starting your monthly budget by thinking of the “50-30-20” rule. After receiving your first paycheck, you’ll know your net income, which is how much you receive after paying taxes and insurance premiums. From your net income, put 50 per cent towards needs such as rent, utilities, and food; another 30 per cent towards non-necessities or “wants;” and the final 20 per cent towards debt repayment and savings. However, if your student loan debt is substantial, flip the percentages so that 30 per cent goes towards debt repayment and savings, and 20 per cent goes towards wants.
Student loans are usually broken up into several loans with varying interest rates. The best way to tack them is to pay off the loans with the highest interest rates first. Pay the minimum towards the balances with the lowest interest rates, and make larger-than-the-minimum payments on the loans with the highest interest rates. “The biggest mistake you can make is paying the minimum into each loan and waiting until you make more money when you’re older to deal with them,” warns Time.
Look to the future
Life is full of unexpected surprises, so an emergency fund is crucial. If your car needed a major repair, if your laptop needed replacing, if you lost your job – what would you do? If you have an emergency fund, you’ll be able to pull from there instead of from your monthly budget. People often face going into debt because they have no way to cover unexpected expenses. To prevent this from happening to you, plan for the unexpected by putting a small amount of each paycheck into a savings account.
Planning for the future also involves retirement planning. Most employers offer 401(k) retirement plans, and many offer some level of matching what you put in. According to Time, traditionally, a 401(k) is employer-sponsored and allows you to save and invest a portion of your paycheck before taxes are taken out, which decreases your tax liability. Usually, if an employer offers a match to your contributions, they will do so up to a certain percentage of your income. “By choosing not to fully participate in these programs, you are effectively turning down free money from your employer,” says Time.
Some employers also offer a Roth 401(k). Unlike a traditional 401(k), your contribution is made after taxes are taken out, but the funds grow tax-free for retirement. This option is ideal for younger investors who are typically in a lower tax bracket, so they’ll benefit more from the tax break in retirement than they would now.
A Roth IRA is similar to a Roth 401(k), but a company does not sponsor it. This individual retirement account allows you to invest a certain amount each year. For 2016, the amount was $5,500. You must also have a specific modified adjusted gross income. In 2016, the income had to be less than $164,000 for filing single, or a combined $183,000 if married. Because the accounts offer tax-free compounded growth, they’re ideal for younger investors. If every year you were to invest $5,500 starting at age 22, by retirement you’d reach more than $1 million. However, if you waited until your 30s and invested the same amount annually, you’d have half as much by retirement.
Finally, it’s wise to set up automatic transfers from your checking account to your emergency savings and Roth IRA accounts. By taking money straight from your paycheck and putting into your account, you won’t forget to transfer the money later or be tempted to spend it. By planning ahead, getting out of debt as quickly as possible, and strictly following your budget, you can have a sound financial future ahead of you.
Jackie Waters is a mother of four boys living on a three-acre Oregon farm. She runs hyper-tidy.com, providing advice on being … Hyper Tidy!
