NEW YORK (MainStreet) --So you or someone close is a freshly minted college grad? Congratulations!
And condolences. It’s one of the worst job-hunting environments new grads have ever faced.
But those who do get jobs – and most do eventually – may well feel richer than they ever have. Finally, an adult paycheck! Even if you’re on the bottom rung of the income ladder.
Here, then, are a few tips for the new grad who did not major in finance and investing. Although the world of adult finances can be intimidating, it’s really not so complicated for those who are young and don’t have much money.
Your first priority: keep up to date on all debts, including credit cards, car payments and student loans. If you fall behind, you’ll end up paying higher interest rates and your credit rating will take a beating, making it harder to borrow for years. A bad credit history can even hurt your job prospects.
Second, do everything you can to avoid new debt. Unless you need a nice car to ferry clients or customers, buy a used vehicle for cash, if you can. A three or four-year old car will cost half to two-thirds what a new one will and still have most of its life ahead of it. A five or six year old vehicle can be a great deal, though the occasional repair is more likely. Leases are generally not a financially sound option, because you never get free of payments and build no equity.
If you can get a credit card, do so – they’re great for emergencies and to start building a credit history. But use a debit card linked to your checking account for ordinary expenses. When you must use the credit card, pay off the entire balance every month so you won’t face interest charges. And if you can’t do that, always, without fail, make at least the minimum payment required.
You probably know that when it comes to financing your retirement you may well be on your own, with no traditional pension and perhaps less in Social Security than your parents and grandparents could expect. Ideally, one should save 15 to 20% of gross pay for retirement, but that’s a target to reach in your 30s and 40s, when your income will presumably be larger and you still have many years of compounding ahead. So don’t panic is you can’t afford much retirement saving right off the bat.
That said, it does make sense to participate in a workplace retirement plan like a 401(k). Your contributions will be tax deductible, reducing your tax bill, and your investment gains will not be taxed until you take them out decades from now. At a minimum, contribute enough to your plan to get the largest employer matching contribution offered, if there is one. At many firms, that equals 3% to 4% of pay, so not getting it is like turning down a raise.
Remember, though, that money put into one of these plans cannot be taken out before age 59 ½ without trigging tax and 10% penalty.
If you don’t know much about investing, put your 401(k) contributions into a target-date fund designed for people your age. It will automatically adjust your balance between stocks and bonds, favoring stocks when you are young and bonds later on. Index-style target-date funds charge very low fees. High fees – 1% a year or more – can really undermine your investment gains over the decades.
Finally, build a good rainy-day fund. In fact, if you’ve just started a new job and aren’t yet eligible for the 401(k), it’s a good time to build a nice cash reserve for emergencies. Most experts suggest having enough for six to 12 months of expenses.
Most other financial issues can wait a few years. You don’t need life insurance, for instance, until you have dependents, such as children or a spouse who does not work. And, for now, renting an apartment probably makes more sense than buying a home, since people in their 20s tend to move often for new jobs. Even if you do plan to stay put, there’s no rush to buy, as prices and mortgage rates are likely to stay low for some time.