So you finally have that college degree in hand. Congratulations! And condolences.
Like many recent college graduates, you may be shouldering a mountain of school debt. And the job market is none too wonderful. But a job will come your way sooner or later, along with an apartment and maybe a car, some credit card offers and so on. Here, then, are a few suggestions for giving your new financial life a sound foundation.
Most importantly, keep debt to a minimum. Ideally, debt should be used for only two purposes: buying a home and getting an education. Without a mortgage, you’d be 50 before you could save enough for a home. And an education is such a valuable investment it’s worth borrowing to pay for it.
What about a car? A vehicle may be a necessity, but anything more than basic transportation is a luxury, and it’s not wise to borrow for luxuries. Today’s cars and trucks can easily last 10 to 15 years. You should be able to find a safe and reliable used vehicle for $5,000 or less.
Many young people resort to leasing vehicles because monthly payments are lower than those on a new-car purchase. But with leases, you’re never off the hook. A lease is really just a loan for renting a vehicle for a few years, after which you have to repeat the process.
Once you’re employed, start an aggressive program of paying off older debts. Start with those charging the highest interest rates, like credit cards. The Accelerated Debt Payoff Calculator will help you devise a strategy. If necessary, pay only the minimum on school loans, since the interest rates are generally low.
As soon as you can, start saving for a home down payment, children’s education and your retirement. If your employer offers a 401(k) or similar plan, contribute at least enough to get the company’s maximum matching contribution, if there is one. Terms vary, but many employers will put in 50 cents to a dollar for every dollar the employer contributes, up to 5% or 6% of the employee’s salary. Not getting that full match is like turning down a raise.
Remember that 401(k)s are meant for retirement, and you’ll pay taxes and a 10% penalty on withdrawals before age 59 ½. Because it’s a long-term investment, all or most of your account should be in stocks. You’ll have plenty of time to weather downturns, and stocks beat bonds and cash over long periods.
Savings that will be needed relatively soon, for a home purchase, for instance, should go into an ordinary taxable account. If you’ll need the money in less than five years, a big portion should be kept in bonds and cash, as stocks could be in a downturn just when you need your money.
With all investments, try to keep fees to a minimum. Index-style mutual funds and exchange-traded funds are cheaper than actively managed products.
You also should have a rainy-day fund to cover living expenses for at least six months if you lose your job. To keep it safe and accessible, use bank savings or a money market fund.
It’s tough to juggle all these needs, but a little easier if you devise a budget that makes a priority of investing and paying down debts. Most people have no idea how much they are wasting on restaurant meals, unneeded phone minutes, entertainment and other spending that can be trimmed without upending one’s lifestyle. You can track all spending with a free program like Mint.com.
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