In a more perfect academic environment, every college diploma handed out would come with a user's manual for navigating the new world of financial obligations, since money moves made — and avoided — in your 20s will reverberate for decades.
"The amounts you save matter less right now than the habits you form," said Ryan Frailich, founder of Deliberate Finances, a New Orleans-based advisory firm.
"If you get in the habit of having credit-card debt, that will follow you for a long time. If you get in the habit of just living paycheck to paycheck, that becomes your norm. The key at the start is to develop habits that will pay off for the rest of your life."
Here's how to get a great start:
- Ace your student loan repayment. Yes, there is a six-month grace period after you leave school before the first payment is due. Do not wait five months and 29 days to get your payments set up. Late payments will incur fees and good God, the last thing you want is to fall into that.
Being late will mess with your credit score (more on that in a sec), and can ultimately end with the government stepping in and pulling the money from your paycheck (called "wage garnishment" in debt-collection circles.) If you have federal loans you can choose from multiple repayment plans some that stretch payments out for a few decades.
College finance expert Mark Kantrowitz recommends trying to stick with the standard 10-year repayment plan, so you can polish off this debt and move on to other financial goals sooner than later.
- Know where it's going. Now that you're making money, the best habit you will ever form is to spend less than what is coming in. "Having a budget is the foundation for everything," said Justin Nichols, chief planning officer at CGN Advisors in Manhattan, Kansas. Consider using a budgeting app to stay on top of your cash flow.
- Automate, automate, automate! Even if you were class valedictorian, you are still human. And when it comes to financial commitments, humans make mistakes. Bills get paid late, money that you planned to set aside in an emergency savings account or earmark for a Roth IRA gets waylaid.
"Ideally you want to treat saving as a monthly expense that is built into your budget, and the best way to do that is to set up automated transfers," said Nichols. Yet a recent SoFi survey found that less than half of young adults take advantage of automated savings:
- Build a $1,000 safety net ASAP. Yes, it's wise to have an emergency fund that can cover three to six months of living expenses. It's also not exactly practical right at the outset. Understood. But push yourself to sock away $1,000 in a bank or credit union savings account. (Automated savings of $25 a week will get you there in less than a year.) That's what helps you cover an unexpected expense without having to put it on a credit card that charges 15 percent or more interest.
- Skip the wheels of fortune. If you need a car, aim to spend the least amount possible to get a reliable car. That's because a car is a lousy investment, or what is called a "depreciating asset" among financial types. If you need a loan, Nichols suggests you aim for no more than a three-year term. "Anything longer is a sign you are stretching to buy an expensive car."
- Make the most of making more. You're likely at the low point of your earnings power. As you begin to snag raises, promotions and income-shifting job changes, Frailich suggests an 80/20 strategy for your newfound riches. Aim to use 80 percent of any extra income for a financial goal — paying off debt, boosting savings — and give yourself the remaining 20 percent to spend or save as you please.
"As you make more you want to make sure you don't fall into too much lifestyle creep. Giving yourself the freedom to spend 20 percent keeps that in check," said Frailich. Employ the same strategy as you pay off loans. Earmark at least 80 percent of the monthly payment that used to go toward that debt for another financial goal.
- Shoot for a 10 percent retirement savings rate. Getting to a 10 percent deferral rate as soon as possible will give you a ton of money 30 or 40 years from now. If you have a company match, make sure you contribute enough to get the maximum match. And if there's a Roth 401(k) offered, take that over a traditional 401(k). No match? Open a Roth IRA at a discount brokerage. You can save up to $5,500 this year in a Roth IRA.
- Get a credit card. A survey by Bankrate.com finds young adults are not exactly grooving to the notion of becoming part of credit card nation.
Not wanting to get sucked into the world of high-rate credit card debt is admirable, yet a sad fact of your new financial reality is that building a strong credit score is important. Your payment history on a credit card is a major factor in calculating your credit score; your debit card spending does zilch for your credit score. Once you have a credit card only charge what you can afford to pay off in full each month.
- Protect your biggest asset. Right now your most valuable asset is your human capital: the decades of earnings power you have ahead of you. Nichols recommends checking out the long-term disability coverage offered by an employer as a way to safeguard a chunk of your income if you were no longer able to work.