Five personal finance tips for new college graduates
As the culmination of years of hard work, college graduation is always an accomplishment worth celebrating. Graduation in 2021 – with the world still grappling with the economic ramifications of the COVID-19 pandemic – can seem daunting, however. Laura Cole, director of the University of Tennessee’s Master Investment Learning Center, Haslam College of Business in Knoxville, offers some tips to help new graduates get started on a sound financial footing.
1. Measure your wealth
To get a clear picture of your financial situation as a recent college graduate, Cole recommends determining your net worth by determining how much you own versus what you owe.
“At this point, you might not have anything other than your student loans, most of which have a six-month grace period,” Cole said. “Your goal is to be able to select reasonable repayment plans to reduce what you owe.”
2. Create a budget
Budgeting begins with tracking where your money comes from and where it goes in a given month. Consider all of your income sources and be realistic about variable expenses like food, clothing, and entertainment, as well as fixed expenses like rent, loan payments, and insurance. To create a simple budget, many financial experts advise using the 50/30/20 rule.
“Spend 50% of your income on necessities like rent or mortgage, loan payments and groceries, and spend 30% on splurges like entertainment, dining and travel,” Cole said. “The remaining 20% should be used to save and pay off any high interest debt (like credit cards) you may have.”
3. Create an emergency fund
Make sure you save money in an emergency. Cole advises setting aside at least $ 500 each month, gradually increasing this amount until you’ve saved enough to cover all of your personal expenses for six months. Keep your emergency fund in a high-yield cash or money market management account, or in a liquid savings account where you can quickly access your money if needed.
“Don’t rely on the ‘Mommy and Daddy Bank’ to help you in an emergency,” Cole said. “If you live within your means, you will be able to save for unforeseen circumstances.”
4. Set up a pension plan
If your employer offers a 401 (k) retirement account, you can arrange to transfer money from your paycheck directly into your 401 (k). Some employers match employee contributions up to a certain amount, so be sure to contribute enough to get the full amount. If your employer doesn’t offer a 401 (k), you can set up an individual retirement account, such as a Roth IRA, through an online broker.
“Your goal is to save 15% of your pre-tax income for retirement, yes, even at age 21,” Cole said. “With compound interest, the sooner you can start saving for retirement, the better off you’ll be and the sooner you can retire.”
5. Use credit and credit cards wisely
Credit cards help you build credit, as does paying off loans on a timely basis. To maintain your healthy credit score, you must use less than 30% of your credit limit in any given month and pay off your credit cards every month.
“Your goal is a FICO credit score around 700 so that you can earn low interest rates when you need to borrow money,” Cole said. “You can check your credit score and report for free once a year at AnnualCreditReport.com.”
Stacy Estep (865-974-7881, [email protected])