You just worked your way through four (or more) years of studying, testing, learning, and growing with great focus and intensity. You put yourself out there — scary isn’t it? — and you landed your first “real” job out of school. Life is grand as you settle into your new normal.
Now what?
Financially, you are likely to be making and managing more money than you ever have in your life. Your parents may or may not have been good role models for how to handle money. Just like with other aspects of your life, you get to make your own decisions about what you do with the money you are earning. Being wise with your money right out of school will help establish patterns — good or bad — for how well money serves you in the future.
Follow these steps to build a solid financial foundation for yourself:
- Assess Where You Are. You may have been living in an apartment or a dorm and living the college life, but now, you have more bills and responsibilities. Understanding the current state of your finances is important. Do you have any debt? Do you have money in savings? Are you good at tracking expenses? Are you comfortable with choices at your new job around insurance, retirement savings, and health care options? Be realistic about what you know and don’t know. Make a list of financial areas or topics you would like to understand more now that you are on your own.
- Educate Yourself. Have conversations with co-workers, parents, and friends about how they deal with money. Treat these as inputs, not directives. Remember, your friends likely have as the same degree of experience with money as you do, so listen to what they have to say, but weigh their words against people who have already worked through the financial events that are still in your future. Learning from people a generation or two ahead of you can save you lots of valuable time (and mistakes) when handling your money. For Christians, the Bible has plenty to say about money, so you could benefit in learning biblical principles around money.
- Pay Off Your Debt. Based on 2016 statistics from the Institute for College Access & Success, most (over 66%) college graduates finish school with student loan debt. You are statistically average if you graduated with $37,574 of federal student loan debt according to figures compiled by the Education Data Initiative for 2021. When you include data from private lenders, that figure approaches $55,000 per person. That means most graduates are starting life $40-50K in the hole. Letting that debt hang around means blunting your sharpest financial tool, your income. Paying back student loans will take time and deliberate effort. If you are thinking some or all of that debt will be forgiven, think again. Only 2.5% of Public Service Loan Forgiveness (PSLF) applications have been approved since November 2020. Only .65% of federal student loans have been forgiven through PSLF. Just $253.8 million was forgiven as part of the Teacher Loan Forgiveness. Student loan forgiveness can and does happen, but the path is narrow. You have about the same chance of being born with red hair (2%) as you do having your student loans forgiven. Student loan debt is not the only kind of debt, but it is quite common. Car loans, personal loans, and credit card debt can also saddle recent grads with demands on their paychecks. Pay off your debt as quickly as you can. It’s not a pet, and it won’t go away on its own.
- Create An Emergency Fund. The best buffer between you and financial trouble is an emergency fund. This is money you set aside for…wait for it…an emergency. That might be a blown tire, and unexpected car repair, or a layoff. Building a cushion between and life’s financial surprises will keep a one-time expense from throwing you off course. Even before you pay off debt, you should build up a small $1,000 emergency fund. After your debts are paid, use the money you were previously using to pay your debts and redirect that into a savings account or money market account. Build this emergency fund up to cover three to six months of expenses (not income, but expenses). If you are in a high-risk position or market, six months may be best. If you are in a low-risk position and could find a job in your field quickly if you lost your current job, you might build just three months of savings. Regardless, putting that buffer in place before investing will help you from being being financially derailed by an emergency.
- Start Retirement Saving. Now. After you are out of debt and have a full emergency fund, use 15% of your take home pay to invest in retirement. Depending upon your profession, there are a variety of options that may be available to you. 403(b), 401(K), Roth IRA, traditional IRA, solo 401(K), SEP IRA, and other options like Teacher Retirement System (TRS) or the military’s Thrift Savings Plan (TSP) may be available. I’ll cover retirement options in another post, but regardless of the vehicle, the principle is to invest early and regularly to grow your future retirement nest egg. It may seem like you don’t need to think about retirement when it is several decades away, but outside of your income, your greatest wealth-building tool for the future is compound interest. Saving early and taking advantage of compound interest is one of those rare times when time really is on your side.
- Learn To Budget. Your largest wealth-building tool is your income. Most people have a general notion of where they spend their money, but once they do a budget they are surprised to see what amount of money is spent in what places. Doing a budget may sound constricting and limiting, but in reality it provides you full control over where your money goes. When people budget for the first time they typically find several hundred dollars they can redirect towards a goal. That “found money” could be used for your savings, paying off debt, or investing. Budgeting is a learned skill, so be okay with not getting everything right the first month. Stick with it. After three to four months, your skills will grow and your accuracy will improve. Combined with investing at a young age, budgeting is the most powerful tool you have.
- Give. This one may sound counterintuitive, but giving money to causes you believe in enhances your quality of life. Whether you give as part of a “pay it forward” cycle, to connect with and support a cause, or because it makes you feel good, generous people tend to live longer healthier lives. Being generous to others also teaches us to be less centered on ourselves and focus on others. Giving money connects you to a purpose bigger than yourself. The mental health benefits of being a giver can start with small regular gifts and expand as your income grows. Giving can have tax benefits, too, but the primary reason to give is to develop generosity.
Those are some great starting points. If that list feels too daunting, take it one step at a time. Commit to taking stock of where you are and determining a single next step. Perhaps you decide to work on generosity and give a small financial gift each month. You could commit to learning about money management or start a budget. Whatever it is, be intentional about learning to make your money work for you.
If you would like help taking stock or where you are or what a good next step is as you spend your first few years in the workplace, we provide a complimentary consultation and can work with you on determining next steps.
KJ Financial Coaching 