Carleigh Machock, CPA, shares some nuggets of financial knowledge for a new college graduate:
One of the hardest parts of transitioning out of college is learning how to be financially responsible without support from mom and dad’s bank account. Dealing with inescapable paperwork and paying bills are necessities to adulthood. So is setting up accounts and understanding what you’re actually setting up. And managing your financial situation while setting goals for the future. These are all activities recent graduates need to be aware of as they step off campus and into the real world. Below, a few key tips will get you started:
Although the thought of retirement probably seems irrelevant to a twenty-something year old, the return on investment in your twenties has the greatest growth potential and is entirely relevant to the quality of life you will lead when you’re ready to put your career to rest. Many employers match a percentage of your retirement contribution, so you may be losing out on an employer match by not participating in your company’s plan. Calculate what you need to defer to your plan in order to maximize your employer’s contribution. Taking advantage of the money growing benefits at a young age is not only wise, but it will also force you to be conservative with your finances. Seeing your retirement account grow over the years will give you a new perspective on the value of a dollar. Set monetary goals and work towards them. You’ll be putting your dollars to work for you, and will feel rewarded in the long run.
Healthcare coverage plans come in hundreds of shapes and sizes. Your new employer may offer you several options depending on the company plan. Although you may be tempted to skim through the healthcare verbiage and pick a plan at random, be sure to understand what you’re signing up for. For instance, high deductible plans may be more affordable on a month to month basis than a traditional buy-up plan, but you will be paying much higher out of pocket costs for doctor visits and co-pays than the traditional plan. Traditional buy-up plans tend to cover doctor visits and prescription costs prior to the deductible being met. Another common option is HSA and FSA accounts. These accounts are set up to defer pre-tax income used strictly for health care costs. Your employer will withhold and deposit an amount specified by you. They may even match a percentage of your contribution to the account, so be sure you’re not leaving free money on the table. If you decide to go this route, be sure to understand what is considered a qualified healthcare expense, or else you could be paying a penalty on non-qualified expenses on your tax return. Also be mindful that FSA plans have a “use it or lose it” policy, while HSA accounts roll over year to year. Meet with your HR manager and research the health provider’s website to become more informed and pick the plan that is best for you.
Establishing good credit
Pay attention to your credit score. Your score will dictate whether you can finance big ticket items, such as a new car or home. It also helps lenders decide the interest rate on the loans you apply for. Open a credit card and use it to purchase items you would normally purchase, such as gas and groceries, but make sure you pay the balance in full every month. It’s easy to overspend with a credit card, so you must be disciplined about when you use it. If you have a hard time controlling your card use, leave it at home for the majority of the time, and only pull it out for trips to the grocery store. If you were the eighteen-year-old that opened a credit card to purchase a $1,000 flat screen, defaulted on your payments, and now have a low credit score, there’s still hope. There are prepaid credit cards available that contribute to your credit score. Although they defeat the purpose of a “credit” card by funding the card up front, they will help improve your score, which is important in the long run.
Paying down student loans
Student loans are a reality for many college graduates. It was easy to take the loans out when you were a student, but now the clock is ticking on your loan and you’re making sizable payments. Staying current on your student loans is a must (see Establishing Good Credit above.) There are options to make the monthly payments more affordable, but be aware that these lower monthly payments may cause the loan to cost more money by accruing interest over time. Lowering your payments may also cause you to pay larger monthly payments years down the road. If you’re on a career path where your salary will grow exponentially over time, then these can be great options to consider. Another option is consolidating your student loans to have a lower interest rate. Shop around for the best available interest rate and talk to a banker about consolidating your loans.
Now that you’re not claimed as a dependent, you will have to become more familiar with filing your own individual tax return. One of the first things you will have to fill out at your new job is a form W-4. The W-4 is important because it tells your employer how much money to withhold from your paycheck to submit to the IRS. Withholding too much from your paycheck will tighten your personal cash flow, and you’ll be giving the IRS an interest-free loan. At the same time, you’ll be receiving a large refund when it comes to tax time. On the flip side, withholding too little will give you more cash now, but you’ll end up writing a check on April 15th, so make sure you have cash set aside. The less exemptions you put on your W-4, the more money that will be withheld for the IRS.
This is just a starting point to solid fiscal responsibility, but if you educate yourself now, you’ll thank yourself later!