Now that you are out of school and working with steady income, are you ready to delve into the key aspects in creating a stable financial future?
For college graduates who are fortunate enough to leave school with a job, financial planning becomes a mysterious puzzle when burdened with tasks of building savings, investing for retirement, and clearing massive amounts of student loans and credit card debt.
Ultimately, young savers ask: What should I do first?
What may appear to be a daunting road ahead can be overcome with a generally systematic process.
The very first step, as recommended by many experts, is to build an emergency fund of at least $1,000 while holding off on investments and making payments towards debt—this number should vary to your comfort level. Liquid cash reserves can be built after tackling investment opportunities and debt reduction.
Dealing With Debt
A college grad can typically carry credit card debt, a car loan, and student loans. The general rule of thumb is if you cannot earn guaranteed returns on savings that beats the interest rates of your debt, you should strive to remove the debt first.
Credit cards debt should receive the most attention with many carrying double-digit APRs, followed by car loans – both of which do not offer tax deductions on interest charges. Student loans tend to have lower interest rates and are tax-deductible, so they can be held for longer.
Example: You have credit card with a 11.99% APR, a car loan with a 4.5% APR, and a student loan with 2.5% APR. If your savings account has a 3% APY, you should make minimum payments on the student loan while aggressively paying down the balance on the credit card.
Few savings and investment options can guarantee a 11.99% return. Depending on your risk tolerance you could opt to pay off the car loan slowly and choose go down the next best route, investing.
Investing For Bigger Returns
During college, you may have heard of the people who get rich by picking the next hottest stock. While the chances of you repeating such a feat is rather unlikely, investing diversely in stock, mutual funds, and bonds can bring about high returns too.
If you are offered the opportunity to invest in a company-sponsored retirement plans such as a 401(k), it should be the first destination for your investment funds because companies often match a portion of your contribution – essentially free money.
Afterwards, you have the option of contributing more money into investments through tax-advantaged accounts such as traditional and Roth IRAs and/or regular taxable accounts. These choices should be considered along with debt obligations. If you’d like to tilt your focus more towards debt, you can do so and put less in investments – but it is still important to continue putting money into investments at the same time.
Personal finances are unique to each individual so it is difficult to provide a one-size-fits-all solution.
While the rules laid out are simply general financial advice, nothing comes before your sense of financial security. If you feel that debt breathing down your neck poses a major distraction toward financial success, don’t let general financial wisdom overtake your psychological peace of mind.
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