SMITH BRAIN TRUST – It’s challenging when you graduate in a pandemic era. Employment prospects have altered and many new hires will begin their jobs not in a shiny new office, but remote from their kitchen tables. Some things haven’t changed, however, like the personal finance advice that young professionals should follow.
Elinda F. Kiss, associate clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, shares her top financial planning tips for young professionals.
As recent graduates move into a phase of life where they can start setting aside money for investing, what are the most important things new graduates should know?
Pay yourself first. That is, to set money aside to save for the long term. Money saved now can grow and compound. I tell my students that if they save $5,000 per year for nine years and then let that money compound for 36 more years at 8%, without saving another cent, they will have more money ($997,017) than a friend who waited nine years to save, and then saved $5,000 per year for 36 years at 8% ($935,511). But if you continue to save $5,000 per year at 8% annual compounding, you will have almost $2 million ($1,932,528). If you start saving nine years earlier, you will have twice as much money; that is the beauty of compounding. (The Rule of 72 shows if you can earn 8%, your money doubles every nine years.) By saving early, you can save less in later years and still have more upon retirement. And, you should diversify your investments. By utilizing index mutual funds, recent graduates can invest in stocks, bonds, commodities and real estate.
While it does not sound like fun, it is important to start and stick to a budget. You can download a personal finance app on your phone (e.g., Mint.com) to track your spending and account balances. You need to understand your living expenses – from utilities to rent to transportation. You may face some monthly expenses that previously were negligible or nonexistent. This will be a large portion of your monthly budget. Perhaps you can live with your parents for a few years to save more. Live within your means. Bag your lunches; invite friends over for potluck meals. Remember, the fun is in socializing, not in spending time in expensive restaurants. During the coronavirus pandemic, we need to socially distance. So, visit via Zoom or meet up with friends for a socially distanced bike ride or outdoor walk.
As student loan debts come knocking, what are the most important details that new grads should understand?
Pay off student loans. Borrowers in the U.S owe $1.64 trillion of student loan debt. For borrowers with federal student loans, the average student loan debt in America is $35,397, according to the most recent Department of Education data from December 2019. While it’s tempting to make minimum monthly payments, opt to repay as much and as quickly as you can. The sooner you pay off those loans, the less interest you pay and the sooner you will have spare cash to put into saving, or plan a treat for yourself, such as a vacation or a sizable down payment for a house.
This goes hand in hand with paying your bills on time. Keep track of expenses and make all payments on time to avoid hefty late fees and negative impacts to your credit rating. To avoid late payments, consider scheduling automatic payments. If you pay utilities, for example, with your credit card, you may get money back or airline miles, or some other reward. But be certain to pay your credit card bill on time; in fact, pay it early to reduce the percentage of your credit limit that you are using; that will raise your credit score. A higher credit score will lead to a lower interest rate when you need to borrow such as for a mortgage on your house. To build and maintain good credit, pay your bills on time, and stay below the credit limit. Keep your oldest credit card open. Your credit score is dependent on how much debt you have relative to your available credit and the length of your credit history.
Post-coronavirus, how should new graduates alter their approach to savings and budgeting?
Establish an emergency fund for unexpected and costly events. During the coronavirus crisis, many people have lost their income. Whether your car breaks down, you get injured or lose your job, having this safety net will give you financial peace of mind. Start by putting away $1,000 (maybe from graduation gifts). Then, contribute a little from each paycheck until you have between three to six months of net pay. The trick here is to reserve this fund only for emergencies.
What are some employer-sponsored benefits to consider for graduates transitioning to professional life?
When you begin work, sign up for your employer’s 401(k) or 403(b). This is a start on paying yourself first. You won’t miss the automated savings when it comes out of your paycheck before you even see it. At the very least, you should save the amount that your employer will match. Your employer’s match is “free money," which you will not get if you don’t save an equal amount. And while it may sound obvious, be sure to sign up for health insurance. As COVID-19 has reminded us, diseases can strike the young as well as the old.
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