Here are three financial steps recent graduates should take
Recent college graduates are often in a state of bliss, and rightfully so. They are starting a new journey – many will move, start on a career path and take on a new set of responsibilities as an adult that they never had to worry about as full-time students.
As a new graduate joining the full-time workforce, it can be easy to get caught up in the day-to-day happenings of adjusting to a new job, balancing work and social life, and figuring things out in general.
Drawing a salary creates a newfound independence, which leads to a desire to spend some of that money on things and experiences. A budget can quickly be tossed aside if special care is not taken to nurture it, analyze it and seriously evaluate the consequences of ignoring it.
Making the concept of budgeting approachable, not just for month-to-month purposes but for the long term, might be helpful in actually getting young adults to give their attention to and dedicating time to it.
Here are the three steps college grads can take, listed in order of priority, to garner financial strength now and in the future:
1) Have an emergency fund: Ideally, for a young single professional, six months of expenses should be set aside in a liquid account (accessible within 24 hours or less). What if that person loses his/her job? What if a pet gets sick? What if any other unforeseeable life event happens that requires money?
The last thing that individual wants to do is go into debt to handle these surprises. An emergency fund is paramount. Anytime funds are pulled from that emergency account, building it back up should be the top financial priority after paying monthly expenses.
2) Have a retirement savings account: Ideally, this will be through an employer once the employee qualifies to participate in a company’s 401(k). Contributions to a 401(k) do result in less money in an individual’s pocket now, but he/she will benefit with a nice pile of money in retirement. Find out what the employer match is and make sure you are contributing at least enough to take advantage of the full match.
Target Date funds make it really easy to invest one’s savings (I invest in one myself). It’s a “one-stop shop” that gives full diversification and automatically adjusts an account’s allocation to the appropriate risk tolerance as the individual gets older (more stocks when they one is younger vs. more bonds when one is older).
A special consideration for Roth 401(k)s: Young professionals have time on their side when it comes to investing in one. They should consider putting at least half of their salary deferral into a Roth, instead of fully investing in a traditional 401(k). This will provide for diversification when considering one’s tax situation in retirement.
3) Set up a non-retirement savings account: Young professionals should not put all of their “financial eggs” in one basket. Having a taxable investment account provides another way to invest long-term in the markets while providing more diversification in terms of tax treatment of future withdrawals. Additionally, this type of vehicle is a good place to put funds for longer-term, non-retirement goals, such as funds for a down payment on a house.
Hapanowicz & Associates is an investment and wealth management firm based in downtown Pittsburgh. This is part of a series of occasional columns that Robert Hapanowicz and his daughter, Christina Hapanowicz, submit.
Christina is the author of this piece.