There’s nothing more gratifying than graduating from college after four years of hard work.
But getting a degree and entering the next phase of your life comes with a whole new set of expectations and responsibilities. Graduation often means starting your first full-time job and getting your first significant paycheck. But that paycheck also comes with more financial responsibilities, like budgeting to pay your bills on time, saving, and even planning for retirement.
Stash put together a checklist of six things new college graduates should know as they enter the “real world:”
#1 Create a budget
You might already have a budget from college. But if you don’t, and you’re starting a full-time job or have a summer gig, the first thing you should do is make one, or alter the one you have to fit your post-graduate circumstances.
One good template to follow is the 50-30-20 budget. First, you need to calculate how much money you have coming in each month. If you get two regular paychecks per month, their total is your monthly income. If you’re waiting tables or working a gig where your income varies, monitor how much you make in a month and use that as your benchmark.
Then, you need to tabulate your monthly expenses. Maybe you just rented your first apartment or leased a car. Figure out how much you’ll spend each month on necessary, fixed expenses and include that in your budget. Under the 50-30-20 framework, your fixed expenses should be 50% of your income. You will also need to know how much you spend on nonessential, variable expenses like going out to eat or shopping. These expenses should make up 30% of your budget. The remaining 20% of your budget should be saved, for whatever your long-term goals may be.
You can adjust the percentages as you see fit. Maybe you’re living with your parents and can afford to put a little more than 20% in savings.
#2 Start a rainy day and emergency fund
You may be tempted to spend that first adult paycheck on a pair of sneakers you’ve always wanted or a big screen TV for the new apartment. While it’s fine to splurge from time to time (as long as it’s in your budget), you should also try to start saving small amounts of money for short-term and long-term goals.
You’ll want to have a rainy day fund where you keep $500 to $1,000 in case you get hit with an unexpected expense, like a car repair or broken iPhone. Your rainy day fund should be liquid so that you can use it at a moment’s notice. You’ll also want to consider having an emergency fund, with three to six months’ worth of expenses, in case of something more serious like a layoff or medical emergency. This money can be kept somewhere that it can earn a return, such as in a high-yield savings account or a brokerage account.
#3 Make a plan for repaying student loans
As of June 2019, 43 million Americans owed federal student loan debt, amounting to a total debt of $1.5 trillion. So if you graduated with some student loan debt, you’re not alone. While you probably don’t want to think about your student debt immediately after graduation, it’s best to start planning early.
Depending on what kind of federal student loans you have, you likely don’t need to start making payments towards your debt for six months. People with Direct Subsidized, Direct Unsubsidized, or a Federal Family Education Loan have a six-month grace period during which they don’t have to make payments.
However, you should know when your first payment is due, and how you’ll make those payments. You’ll need to set up a repayment plan with your loan servicer. You may consider setting up your loan payments in advance so that you make them automatically. You should also include those payments in your budget when it comes time to make them.
#4 Start saving for retirement
When you’re just leaving college, you’re probably not worried about your retirement savings. But the earlier you start putting away money, the better off you may be when it comes time to retire.
The sooner you start investing, the more money can work for you through the power of compounding. Compounding is any return earned on your principle, or your initial investment, plus your past returns.
For example, if you start with $100 and put $50 a month away for 10 years, with an annual return of 5.25%.1 You’ll have slightly more than $7,800, but you’ll only have put away $6,100. In this scenario compounding could add about $1,700 to what you save.
Using the same example above, the person who starts saving in his or her 20s may be able to put away almost twice as much as the person who starts in his or her 30s, which could set you up for a more financially sound retirement. (Find out more about how saving early for retirement can help here.)
If you have a full-time job, your employer might offer you a retirement plan, such as a 401(k) or, if you’re a teacher or government worker, a 403(b). Know what your options are, and start putting a percentage of your paycheck into your retirement account. Your employer may even match up to a certain percentage of your retirement contribution.
If your employer doesn’t offer you a retirement plan, you can still start saving by opening an individual retirement account (IRA). IRAs allow people to save for retirement independently, without having to rely on an employer. There are two different types of IRAs: traditional and Roth IRAs. The main difference between these two types is that you pay taxes on the money you contribute to a Roth IRA, so that you don’t have to pay taxes when you withdraw from the account during retirement. You contribute to a traditional IRA with pre-tax income, so you have to pay taxes when you withdraw during retirement.
You can set up a traditional or Roth IRA with a Stash Growth plan ($3/month).2
#5 Start building credit
Your credit history is the sum of all the transactions that have been reported to credit bureaus in your name over the years; these are all recorded in your credit report.Your credit score is a point-based rating system that assesses how responsible you are with loans and debt over time. Having a credit score can give you access to things you might want later in life, like a mortgage, student loans for graduate school, and even a mortgage for a house.
Credit scores run from a low of 300 to a high of 850, which is considered perfect credit. A score of 670 or above is considered good credit. Paying your student loans, credit card bills, and others each month can help you maintain a strong credit score. Another general rule of thumb is to never use more than 30% of the total credit you have on all of your cards or credit lines.
When you’re just starting off after college, you might not have a credit history or score. So depending on your situation, now may be a good time to sign up for a credit card, if you haven’t yet. Something to consider is that you may only want to get a credit card if you’re absolutely certain you can pay your credit card bill in full each month.
Debit cards are an alternative to credit cards. They draw money directly from your checking account, rather than a credit line, and they can help you stay on top of spending while keeping you out of debt. They may not help you develop a credit history, however. You can learn more about the difference between credit and debit here.
#6 Consider insurance coverage
This new chapter in your adult life often comes with things like getting a first apartment, a car, or if you’re lucky a house, all of which you may want to protect with renters, auto, and homeowners insurance. Apartment insurance will protect things like your furniture, clothes, headphones, and computer, as well as offer liability protection in case someone injures themself in your home. Auto insurance, which is required in most states, can help cover medical costs, repairs, property damage, even the replacement cost of your car if you get into an accident, or if your vehicle is stolen. Having renters and auto insurance can protect you and your things in the case of accidents, theft, and more.
You should also consider signing up for health and life insurance. If you’re on your parent or guardian’s health insurance plan, you may be able to stay on that plan until you’re 26. Or you may be able to enroll for health insurance through your employer. (Just make sure you don’t miss the enrollment deadline.) If neither option is available to you, you can get insured through HealthCare.gov, the health insurance marketplace established by the Affordable Care Act. You may also be able to get life insurance through your employer, but there are other ways to get a plan as well.
#7 Start investing small amounts
You can start investing small amounts of money to save for your future with Stash.3 Stash allows you to invest small amounts of money regularly in stocks, bonds, and exchange-traded funds (ETFs). No matter where you stand in your post-graduation life, you can start investing. Just remember to follow the Stash Way® by investing in a diversified portfolio for the long-term.