You’ve certainly earned the right to celebrate your accomplishments and take loads of cap-and-gown photos with your friends and family.
But there’s something else you need to do now as well: Start thinking about your financial future.
You’re lucky to graduate at a time when the job market is relatively favorable.
Making some smart decisions about what you do with those first few paychecks can help you build a strong financial foundation that will afford you flexibility and independence as you move through adulthood.
Take these steps to get started:
1. Make retirement savings a priority.
You’re a new graduate just starting your career now, so it may feel strange to start planning for the end of it, but money you can stash away for retirement now is the most valuable.
Your long time horizon means that the dollars you save now will be worth far more at retirement, thanks to compound interest. Aim to save at least enough through your work retirement account to get any employer match, since that’s essentially free money.
Next, you’ll want to start a Roth IRA. It is funded with after-tax dollars, but will grow tax-free and you won’t pay any money on withdrawals. These are great accounts for young workers, since you’re likely in a lower tax bracket now than you will be in retirement. You can put up to $5,500 into a Roth IRA this year, as long as you’re earning less than $117,000.
2. Have a plan for your student loans.
Last year, the average graduate with education debt finished school owing nearly $30,000 in student loans. Regardless of your balance, it’s important to prioritize your student loan payments early on, even if you’re still in the grace period (typically six months after graduation) before payments come due.
If it looks like you’ll have trouble making payment based on your income, see if you’re eligible for federal student loan repayment programs, which may tie the amount you have to pay to your income. Unless you’re eligible for loan forgiveness because you work in the public sector, however, stick with the standard plan if you can afford it, because it will cost you the least in interest over the life of the loan. If you are making standard payments, prioritize saving for retirement over paying your loans off early, since your long-term return on those investments is likely higher than your current interest rate, and you can deduct the interest on your taxes.
“Unless you’re paying more than 7 percent on your student loan, I’d resist the temptation to pay them off, and instead just save and invest that extra money,” says David John Marotta, president of Marotta Wealth Management in Charlottesville, Va.
3. Consider your health insurance options.
Under the Affordable Care Act, you must have health insurance or pay a penalty, but you’ll want a policy to prevent an illness or injury from jeopardizing your financial future. If you’re under age 26, you can stay on a parent’s health insurance plan, although you’ll need to see how the cost of that plan compares to the options provided by your employer. (If you’re not eligible for health insurance at work, or you’re a freelancer, you can buy insurance directly via the Obamacare exchanges).
If you don’t have any chronic illnesses and rarely visit the doctor, the most affordable option is likely a high-deductible health plan, which has low premiums and will cover preventative-care basics such as a check-ups and birth control. You’ll have to pay out of pocket for the costs of additional care up to your deductible amount. Prepare for those costs by setting tax-free money aside in a Health Savings Account.
4. Build an emergency fund.
Even on a low starting salary, you should aim to set aside some money regularly for unplanned expenses and emergencies. Try to set aside about 10 percent of your income until you have three to six months’ worth of expenses in this rainy day fund. That way you don’t have to dip into your retirement accounts or run up high-interest credit card debt if your car breaks down or you find yourself temporarily unemployed. Set up automatic transfers from your checking account into a designated savings account (or if your employer allows it, direct deposit part of your paycheck into savings) from the start, so that you get used to living on less than you earn right away.