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MarketWatch: 7 Money Moves Everyone Should Make In Their First Year After College Graduation

May 22, 2015

This article was published on MarketWatch’s website on May 21, 2015.

-Charles Passy

A college student’s life can be full of challenges, from the academic (hello, senior thesis) to the everyday (loads of laundry to do without parental assistance). But all this is just a rehearsal for the real challenge: life itself. And it’s in the first year after graduation that many young people learn the true meaning of adulthood: working hard, paying the bills and, if the budget permits, enjoying a little grown-up fun.

Recent college graduates should take heart in the fact they’re not alone: Some 1.8 million students are expected to receive bachelor’s degrees at the end of the current school year, according to the National Center for Education Statistics. But looking beyond the comfort-in-numbers factor, grads should recognize that being a grown-up is not so difficult — provided you approach it with a sound strategy. Presuming you’ve already tackled a couple of the biggest challenges — namely, finding a job and a place to live — here are some other steps to follow.

Get your papers in order
Actually, this piece of advice will apply to almost any stage in life, but it’s particularly important when you’re organizing your finances for the first time. What kind of papers? Certainly, your birth certificate and Social Security card). You’ll need such identification when applying for everything from a passport (if you don’t already have one) to a marriage license (yes, you might get married one day). But don’t forget other documents — for example, if you want to sell your car, you’ll need the title. The key is to always store the documents in a secure place, such as a home safe or a bank safe-deposit box. But just as important, says Clare Levison, an accountant and author, is to “make sure you return them to that place each and every time you take them out.”

Figure out your student loan
Next to your rent, this will likely be your biggest monthly expense, so it’s one that needs to be carefully addressed. And in a timely manner, too — you typically have within six months of graduation to begin making payments on most student loans. (If you don’t start paying, your credit rating could take a hit and your wages may be garnished — not exactly a positive way to begin your financial life.) Today’s graduates have many payment options for federal student loans, from the standard (a 10-year term with a fixed payment amount) to the income-based (up to a 25-year term with amounts that change according to what you earn). Graduates also have the option of consolidating loans from multiple years with different interest rates into one lump sum with a fixed rate.

What should you do? The short answer: It depends. While some payment options result in a lower monthly hit, they also can result in a larger overall payout because of the extended time frame. (That being said, loan forgiveness is possible in certain instances and particularly for those in certain fields, such as teaching.) The U.S. Department of Education and the National Consumer Law Center offer advice on the various options. Still, experts often suggest going the standard payment route, since it ensures you will be without any sizable debt as you head into your mid-30s — the very time you’ll likely need the money for other matters (like raising children and, ahem, saving for their college education). “Your (payment) goal should be 10 years or less,” says Mark Kantrowitz, senior vice president at Edvisors.com, a Las Vegas-based firm that runs websites focusing on college costs.

Make a budget
Once you know some of your major fixed costs — rent, utilities, student loan, cellphone, etc. — it’s time to put them down on paper (or on a computer spreadsheet or savings-oriented website) and create a monthly budget. “It’s a roadmap to maximizing your savings opportunities,” says Greg McBride, chief financial analyst for Bankrate.com. (And you will need to start saving — more on that later.) But it’s helpful not to think of a budget as a financial straitjacket. You can still treat yourself to the occasional — or even daily — coffee at Starbucks. “A responsible budget doesn’t mean you can’t spend money on yourself,” says Alisa Wilke, a managing director with the American Student Assistance’s SALT program, which advises students about financial matters.

What’s critical is to plan for your latte: If you simply visit Starbucks at random — without factoring it into the discretionary portion of your budget that also includes expenses ranging from vacations to movie tickets — you may not have money left over for savings. Or even worse, for essentials — like rent.

Another point to keep in mind: You should base a budget on your take-home pay, not your salary. The reason: “Taxes, health-care costs and retirement contributions can quickly eat up nearly a third of your salary,” says David Rudd, professor of business administration at Pennsylvania’s Lebanon Valley College.

Open the proper accounts
If you haven’t done so already, you’ll need to establish a checking account and/or savings account so you can manage your money. It’s worth shopping around among credit unions, traditional banks and online banks for the best deal in terms of lower fees and higher interest rates (yes, you can still get interest on checking, though not much). And don’t forget to look into promotions: Some banks will offer sign-up bonuses of $100 or more on new accounts.

And a credit card? Even if you fear it may be an invitation to spend, spend, spend, it’s a necessary tool to help you establish a good credit rating, which will be important when you apply for loans down the road. “Having a better credit score means you’ll pay less — often hundreds of dollars less per month — for years and years,” says Lee Gimpel, a writer who covers personal finance. But once you have that credit card, make sure to rein in your spending. “I recommend that people treat it as a debit card,” says Brandon Moss, managing director at United Capital, a financial advisory firm. In other words, pay it off every month (and on time) and only charge items that you can truly afford to buy. Otherwise, the interest rates, which can top 15%, will play havoc with your budget. Also, look for a card that offers rewards — cash rebates, airline miles, etc.: If you’re going to charge, you might as well get something back.

Insure yourself
You probably won’t need life insurance — that’s something that becomes necessary when others (namely, a spouse and children) are dependent on your income. But you will likely need other types of insurance. If you have a car, just about every state requires auto insurance. And following the enactment of the Affordable Care Act, the same pretty much goes for health insurance — if you can’t get your medical coverage through your employer, you’re generally expected to get it on your own (or through government-run exchanges), unless you want to pay a tax penalty. Still, it’s worth weighing your insurance choices, particularly when it comes to deductibles: Since young people generally have fewer health issues, it may be worth it to take a plan with a higher deductible in return for a lower overall cost. You can also stay on your parents’ insurance until you reach the age of 26 if they are willing to keep you on it.

Finally, there’s renter’s insurance (presuming you don’t already own a home): It’s a relatively affordable option — plans average about $15 a month, according to the National Association of Insurance Commissioners — that can be a good idea as you accumulate more belongings. Plans cover personal property (”from your clothing to your appliances to your furniture”) in the event of theft, fire, storm or other peril, says Allstate, of its policies. And the cost for renters insurance can be even cheaper if you have auto insurance and use the same company, notes Erin Ellis, financial educator with the Philadelphia Federal Credit Union. “Look for a discount for bundling your policies,” she says. One caveat: Since traditional renter’s policies cover only so much, you may need extended coverage if you have particularly valuable items – like family jewelry or high-end audio equipment.

Have enough savings to cover surprise expenses
Sure, it’s easy to do all of the above and think you’re set for life. But then comes a bump in the road — like the literal kind that will result in an accident and cost you a couple of thousand dollars in front-end damage to your car. Or the metaphorical kind — like the sudden loss of a job. That’s why emergency savings are necessary. How much in savings? Typically, enough to cover at least three months of expenses, but if you’re in an unstable employment situation, you may want enough to cover six months or more. If this figure sounds too daunting, save what you can, says Kevin Gallegos, a vice president with Freedom Financial Network, an advisory firm. “Start with the level of expense that causes you to rush to a credit card. Is it a car repair for $250? A medical bill for $500? Have at least that amount available,” he says.

Plan for your retirement
Wait, you just started working and now you have to think ahead to the day — four or so decades in the future — when you’ll stop working? It may seem a bit strange, but retirement planning should begin in your 20s, financial pros insist. That’s because of the power of compounding. The earlier you start saving — even if it’s just $100 a month — the greater the chance your savings will snowball into something significant. “Ignoring the issue can literally cost (college graduates) hundreds of thousands of dollars,” says Lule Demmissie, managing director of retirement at TD Ameritrade.

Of course, you have to figure out where saving for retirement ranks in your list of priorities — certainly, it’s not as important as paying the rent, but it’s probably more important than another weekend ski vacation. (Think about it like this: If you fund your retirement properly, you can ski all you want later in life.) And some financial pros suggest that you shouldn’t skimp on saving for retirement in order to pay off your student loan quicker, since the loan is generally considered “good” debt — it typically has a relatively low interest rate and the interest (or a portion thereof) can be tax-deductible. On top of that, retirement plans have tax benefits all their own. Plus, if you’re in an employer-sponsored retirement savings program, like a 401(k), the money you contribute is pre-tax so you’re lowering your taxable income — which is great news come April 15 — and if your company matches the contributions, the match is an effortless way to add to your investment.“It’s free money,” says McBride of BankRate.com.

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