Entering the 'real world'
Tips to help you kick-start your financial life after college
Graduating from college is an exciting milestone, marking a segue from your time as a student to your adult career. If you recently finished school, congratulations! Now it's on to the next stage as you establish a personal finance strategy for the long term.
- Once you've entered the "real world," it's important to focus on saving, investing and paying off debt.
- It's suggested to have at least six months' of expenses set aside for emergencies. Failing to plan could have lasting consequences.
- The next checkbox for new graduates is saving for retirement—either in an employer-sponsored 401(k) plan or Individual Retirement Account (IRA).
- If you graduated with student debt, have these payments automatically deducted from your bank account—and be sure to do the same for credit cards and any other debts.
Getting a job is, of course, the first step. But speaking with Justin Waring, Investment Strategist Americas for the UBS Chief Investment Office, it's clear that this is just the beginning. Once you've entered the "real world," it's important to focus on saving, investing and paying off debt. By following these tips, you can set yourself up for a secure and fulfilling future—while still having fun.
Build an emergency fund
The first step for a newly independent adult with a grown-up job is to build an emergency fund. Urgent situations happen far too often, and they can easily cost thousands of dollars. Many people learn the hard way that failing to plan for the unexpected—major car repairs, unforeseen medical visits and dead furnaces—can have lasting consequences. But how much should you set aside?
"Look at your expenses," Waring said. "How much would you need to live each month?" He adds that your "rainy day fund" should reflect your employment risk, first and foremost. "Unless you have a virtually guaranteed job, it's good policy to have at least six months' worth of rent, utility bills, groceries and other basics set aside. If you've started your own business, or work at a start-up firm, you may want to set aside up to a year of expenses to hold you over if you end up in a cash flow crunch."
Start saving for retirement
Once you have your safety net, you should be covered for most typical emergencies, including a one-time expense or a job loss, and you can begin investing in higher return assets to grow capital for your long-term needs. For example, saving in a health savings account (HSA) offers a great tax benefit for medical expenses. And if you're lucky enough to work for a big company that has an employer-sponsored 401(k) plan—the kind that matches your own retirement contributions, for example—good for you! That makes saving for the day you leave work easy.
"At the very least, contribute enough to your 401(k) to get the match from your employer. That's free money, and it's part of your compensation. In many cases, you should probably even do this before paying down debt, but do the math first," Waring says.
And if your employer doesn't offer such a plan? Start saving as early as possible in an Individual Retirement Account (IRA). Waring notes that young workers may also want to consider contributing to a Roth 401(k) or Roth IRA—special retirement accounts that you can fund with post-tax income—if they're eligible. "Even though you pay taxes on your income before contributing to a Roth account—unlike a traditional IRA or 401(k)—the earnings won't be taxed when you withdraw them in retirement. And the upside of making very little money early in your career is that your tax rate will probably never be lower," he adds.
Getting started with a good savings habit right out of college makes it much easier to meet your retirement goals. UBS research shows that waiting to begin saving can be incredibly costly. "Our research shows that, by the age of 25, it's important to be saving about 8% of your income," says Waring. He cautions that "if you wait until you're 35 to begin saving, you'll need to save about 21% of your income to catch up – by 45, you'd need to really cut back on spending and save about 45% of income to retire on time and on budget."
Make debt payments automatic
If you graduated with student debt, you're in the same boat as about 45 million other Americans. In fact, the average 2019 grad walked away with $29,800 in loans, according to data from Student Loan Hero.1
You'll want to get rid of the burden as soon as possible, so have student loan payments automatically deducted from your bank account. That way, you'll never forget to pay on time. Waring suggests you do the same for credit cards and any other debts because the faster you get out of the red, the easier it will be to save for big milestones like buying a home. At the very least, pay the minimum amount you're expected to pay.
"If you can't afford to actively pay down your debts, you need a plan to cut expenses anywhere you can," Waring says. Getting out of debt, and starting to invest early, will make the rest of your life much easier. "Compound interest has been called 'the most powerful force in the universe'," Waring says.
As you get older, "saving versus spending" tradeoffs will get more and more difficult, so starting early and setting your savings and investment strategies on autopilot can help buy you a surprising amount of freedom later in life.
Establish a strong foundation for personal finance success
Starting your first job is a big deal, but avoid the temptation to spend that new paycheck as fast as you earn it. With the right focus on savings, investments and debt freedom, you can put yourself on track to a fun and stable financial future.