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How New College Grads Can Get a Jump on
Financial Planning For a Lifetime
The average college graduate with a four-year degree now
takes about five years to put on a cap and gown, and her average
debt is growing too. According to 2006 figures from the Project
on Student Debt, the average college I.O.U. was approaching
$21,000.
With all that student loan debt, it's genuinely tough to
focus on saving and planning for retirement. But there's really
no better time for a young person to be better positioned for
good money habits that will last for a lifetime. Here are some
of the best moves to make coming out of school, even if you
haven't gotten a job yet:
Talk to a financial planner. Ask your parents for the
graduation present of financial advice. A meeting with a
financial planner can set a spending plan that will accommodate
what your future income needs will be to extinguish that debt
and how you'll be able to save in the future.
Sign up for the company 401(k) the minute you're eligible.
A 401(k) plan accomplishes more than retirement savings. It
teaches a new worker the value of "out of sight, out of
mind" savings — when money goes to savings before you have
a chance to spend it. In addition, having deductions taken to go
directly into your 401(k) will mean less federal and state taxes
from your paycheck. That's why new grads should sign up for
their 401(k) retirement savings the moment they become eligible.
But it's important to stress that even if it takes a year before
you can join the company plan, start putting money away in a
traditional or Roth IRA. You'll be capturing funds from the
start, which experts say is the absolute best way to build a
financial future.
Always aim for the maximum. It's a tremendous
challenge to put away the most you can save in any retirement
plan once you get out of school — you have a household to set
up, school loans to pay off and you need to have a little fun,
too. But even if you can't set aside the maximum in your various
retirement options at the start, make it a goal to get there as
soon as your income rises and your debt falls. Have the payroll
department calculate a sample of what your net pay will be with
and without money deducted for your 401(k) savings. You'll be
surprised how similar your net pay could be.
Check your investment balance each year. Studies show
that many people will pick a handful of mutual funds for their
401(k) at the very start and not change them. That's one of
the great reasons to have access to a financial planner because
you can examine whether your investment choices and style fit
your age and goals.
Hold off on buying a new car. Mass transit is best,
but if you need a car, think about buying a quality used car
that you can pay off quickly. A new car with a low down payment
means you'll be doubling your debt if you owe the maximum in
school loans. Do you really want to owe $40,000 or more? That's
a tremendous burden for a new professional.
Don't forget about insurance. If you're single, it's
not time for life insurance, but you must have auto, rental
apartment and yes, disability insurance. Even if your employer
does not offer you health insurance right away, you must find
another insurance resource since you probably won't be able to
piggyback on your parents' health plan for awhile. If you're
driving a used car, you may not need to keep as much collision
on your car. Don't forget to insure the contents of your
apartment — one break-in can cost you thousands of dollars you
don't have. And if you think about "old folks" being
the only folks who can become disabled and cut off from a
paycheck until they can work again, guess again. Think of how
losing a paycheck for six months would hurt your finances.
Start laying away an emergency fund. Even if all you
have is the proceeds from two missed lattes a week, start
putting money in a special account you will not touch unless you
are out of work and need to find some way to pay the rent. Make
the trigger something as serious as that, or you'll never have a
serious reserve for emergencies.
Figure out taxes. New workers tend to do one of two
things when it comes to taxes — they either withhold too much or
too little. It makes sense to sit down with a planner or a tax
professional to make sure your annual tax set-aside is correct,
because withholding too much means Uncle Sam gets to hold the
money that could go to your retirement or your emergency fund.
Don't forget about health insurance. Health insurance
gets more expensive by the day, and finding a good employer that
provides good options for this benefit is particularly
important. Given that younger people are generally healthier,
get some advice on whether you should investigate a
high-deductible plan that's paired with something called a
health savings account (HSA). Such accounts allow you to stash
money that can cover that big deductible — for individuals, the
minimum deductible in 2008 is $1,100 — but the accounts can be
invested just like IRAs. Over the course of time, you can
develop a nice little nest egg that can alleviate a lot of
future worries about how you'll pay for health care.
July 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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