While I can't necessarily help you figure out what's next, I can help guide you through how to best prepare financially during this transitional life period so that you're ready for whatever life has in store for you.
So ladies and gentlemen, I present to you my Top 5 Financial Tips for Graduating Seniors:
1. Save 20%
- If there is just one financial habit you can develop early in life, it would be to save at least 20% of every dollar you earn. In today's economic environment, we are finding that 10% - 15% savings rates are just not cutting it. People are not able to retire when and how they want to. It really takes 20%! Instituting this habit early and sticking to it will have a larger impact on your financial future than you can imagine.
2. Differentiate "Savings" from "Future Spend"
- Sometimes we set aside 20% as savings and we truly don't plan on touching it. Sometimes we set aside money to buy a new phone, take a senior trip, etc... the latter is not true savings. We all need to save money today to spend later on things like trips and big purchases. It is prudent to do so. But don't play games with yourself and call that savings. Only dollars set aside for the sole purpose of wealth building count as true savings. Get this distinction down, in combination with #1, and your future is looking good.
3. Learn to Budget & the Power of Cash
- A lot of people graduate high school and/or college and start making more money than they ever have. They want to be financially responsible, but when more money is coming in than they've ever had before, budgeting doesn't always feel necessary. Next thing they know, their lifestyle spend has grown, bills have piled up, they can't save like they know they should and life feels stressful. Always use a budget! There are so many online tools and apps that can help. If you budget for 20% savings/80% spend right out of school, it's much easier to do. There are certain things that always seem to break the budget - like dining out. Instead of swiping the credit or debit card every time you dine out, pick a monthly amount and get that amount out of your bank in cash at the beginning of each month. If there is cash in your wallet, go out. If there's not, make yourself stay home. Whether it's dining out, or something different for you, use a cash budget for that item and it's much easier to stay on track!
4. Using Roth IRA's
- A Roth IRA is an individual retirement account that allows you to invest money for retirement today and then use that money to pay for expenses in retirement tax-free, as long as you're 59.5 years or older. This means that you'll never have to pay taxes on the investment earnings in this account. There are income limitations to Roth IRA's, so once your income reaches a certain level, you are not allowed to contribute. It could be beneficial to open and start adding to a Roth IRA as soon as possible, so you get as many Roth contributions in as you can, before your income disqualifies you.
5. Student Loans!
- Now for the big one... Student Loans! At 18 years old you probably had not made very many financial decisions. At least not many big ones. But when it comes to student loans, we are asking you to make some huge, life-changing decisions, before you even really know what you're doing. Don't take these decisions lightly. Think long & hard about decisions like going to college out of state. You certainly don't have to know what you're going to do with the rest of your life, but do some research on careers that interest you and what starting salaries look like in those careers. Use online calculators (link provided below) to estimate what your future repayment would be. Keep in mind that large student loan payments could delay things like purchasing a home. When it comes to paying back your student loans, know that not all repayment plans are equal. There are the standard 10 and 20 year repayment plans, but newer plans base your monthly payment on your income. Even though it sounds great that the government will allow you to pay a really small amount on your loans, the reality is that the small amount may not be enough to even cover the interest on the loans. Do that for a couple years and you'll find that instead of your loans decreasing, they've increased! When it comes to loan repayment decisions, I'd highly recommend working with a professional who can walk you through your options and help you navigate these waters.