Graduating Into Financial Independence
Time for your graduate to gain financial stability
Do you have a recent college graduate in your life that can use some guidance when it comes to their finances?
As the job market becomes increasingly more competitive and the influx of student loan debt continues, college graduates enter a challenging environment to become financially stable.
Here is some advice you may want to give to those heading into the world with their newly acquired degrees:
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Understanding Your Loans and Managing Debt
Student debt is a big problem, to say the least. It has become a $1.56 trillion crisis effecting over 44.7 million students (Forbes). Make sure your graduate understands the terms of their loan(s). Specifically: how much they owe, the current interest rate at which the debt is accumulating, and the payment schedule at which installments are due. Recent grads should ensure that the repayment plan that best fits their goals is part of their budget and scheduled accordingly.
It is also important to address the use of credit cards. Tell your graduate to avoid over-charging their credit card for amounts larger than they’re able to pay off in full each month. Credit scores are affected and can make it difficult to borrow money in the future.
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Build a Budget
Each individual’s budget is different, but necessary for helping stay on track with financial goals. In order to calculate a budget, your recent grad will need to understand the basic inflow and outflow of money. To do so, they will need to calculate all income sources as well as expenditures. During this process they should first ensure they are putting money away into savings. A good rule of thumb is about 10% of income. Next, make certain that fixed expenses, such as housing costs, food, and transportation for example, are accounted for. Any funds remaining could be geared towards discretionary spending such as entertainment or travel. Your graduate must not lose sight of staying within their means. This exercise will also show where they can cut back on spending while building good financial habits.
Additionally, an emergency fund will help avoid debt if any unplanned expenses arise. Extra income can be used for this fund, but putting a set percentage of each paycheck towards emergency fund is a best practice.
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Gain an Understanding of Employee Benefits
As your graduate embarks on their first full-time job, they should also understand the benefits, offerings, and perks that their employer is providing. This may be something a graduate takes into consideration even during the job search phase.
Important questions to consider are: does your company offer a 401(k) and if so do they offer a match? Additionally, what kinds of health insurance plans are available and what is the right plan for you? The company which your graduate joins may also include optional benefits such as life insurance, transportation reimbursement, and other perks such as discounted gym memberships and discounted mobile phone plans. Determine if these additional benefits are practical and if they should sign up or not.
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Create a Financial Plan
A financial plan outlines and prepares your graduate to save for short term goals such as a new car or a vacation to long term goals such as purchasing a home and retirement. It also keeps your graduate on track to manage the payments of outstanding loans.
Graduating and stepping into the real world is an exciting time for young adults. However, with this excitement comes the responsibility and reality of adulthood and financial independence. By understanding proper management and planning along with proactivity, graduates can address their financial goals with limited stress, crippling debt, or loans.
To learn more about budgetary planning and creating stability, contact an Oppenheimer Financial Advisor.