Laura answers a recent graduate’s question about general financial advice. You'll learn to prioritize your resources, create goals that guarantee financial success, and become a money-adulting pro!
Laura answers a recent graduate’s question about general financial advice. You'll learn to prioritize your resources, create goals that guarantee financial success, and become a money-adulting pro!
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Maggie, who says:
"I graduated from college a year ago and am new to adulting! What guidance or recommendations do you have for savings, investment platforms, etc?"
Maggie, I love your question because adulting with money is a lifelong pursuit. Everyone should keep learning and trying to improve their personal finances.
However, being a new graduate and managing money for the first time can feel overwhelming. The fact that you've asked about saving and investing tells me that you're going in the right direction.
This post will review how a new graduate or anyone seeking solid advice can take their finances to the next level. You'll learn to prioritize your resources, create goals that guarantee financial success, and become a money-adulting pro!
Welcome back, everyone, and thanks for joining me. I'm Laura Adams, an award-winning author, finance spokesperson, money speaker, founder of The Money Stack newsletter, and host of the Money Girl podcast with 43 million downloads.
Be sure to follow Money Girl on Apple Podcasts, Spotify, or wherever you listen to podcasts so you automatically get each new weekly episode! This is episode 850, which means there's so much more Money Girl for you to explore in previous episodes! Be sure to follow my Instagram and the Money Girl Facebook page!
If you have a question you'd like me to cover, please leave it on our voicemail line at 302-364-0308. You can send an email and sign up for the free Money Stack newsletter at LauraDAdams.com.
5 Tips for Better Adulting with Your Money
If you're a new or recent graduate, you might feel stressed about your future and finances, which is normal. But I want to put your mind at ease by explaining that if you learn a few fundamental personal finance rules now, applying them will set you up for a lifetime of financial success.
Use the following five tips for better financial adulting.
1. Have an excellent bank account.
One of the first things you should do after graduating is to find a great checking and savings account with a bank or credit union. These accounts are the foundation of your money management system, so they need to offer lots of benefits, like a convenient mobile app, no monthly service fees, easy transfers, bill pay, and remote check deposits.
Check out a site like Finder.com to compare the best FDIC-insured accounts. I'm a huge fan of USAA, which operates only online, offers military benefits, and has a best-in-class mobile app. But shop around to see what makes sense for your lifestyle and financial situation.
2. Build an emergency fund.
My advice for better financial adulting is to slowly build an emergency fund using a portion of each paycheck. If you set aside $100 a month, you'll have more than $1,000 in a year. Then, you can increase your savings rate until you have at least one month of expenses saved.
For instance, if your typical monthly living expenses are $3,000, set a goal to save $3,000. That way, you'll be prepared for unexpected costs, like car repairs, last-minute travel, or out-of-pocket medical bills.
Ideally, you should accumulate at least three months of living expenses. To reach that goal, consider saving 5% to 10% of your gross (pre-tax) income.
Think of an emergency fund as an investment in yourself. It's how you'll stay calm and cool in a potential crisis like losing your job. Once you start building a cash reserve, keep it in an FDIC-insured, high-interest savings account so it earns as much interest as possible.
Emergency funds should never be invested because their purpose is potential short-term needs, not long-term growth. Avoid tapping your cash reserves except for a financial crisis. They're not for shopping, vacation, or anything that you could genuinely survive without.
So, no matter how much or little money you earn, building an emergency fund is a top priority. Being a financially responsible adult means never getting caught without a healthy cash cushion to keep you safe.
3. Understand how to build credit.
If you're a recent graduate, you probably have little credit history, which means you likely have low credit scores. But don't worry—it's easy to build good credit scores over time.
Your credit reports, which contain the details of your credit accounts, are maintained by nationwide credit agencies, including Equifax, Experian, and TransUnion. The data in your credit reports is used to calculate various credit scores.
High credit scores tell lenders and merchants you've been responsible with money. Excellent credit gives you privileges like paying lower interest rates on loans and credit cards, which can save you a bundle. Low scores mean you won't qualify for credit or will have to pay a high interest rate.
In addition, your credit affects other aspects of your finances, including rates you're quoted for auto, home, and renters insurance. Credit is also a factor in promotional offers you receive and security deposits you pay for utilities and cell phone contracts. Credit can even play a role in how potential employers evaluate you.
The easiest way to establish good credit is to pay bills on time. If you have a credit card, making charges you pay off in full each month is a great way to raise your credit scores slowly.
Also, use about 20% of your available credit at most. For example, if your card limit is $2,000, try not to charge more than $400 ($2,000 x 0.20). If you need to charge more, ask your card issuer for a higher credit limit or apply for another card with a different issuer.
If your credit needs to be better to qualify for a credit card, using a pre-approved secured credit card is an excellent option, if it reports payment information to the credit agencies. You must pay an upfront refundable deposit, but a secured card works just like a regular card and is a foolproof way to start building a positive credit history.
LISTEN ALSO: 9 savvy credit-building tips for better finances
4. Avoid high-rate debt.
Once you have credit, it can be tempting to use too much of it. So, avoiding expensive debt is a must for good financial adulting.
Debt is a powerful financial tool that can help you build wealth when used the right way. For instance, using relatively low-interest debt to get an education so you earn more over your lifetime or to buy a home that appreciates over time can be wise.
But using high-interest consumer debt, such as credit cards, to finance a lifestyle you can't afford can be devastating to your financial life.
If you're a recent graduate with student loans, understand their terms and various repayment options. For example, Stafford federal loans give you until six months after graduation to start making payments. And a Perkins Loan gives you a nine-month grace period.
When your loan payments are due, you'll automatically be placed on the Standard Repayment Plan. However, you can request a different repayment plan at any time.
For instance, If you still need to land a job or find that your federal loan payment is too high relative to your income, contact your lender to discuss your situation and investigate alternative plans based on your income.
To learn more about eliminating debt and creating the financial future you deserve, check out the paperback or audiobook version of my book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love.
RELATED: 7 benefits of SAVE for student loans and your credit
5. Start investing sooner rather than later.
The last tip for better adulting with your money is to start investing for retirement sooner rather than later. You might be thinking, I just started working, so why should I be worried about retirement?
The answer is that the earlier you start investing, the less you'll need to save to reach significant financial goals. That's because the effect of compounding, where you earn interest on your interest, allows your balance to grow exponentially over a long period.
Let's say you're a smart new graduate who signs up for your workplace 401(k) retirement plan and contributes $400 a month. If you never increase your contribution and earn an average 7% return, after 40 years, you'd have a nest egg worth over $1 million. That's impressive considering you only contributed $192,000 ($400 a month x 12 months x 40 years) of your own l
money.
Even if you can only make a small contribution, it’s better than nothing. Try to slowly raise the amount you invest annually until you work up to 10% to 15% of your income. If you do that for several decades or max out a retirement account for many years, it’s a surefire way to set yourself up for a comfortable future.
Invest using tax-advantaged retirement accounts whenever possible. They reduce your taxes and may even come with free employer matching! But if your job doesn't have a retirement plan or you're self-employed, just about everyone can contribute to a tax-advantaged individual retirement account (IRA).
Choosing a traditional IRA or workplace retirement account means you skip income taxes on your contributions and earnings until you take withdrawals in retirement. Having a Roth IRA or Roth 401(k) means you pay taxes on contributions but can take tax-free withdrawals in retirement.
No matter your age, these tips can help you take charge of your financial future. Also, keep learning about money by listening to the Money Girl podcast, reading books, and consulting with financial professionals when needed, such as a financial planner, tax accountant, and insurance broker.
Be sure to follow Money Girl on Apple Podcasts, Spotify, or wherever you listen to podcasts so you automatically get each new weekly episode!
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio engineers the show. Our Director of Podcasts is Brannan Goetschius, our digital operations specialist is Holly Hutchings, our advertising operations specialist is Morgan Christianson, and our marketing and publicity associate is Davina Tomlin.