6 Steps to Building a Strong Financial Future in Your First Year After Graduation
You’ve put in your time in school, and you’re done. Congratulations! Now it’s time to try to navigate that whole adulthood thing. Building a strong foundation for your future takes time, but there are some simple steps you can take early on to get there.
But first, a caveat
We’re not here to lecture you about financial responsibility. We know that many people face unique challenges, while others get a leg up from family support or greater access to resources early on. The fact is that not everyone in the United States is playing according to the same rules. Social mobility—meaning, the likelihood that someone born into poverty will ascend into a higher income bracket later on in life—has been on a downward trend since the 1980s.
Simply put, if you were born into wealth, it’s much easier to stay there. Minimum wage is less than half of the average cost of living in most places in the U.S.; if you’re a minimum wage worker, it’s nearly impossible to get by, let alone save for the future. There are generations of factors contributing to a vast divide in wealth along racial lines. If you have high childcare costs or dependent family members, a disability, or any number of personal circumstances entirely out of your control, financial stability can be difficult to achieve. If some of these simply aren’t doable for you right now, don’t be discouraged. Do what you can for now and think of the rest as a long-term project.
With that being said, here are some ways to move the needle and put your best foot forward in your early 20s:
Come up with a budget and commit yourself to a 1-year financial diet
Do you know how much it costs for you to live each month? It’s probably more than you’d think. The average American spends over $5,100 per month, and that dollar amount can get even higher in big cities. However, the average base cost of living is a little over $2,500. For most of us, there’s some wiggle room between what you’re spending and what you absolutely must spend. Getting a personal budgeting app, such as Mint, will help you visualize where your money is going. Once you figure out where you’re spending beyond the necessities, determine where you might be able to cut down.
We know financial dieting is no fun, but trust us, it’s much easier to tolerate a frugal lifestyle when you’re younger. In your late teens and early 20s, you’re much less bothered by minor inconveniences than you would be later on. Think of it as a gift to your future self; you will have much less anxiety if you’re not living paycheck-to-paycheck, knowing that you always have a backup plan in the event of a major unforeseen expense.
Can you spend a year living with your family? If not, can you rent a small room rather than that one bedroom apartment? Challenge yourself to avoid ordering delivery or eating at restaurants, and learn how to cook using inexpensive ingredients. Bring a homemade lunch to work. Don’t go out to the bar and order drinks every night. It’s okay to “cheat” on your diet from time to time and celebrate your hard work, but think of those as special occasions.
After your 1-year financial diet, reward yourself by introducing some luxuries here and there. Just make sure that you continue to stay in your budget, and be mindful of where your money is going.
2. Build an emergency fund
Before everything else, you must build an emergency fund. If you don’t have an emergency fund, one large unexpected expense could derail your other plans. Keep a separate bank account for emergencies, and do not withdraw anything from it unless you have no other choice.
Experts say you should have six months of living expenses saved up, but let’s be realistic—that’s just not going to happen overnight. Aim for a month at first, and put a little bit more aside every week. If you have a Roth IRA (see #4), you can substitute that for the rest of your emergency fund after you have a few months saved up. Your emergency fund will be an ongoing project that you will keep building for years to come.
3. Make sure you’re covered
Nothing can upend your financial future as quickly as an unexpected pile of medical debt. Healthcare costs in the United States are ridiculously high, and health insurance can be expensive. If you have parents with health insurance coverage, you can stay on their plan until you turn 26. Many jobs offer health insurance, so make sure to take advantage of your employer’s health care plan if that is an option for you.
If you don’t have parents who can put you on a healthcare plan, or if you don’t have a job that offers coverage, make sure to get your own health insurance ASAP. If you’re young and healthy, you don’t necessarily need the most expensive insurance, but catastrophic coverage is a must. You can sign up for health insurance through the government website, healthcare.gov. If your income bracket is low enough, you might even be able to get covered for free.
4. Start a retirement account
It can be difficult to fathom your needs at retirement when you’re just starting out, but the earlier you begin saving, the better off you’ll be in the long run. Furthermore, depending on the type you open, starting a retirement account can lead to big savings on your taxes or yield you a higher refund on your taxes next year. There are many different types of retirement accounts that are available. You can read about the benefits of each kind in this article from Nerdwallet. If your work offers a retirement plan, you should contribute as much as possible with each paycheck. If not, you start your own account for free with a robo-advisor like M1 Finance.
A Roth IRA is a good option for most young people earning some income. You can max it out for $6,000 per year. That might sound like a lot of money, but it’s less than it sounds. When you break it down, $6,000 is only $16.44 per day, which is about as much as most people spend on lunch. If you’re making your own meals, you can put the money that you would otherwise be spending into your Roth IRA.
Starting that Roth IRA and maxing it out from a young age will have a huge impact on your quality of life at retirement. At current average returns, a 21-year-old recent college graduate maxing out their Roth IRA and investing it in the S&P 500 would retire at age 65 with over $4 million. Even if you can’t afford to max out your Roth IRA right now, starting with even $1 a day will get you used to saving and investing.
5. Pay off debts ASAP
As soon as you’re able to, you should start paying down whatever debt you have—yes, even student debt. Although income-based repayment plans are available for most student debtors, you should still aim to pay off whatever debt you can early on. If you’re eligible for income-based repayment, stay on it so that you are eligible for potential debt forgiveness down the road, but paying it off sooner is better than waiting for up to 25 years for that to happen. You can get kicked off of your IBR and become ineligible for future forgiveness if your income gets too high in the coming years, and even if you do eventually become eligible for forgiveness, the forgiven amount is currently taxable, so you can end up owing a huge amount of money to the IRS. It’s best not to rely on debt forgiveness as your end goal if you can help it.
Accumulating interest can get out of control very quickly if you’re not staying on top of it. If you have a credit card, make sure you are paying off the balance in full every month so you don’t end up with even more debt.
6. Build your credit score
As you make your way through adulthood, having a strong credit score will pay dividends in the future. You’ll need a credit score to take out a mortgage, car loan, or open a credit card with great rewards, and a low credit score can make all of those loans exorbitantly expensive. You may even need a credit score to rent an apartment or get a job that pays well enough to afford the lifestyle you want.
You can begin growing your credit score with a Grow Credit card, which allows you to pay the subscriptions you have anyway, automatically. By having your card paid off in full every month and your progress reported to the credit bureaus, you can start to grow your credit and lay the foundation for investing in your future.
The takeaway
It may be tempting to spend your first year after graduation enjoying many of life’s luxuries, but a little bit of wisdom and frugality early on can make things much easier down the road. Building an emergency fund, starting to save for retirement, getting your debts under control, and making sure that you’re covered in the event of a medical catastrophe will minimize or eliminate one of the greatest sources of anxiety that most experience by their late 20s. Anxiety can sabotage not only your mental health, but your physical health as well. Here at Grow, we’re committed to helping you get off on the right foot so that you can have a financially successful future.
