Financial Literacy Blueprint: Guidance for Young Adults and Fresh Graduates

March 15, 2024



Essential Financial Tips for Your Post-Grad Life

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Stepping into your journey towards adulthood comes with its share of excitement and challenges, especially in the realm of managing your finances. Whether you're a recent college graduate or a young adult learning the complexities of financial independence for the first time, mastering the basics of financial literacy is crucial.

From crafting your first budget to making informed decisions about credit, debt, and investments, this guide is here to equip you with the knowledge and tools you need to lay a solid financial foundation.

Let's explore the essential financial skills that will empower you to achieve your dreams and secure your financial future.

Don't want to read through? Speak to a debt specialist right now.

Create a Realistic Budget

One of the most important things recent graduates can do before starting salary is create a budget to track income and expenses. Without a clear understanding of your financial situation.

It's easy to overspend and fall into debt. A budget acts like a roadmap, guiding your spending so you can reach financial goals.

How to Make a Budget

The 50/30/20 rule is an easy guideline to follow when creating your first budget:

50% of your income covers needs

This includes expenses like rent, utilities, groceries, insurance, minimum debt payments, and transportation.

30% is for wants

Entertainment, dining out, hobbies, new gadgets.

20% goes to savings

Emergency fund, retirement contributions, and other retirement savings and goals.

To start, calculate your full monthly income after taxes. Then list out all your expenses and categorize them. You can use a budget worksheet to organize everyday expenses after this.

Fixed expenses stay the same each month like rent and car insurance. Variable expenses fluctuate, like groceries or electricity bills. Be honest about your spending habits and conservative in your estimates. It's easy to underestimate expenses, so track your spending to get accurate totals.

Once your income and expenses are calculated, see where you can trim excess spending. Finding ways to save even $20 here and there makes a difference.

For example:

• Make coffee and lunch at home instead of buying
• Cut back on impulse purchases and shopping sprees
• See if you can negotiate/lower your cell phone or cable bill
• Consider public transit or carpooling to save on gas

Sticking to your budget takes discipline, especially when wants seem more fun than needs. But remember that budgeting leads to financial freedom in the long run.

Maintaining Your Budget

Check your budget weekly or monthly to see if you are sticking to it. Using budgeting software or money apps makes it easy to link accounts, categorize transactions, and track spending automatically.

If you find your expenses are higher than expected, look for places to cut back. Avoid beating yourself up over slip-ups. Budgeting is an ongoing process.

Build in rewards when you meet savings goals or stick to your budget for a certain period. Over time, you'll find budgeting becomes a habit leading to financial stability.

Pay Down Student Loan Debt

Student loans are a huge financial burden for college tuition for many recent graduates. It's critical to have a plan for managing this debt so it doesn't spiral out of control.

Understanding Your Loans

Federal student loans have a 6 month grace period after graduation before payments are due. Private loans may have less time.

Before the grace period ends:

• Contact your loan servicer and make sure your info is updated
• Review loan balances, interest rates, and minimum payments
• Calculate total monthly loan payments

Having this snapshot will help you budget for loan repayment and explore options like:

• Income-driven repayment - Payment is a percentage of your income
• Refinancing - Taking out a new loan with better terms to lower your rate
• Debt avalanche - Paying extra on highest interest rate loans first

While it may be tempting to put off loans, it's important to face this debt head-on and make payments each month. Ignoring student loans can lead to delinquency, which damages your credit.

Handling Multiple Loans

If you have loans from different lenders, keep track of:

• Total balance with each lender
• Minimum monthly payment for each loan
• Interest rates for each loan

Compare interest rates and focus on paying down the highest interest debt first through the debt avalanche method. You can also consider consolidating or refinancing loans to simplify debt repayment.

Automate payments through your loan servicer's autopay feature so you never miss or forget a payment. Even a late payment of a few days can hurt your credit score.

Pay More Each Month

Making the minimum payment will take longer to pay off debt and accrue more interest charges.

Pay extra each month to pay down the principal faster:

• Add $20 or $50 to the minimum
• Pay one extra monthly payment yearly
• Put bonuses or tax refunds toward debt

Every extra dollar goes directly towards the principal when you pay the down payment amount ahead. This will help you pay off loans faster and have ways to save money over time.

Build Your Credit History

A solid credit score opens doors for financing major purchases like a car or home. Most recent grads start with no credit history, so it's important to take steps early on to build your score.

Your FICO credit score ranges from 300-850 and is calculated based on these factors:

Payment history

Are you making monthly payments on time? This has the biggest impact.

Credit utilization

How much of your available credit are you using? Below 30% is best.

Length of credit history

How long have you had credit accounts open?

New credit

Opening too many new accounts can lower your score temporarily.

Credit mix

Having different types of credit like credit cards, loans, and mortgages.

Ways to Build Credit

You should start establishing your credit history if you don't have any yet. Here are some smart strategies:

Become an authorized user

Get added to a parent's or partner's child's education credit card. Use responsibly.

Apply for a secured credit card

Requires a refundable deposit that becomes your limit.

Open a credit builder loan

Make monthly payments to yourself that report to credit bureaus.

Avoid payday loans or other predatory lending offers. The fees and interest often outweigh any small temporary benefit to your credit score.

Using Credit Cards Responsibly

If you do opt to open a credit card, using it wisely is key:

• Always pay your full statement balance each month
• Try to keep balances below 30% of your credit limit
• Set up autopay so you never miss payments
• Review statements closely for errors or fraudulent charges

Building your credit score takes diligence and patience. But establishing responsible credit habits early on pays off when you need access to low-interest-rate loans down the road.

Start Saving for Retirement

Retirement may seem ages away when you're just starting your career. But thanks to compound interest, the earlier you begin saving, the more your money can grow.

Starting retirement contributions in your 20s allows decades for that money to grow through market returns. Waiting even 10 years can significantly reduce the size of your eventual nest egg.

Retirement Accounts for Young Adults

If your employer offers a 401k plan, sign up and contribute a percentage every paycheck. Many companies also provide matching contributions up to a certain percentage. This essentially gives you free money towards retirement.

Even if your budget is tight, contribute enough to get the company to offer a full employer match. Over time, increase your percentage as your income grows.

If you don't have access to a 401k, open an Individual Retirement Account (IRA). Options include:

Traditional IRA

Contributions reduce your taxable income. Funds are taxed upon withdrawal.

Roth IRA

Contributions are made with after-tax dollars. Withdrawals are tax-free.

IRAs allow you to choose your investments and have higher annual contribution limits than 401ks. The key is to start small - investing even $50 or $100 per month helps build lifelong savings habits.

Retirement Planning Resources

Learning about retirement accounts now will pay off exponentially down the road. Helpful resources include:

• IRS retirement account contribution limits
• Finding a fee-only financial planner

Investing for retirement may seem complex. But early small steps will lead to big rewards later in life.

Create an Emergency Fund

When unexpected expenses pop up, having cash savings provides a financial safety net. That's why building an emergency fund should be a top priority.

Ideally, your emergency fund should equal 3-6 months of living expenses. But any amount you can start setting aside creates a buffer.

Starting an Emergency Fund

Begin by opening a separate high-yield savings account just for your emergency savings. Online banks tend to offer higher interest rates than brick-and-mortar banks.

Then automate regular transfers from your checking account to emergency savings accounts, even if it's only $25 or $50 a month at first. Treat this transfer like any other fixed expense in your budget.

When you get a tax refund, bonus, or graduation gift money, put all or a portion towards growing your emergency fund faster. Avoid the temptation to spend this inflow.

Over time, you'll see your emergency savings grow. Track your progress to stay motivated. Once you hit your 3-6 month target, you can reduce deposits to just cover the replacement of any withdrawn funds. Before withdrawing emergency funds, be sure to ask yourself important questions to avoid using the money for splurges.

Using Your Emergency Fund

Only withdraw money from your emergency fund for true financial emergencies like:

• Job loss or reduction in income
• Major home, auto, or medical repairs
• Unexpected travel for a family emergency

Avoid tapping it for splurges or impulse purchases. This defeats the purpose of building available cash reserves.

Replenish the fund as soon as possible when you do make a withdrawal by ramping up your automatic monthly transfers temporarily.

Avoid Common Money Mistakes

It's easy to fall into detrimental financial habits, especially when you're still learning money management. Be aware of these common mistakes recent grads make.

Relying on friends or social media for advice

Get input from certified financial experts, not just what sounds good. Always verify the information.

Not paying yourself first

Set up automatic savings when you get paid before you can spend it elsewhere.

Buying too many cars

Don't commit to an expensive used auto loan or car loan with payments that strain your budget. Buy used.

Running up credit card debt

Use cards sparingly and pay statement balances in full each month.

Overspending on wants

Fun stuff feels good at the moment but isn't worth sacrificing needs or getting into debt.

Paying only minimums

Pay extra each month to pay down debts, pay interest off faster, and save money on interest.

Not having insurance

Make health insurance a priority. Also, get renters insurance if you're on your own.

Putting off taxes

Understand tax withholding on your paychecks. Set aside money to avoid a huge tax bill.

Staying aware of pitfalls like these will help you form good lifelong money habits. Breaking bad habits before they start putting you spiral lays a foundation for financial success.

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