It’s college graduation season, a time to celebrate the years of hard work and effort you’ve invested in your education and career development. Hopefully, the future feels full of endless possibilities. But there’s also an undeniable reality: those possibilities cost money.
One antidote to the uncertainty you might feel about your financial future is to put together a plan. Here are five first steps you can take now.
1. Build a budget you can stick to
The best budgets account for your needs, wants and financial goals. A 50/30/20 budget might be a good place to start.
The idea is to spend 50% of your take-home income on needs including housing, utilities, groceries transportation and minimum monthly debt payments. The next 30% of your income goes toward wants, like travel, monthly subscriptions and entertainment. The last 20% should go toward savings goals and paying down debt.
While your circumstances — like living in a high-rent area — might require more flexibility, this is a good framework for managing your monthly income. The key is to find a budgeting approach that’s sustainable.
2. Stash some cash in an emergency fund
Now is the time to start setting aside some extra cash for the unexpected. If you were lucky enough to get money as a graduation gift, consider using it to start an emergency fund.
“It’s important just to start building up some cash,” says Jaime Eckels, a certified financial planner and wealth management partner with Plante Moran Financial Advisors in Michigan. “The very basics should be just having three to six months, at least, of living expenses on hand.”
This type of savings could take years to build, so starting with smaller goals can make it feel more attainable. Having $500 saved could be enough to avoid going into debt, but any amount will make a difference. Consider putting your emergency fund in a high-yield savings account, which can have annual percentage yields (APYs) of 5% or more and will grow your balance more quickly.
3. Be proactive about student loan repayment
The federal student loan landscape has changed dramatically in recent years, as a result of the COVID-19 pandemic and Biden administration policies. The key to making on-time payments and staying on top of debt is being a proactive manager of your student loans.
Because there’s a six-month grace period after you graduate, “it’s easy to get complacent,” says Winston Berkman-Breen, the legal director for the Student Borrower Protection Center. “But there are things you can do to make your month-to-month payments work for you.”
First, set up online accounts with your student loan servicer and studentaid.gov. You’re assigned a servicer when you take out your loans, and you’ll manage repayment through this servicer.
Activating your accounts can help you get a sense of your loans and ensure the servicer and federal government can contact you, says Berkman-Breen. You can find the name of your servicer and link to their website by logging into your studentaid.gov account and checking the upper right-hand side of the dashboard.
A common mistake graduates make, according to Berkman-Breen, is not knowing they have a choice when it comes to picking a repayment plan. “You can move pretty fluidly” between repayment plan options, says Berkman-Breen. Income-driven repayment plans, like SAVE, can lower your monthly payments and lead to eventual loan forgiveness. And generally, you can switch plans anytime.
To estimate what your payoff journey would look like on different repayment plans, use the Education Department’s loan simulator.
4. Enroll in a retirement plan and get the employer match — if you can
While retirement feels like a lifetime away, taking advantage of the retirement plan your employer offers at your first job will pay off big down the road.
You’ll likely be offered enrollment in a defined contribution plan like a 401(k) or 403(b). Eligible employees can contribute money toward retirement, typically through a payroll deduction. These are fairly easy to set up and can make saving for retirement something you don’t have to think about.
Do your best to take advantage of an employer or company match, where employers match employee contributions up to a certain percentage. If your employer offers a full match on contributions up to 5% of your salary, but you contribute 3%, you would lose out on the extra 2% of “free money” from your employer. This could make a meaningful difference in retirement, so if you can make it work in your budget, it’s worth it.
5. Check your credit score and review your credit report
Your credit score is the gateway to much of your financial life, and the first step to growing your score is knowing what it is. You can check your credit score for free with personal finance websites like NerdWallet, or find it on your bank’s app.
If you already have established credit, focus on making on-time payments each month, and use 30% or less of the total credit available to you. Set up alerts on your credit cards to know when you’re approaching that threshold.
If you’re new to credit, you have options. Find a trusted person with a strong credit history and become an authorized user on their account. You can benefit from their positive credit history without being responsible for payments. Also, consider enrolling in a rent-reporting service to get credit for on-time rental payments.
Next, use AnnualCreditReport.com to download a free copy of your credit report. Look for things you don’t recognize, like accounts or names. Set a calendar alert to check on your credit report quarterly so you can catch mistakes or dispute errors quickly before they damage your credit. Credit scores can feel mysterious, but you have what it takes to build a strong score.
Don’t be afraid to ask for help
As you work through this financial checklist, remember that you don’t need to have it all figured out right away.
“Asking for help is very important, and if you can start off on a strong foot, the future is very bright,” says Eckels. You don’t always need to turn to a financial advisor, she says. Your parents, family and friends are also valuable resources.
