Financial Checklist for College Graduates

Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®

Congratulations on your recent graduation and officially starting your career! You will encounter many changes at this stage of life, but with a strategic approach, you can lay a solid foundation for your financial future. We’ll run through some key items to consider as you step into this exciting phase of life.

Understand Your Paycheck

One of the first surprises many new graduates face is seeing their first ‘real world’ paycheck and realizing how much is taken out for taxes, benefits and other deductions. You may have seen some of these deductions on your high school or college job paychecks, but your new job will likely be a substantially larger salary, which will equate to larger deductions for taxes, etc. It’s crucial to understand your actual ‘take home pay,’ as this will be the foundation for creating a budget.

Cash Flow/Budgeting

In most instances, this will be the first time you’ve created a budget. Start by tracking your expenses to see where your money goes each month. An easy way to determine prior spending is to review past credit card statements. Oftentimes, your credit card will provide you with an Annual Summary Report.  This can give you a great high-level breakdown of spending in various categories. Tools like budgeting apps or spreadsheets can be incredibly helpful here. Remember to allocate a portion for savings and investments, as well as any short or long-term goals such as car and home purchases, or a future wedding.

Before you start accelerating any debt paydown, you’ll also want to make sure to have at least 3-6 months of cash set aside in an emergency fund, which acts as a buffer that can keep you afloat in case of unexpected expenses or job loss. With interest rates rising over the past couple of years, money market funds and high yield savings accounts have become great places to park your emergency savings.

Start Saving for Retirement

It might seem premature to think about retirement when you’ve just graduated college. However, beginning your retirement savings in your 20s allows you to take full advantage of compound interest.  Even a small amount saved now can grow significantly over time. Be sure to review when you are eligible to enroll in your new employer’s retirement plan (401(k)/403(b), SIMPLE IRA, etc.). You’ll want to enroll as soon as possible.

If your employer offers a 401(k) match, be sure to contribute at least enough to get the full match. For example, if the employer offers a 100% match up to 5%, you’ll want to make sure you’re contributing at least 5% to the account to maximize this benefit. If possible, you should target saving at least 10% towards retirement.

A common question is whether to be saving to the pre-tax or Roth portion of the 401(k). If you anticipate being in a higher tax bracket in retirement than you are now, it often makes sense to contribute to the Roth portion. If you anticipate being in a lower tax bracket in retirement, it often makes sense to contribute to the pre-tax portion. We typically find that Roth tends to make the most sense for recent college grads.

Another question is what should I invest in? Since you’re young and time is on your side, it often makes sense for individuals in their 20s to invest aggressively. This strategy aims to maximize returns over the long-term. A great option within 401(k) plans are target-date funds. This is an ‘all-in-one’ fund that starts out aggressive and slowly gets more conservative as you approach retirement. For example, if I’m currently 25 years old and plan on retiring at age 65, a 2065 (40 years from now) target date fund can be a great option. The fund will be very aggressive now, but will slowly get more conservative as I approach my retirement date of 2065. The best part is all investment changes occur within the fund, so there is no action required on your end!

Manage Student Loans

Understanding the terms of your student loans is critical. You typically have 6 months post-graduation before student loan payments are required. For example, if you graduate in May, your first loan payment will likely be due in November. Be sure to plan accordingly and account for the anticipated payment in your budget. In the meantime, make sure you know who your student loan servicer is. If you’re unsure, you can search at studentaid.gov.

If you anticipate struggling to make your monthly required student loan payment, consider looking into the various income-driven repayment (IDR) plans. A new repayment plan – Saving on a Valuable Education (SAVE) Plan – was recently introduced. In most instances, the SAVE Plan tends to be the best option. More information on the IDR plans can be found here.

If your budget allows, making more than the minimum payment can reduce the amount of interest you’ll pay in the long run. Also, look into whether your employer offers student loan repayment assistance, as more companies are starting to include this as a part of their benefits package.

The checklists below are a great starting point to review and complete as you go. Reach out to your Shakespeare Financial Advisor at (262) 814-1600 with any questions.

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