College seniors are gearing up to leave their college life behind and enter the real world, but experts say they still have a lot to learn when it comes to managing their finances.
“The kids graduating from the top 10 schools at the top 10% of their class aren’t going to have much problem,” says Scott Hanson senior partner of the Hanson McClain Group. “But for the rest of the masses, maintaining their finances is going to be a real challenge. They need to take responsibility since their actions after graduation can impact the rest of their financial lives.”
College graduates are entering the working world at fluid time. Recent polls show graduates are more optimistic about their hiring prospects as more employers look to add them to their payroll, but the unemployment rate for graduates in 2013 (those ages 20 to 29) was 10.9%. On top of that, the average student loan debt tops $26,000 per student, according to the College Board's latest figures for 2012, making financial security hard to achieve.
“Grads need to learn the discipline of setting aside money and living below their means from the start. People who are financially secure did this. Most of the time people are in financial problems of their own creation,” says Hanson.
For college graduates gearing up to enter the real world, experts offer the following tips on getting started on the right financial footing:
Find a Financial Mentor. Paul Saganey, certified financial planner and president of Integrated Financial Partners, encourages graduates to identify someone they regard as financially successful and ask them to be a mentor to help make financial decisions, whether it’s how much they should spend on rent or how to ask for a higher starting salary.
“Ask them about the financial moves they made in their 20s that paid off and what they would do differently if they could go back and do it all over again,” he advises.
Plan to Live Off 70% of Your Income. Lance Roberts, chief strategist at STA Wealth Management, recommends fresh graduates plan to save 30% of everything they make.
“Make sure you pay yourself first, take 30% of you salary and put it in a 401(k) or IRA plan and then live off the rest. If you do this and you can invest it logically and grow wealth slowly, you will be in a good position to become wealthy and be able to retire.”
Experts also recommend young adults spend no more than 25-35% of their income on lodging.
Learn the Difference Between Want vs. Need. Overspending as a young adult can carry over far into adulthood, warns Dave Richmond, president of financial-planning firm Richmond Brothers.
“The decisions you make now on spending will take years to fix. If you are just starting out and don’t have a lot of money, act like it. It’s OK.”
Terry Siman, managing director at United Capital, recommends setting up a budget that shows incoming revenue, debt obligations, savings requirements and monthly expenses to provide a snapshot of how much is left over for discretionary spending.
“You need to know what you take home, after taxes, after savings, after health insurance costs. That can sometimes leave new graduates with half their salary to work with, so they are going to have to be disciplined with their spending.”
Stay Up-to-Date on Current Events. Knowing how to best manage a budget and finances means staying up-to-date on current events and knowledgeable about the investing world. “So many college graduates leave school not knowing the difference between a stock and bond, or how to properly manage their finances,” says Saganey. “Yet, we expect them to be able to start investing for retirement, finance a mortgage or apartment and tackle any existing debt with such little tools.”
He recommends young adults use financial websites to learn about different investment options and savings tools and to monitor the news to track any trends and events.
Make a Student Loan Repayment Plan. Many federal loans have six-month grace periods to help borrowers get their financial stability before payments come due, but experts urge students create a repayment plan right away.
Roberts says one of the first questions he asks young potential hires is if they have student loans and if they have a repayment plan. “We don’t want them to be incentivized with this big burden…we work in the financial industry, we don’t want people who potentially have an incentive to cut corners or create additional revenues to handle their debt issues.”
Establish Your Own Banking Footprint. College students are often tied to their parents' bank accounts or credit cards, but Hanson says it’s time for them to part ways after graduation.
“You need to have a credit card and bank account in your own name to help establish credit history so you can increase your purchasing power later in life.”
When evaluating different banks and their offers, Richmond recommends looking for accounts with little to no fees, and flexibility. “You need to understand the rules of the accounts, what fees you will be hit with and what will and won’t be protected and what you will be liable for if anything goes wrong.”
Know What Your Employer is Offering. There’s more to a job offer than the salary, but few young professionals know what’s on the table. Saganey says new hires should not be afraid to ask someone from human resources to walk them through their benefits until they thoroughly understand what’s being offered and take advantage the perks—especially retirement savings tools.
“Often times, young kids when they get hired into companies feel they aren’t worthy enough to ask questions, but it’s important that they know, and take advantage of their employer’s benefits. For instance, many companies match 100% of an employee’s 401(k) contributions up to a point. That’s like a 100% return, no one should walk away from that.”
Assess Your Insurance Needs. “Anything that can bankrupt you should be covered by insurance,” says Richmond.
The Affordable Care Act mandates every person in the country have health insurance, and recent grads without employer-sponsored coverage should check to see if they are eligible for subsidies to help them afford a plan on the federal or state exchanges.
However, Hanson says some insurance plans aren't worth the price tag when students are just starting out and don’t have much in terms of valuables. “When you have nothing, renter’s insurance might not make sense. It’s not worth paying the premiums when you are young and you don’t have significant assets.”