Graduates: Time for Financial 'Adulting'
If you are graduating from college, these tips may help you push past your college debt load and plan for a more secure future.
Few people feel the crushing weight of debt more than college graduates who are trying to pay off student loans. According to a recent study1, Americans owe more than two and a half times as much in student loan debt as they did 10 years ago, and about four in 10 adults under the age of 30 have student loan debt.
If you are graduating from college this year, congratulations on a major achievement in your life. If you are now looking to push past the debt and make your way to financial freedom, the following tips should help.
Be clear, but also realistic, about your financial goals
In order to gain financial freedom, you need to start with goals and continuously work toward them. Make sure you understand what those goals are and how you plan to achieve them. What’s your ideal job, and what will it take to get the position you want? What are your goals for annual salary? How soon would you like to have your student loans paid off and be debt-free? You can’t work toward your goals if you don’t know what they are.
Come up with a plan and a budget
A great place to start is to write down a financial plan. Refer to your written plan regularly and hold yourself accountable. As you're in the planning stage, figure out your budget. List all regular expenses and all sources of income, then calculate what you have left and how you want to use that. Be realistic and flexible with your budget, but try to stick to it as much as possible for the best results.
Leave yourself some wiggle room
Even as you're budgeting and trying to reduce expenses, you need to leave yourself a little bit of money each month for unexpected expenses. If you don’t, you may find that you have to dip into funds that you had allocated to other bills. Your plan should be somewhat flexible because reality doesn't always work out the way we hope.
Save whenever possible
If you have any extra money coming in, put it into a savings account. While it's important to set aside a certain amount for entertainment or travel, you don't want to overdo it if you're looking to gain financial freedom. The more you can stash away in savings, the quicker that can become a reality. Once you get a job that pays a regular salary, arrange to “pay yourself first” by setting aside money from each paycheck into your savings account. This can be done through your employer or through online banking.
Reduce your debt load
You must reduce your debt load if you want to achieve financial freedom.2 You'll need to prioritize your payments, especially if you have more than one kind of debt. Figure out which ones you want to pay off first and focus on those ahead of the others. For example, if you have credit card debt, it will almost surely carry a higher interest rate than your student loans, so it should paid off first. Be sure to pay all your bills on time, but if you can put more money toward priority debts, you can eliminate them more quickly. If you have high-interest debt, talk to your banker to see if you qualify for a new loan at a lower rate so you can reduce your interest expenses.
Leave your retirement account alone
If you have a retirement account, do not take money out of it when you need some extra cash. The ability to do so may seem like a form of financial freedom, but in reality, this is very short-term, and will damage your freedom in the future more than it will help you right now.
As Scott Spann wrote for The Balance3, “Many people make the mistake of cashing out retirement plans when switching jobs instead of benefitting from continued tax deferral through 401(k) or IRA rollovers. Not only are 401(k) withdrawals subject to the 10 percent early withdrawal penalty, they also rob us of future retirement savings. From my experience as a financial planner, I’ve found early retirement plan distributions to be one of the leading causes of IRS tax problems and a decision most people will end up regretting later in life."
Pay attention to your credit score
Your credit score4 is a major component of your financial freedom. A poor credit score makes it difficult to buy a new car or home or gain financing for other large purchases. It may also mean that you have to pay a higher interest rate for financing because the lender will assume that you represent a higher risk of non-payment.
Still, not even a good credit score is synonymous with financial freedom as long as you have unpaid debts. Make paying down your debts, including your student loans, a priority, and ask your banker how to set up a financial plan that will help you achieve your goals.
2. For a Two Cents article on reducing your debt load, visit www.nsbank.com/blog/two-cents-blog/articles/2018/february/start-today-to-reduce-your-debt/
4. For a Two Cents article on monitoring your credit report, visit www.nsbank.com/blog/two-cents-blog/articles/2018/january/credit-report-items-to-watch-out-for/
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC