LUTZ BUSINESS INSIGHTS
Financial Planning for College Grads
JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL
PUBLISHED: MAY 26, 2016
Graduation season is upon us and many of our children are leaving college and preparing to venture out on their own. Many professors, counselors and parents have been giving them advice on highly academic pursuits for a while now. However, probably less time has been spent on practical advice to prepare them for their individual financial lives. Because it is a path everyone must cross, here are a few financial lessons we would teach our new grads to prepare them for the next phase of their life.
UNDERSTAND YOUR EXPENSES AND CREATE A BUDGET FOR YOURSELF.
Microsoft Excel has many templates already set up for a budget preloaded on your laptop. Find one that suits you. You won’t have every expense on the sheet but begin tracking and understanding what you are spending month-to-month. Also, if you want, a service like Mint.com will link to your bank accounts and credit cards and categorize expenses for you. You may have to manually adjust some so as not to duplicate, but there are all kinds of online tutorials to help. It’s a great skill to start early. It becomes more difficult when you get to your parent’s age.
BEGIN SAVING 10% A PAYCHECK TO BUILD UP AN EMERGENCY FUND.
Life will throw you curveballs, so it is important that you have some savings in order to get you through those times. Begin with your first paycheck and move 10% each month into another account outside of your checking (many banks will let you automate this via online banking). Continue to save until you reach at least six months of your fixed expenses (food, rent, insurance, car payments etc.) and then consider increasing your 401-k contribution with the excess after that. You will never miss this money if you start immediately!
SAVE AT LEAST 6% OF YOUR INCOME INTO A COMPANY RETIREMENT PLAN.
Begin saving into the company retirement plan when you become eligible (usually after six months on the job). The 6% figure will give you a good start and allow you to meet most company’s matching provisions. Contributing up to the company’s match allows you to take advantage of the “free money” they are willing to incent you to save with. Also, sign up for a percentage contribution, not a specific dollar amount, as your contribution will then increase automatically as years pass! As for investments, pick a low cost Retirement Target Date Fund or an aggressive pre-allocated portfolio within your plan. Pay close attention to the expense ratios of the funds you choose.
ROTH IRAS AND ROTH 401-K’S ARE A GOOD OPTION WHEN YOU ARE YOUNG.
Chances are, you will be making more money down the road in your career and thus be at a higher tax bracket later. So, right now, while your tax bracket is low put your 401-k contributions into a Roth if your company has that option. (If they don’t, ask your HR rep why not?) If you don’t have that provision, consider opening a Roth IRA and invest up to $5,500 for the 2016 tax year. This will be funded with after-tax money, but will be tax free upon withdrawal later in life. At a 6% average annual return, this $5,500 invested now will grow more than ten-fold by the time you think of retirement in 40 years.
STUDENT LOANS: WHAT TO DO?
If you have student loans, you are definitely not alone. According to the Federal Reserve Bank of New York, more than 43.3 million Americans have student loan debt. Make it a goal to pay more than just the minimum monthly payment, which will allow you to pay them down much sooner and save money on interest. Also, examine what kind of loans you have. Private loans from banks typically carry higher rates of interest than government programs (be wary of private lenders offering consolidation!). Aggressively pay those private loans first and use the minimum payments on the lower interest government loans. Also, when you have a plan, sign up for auto-payment. Many lenders offer a small interest rate reduction when you sign up.
DON’T MISS THE STUDENT LOAN TAX BREAK!
If you have a student loan, you can claim the interest deduction every year up to $2,500 on a federal level (*dependent on income levels). This is an above the line deduction, meaning that you don’t have to itemize deductions in order to receive it. It may make sense to find a friend with an accounting degree or a qualified CPA to explain this to you further.
GET OFF OF YOUR PARENTS’ PAYROLL!
The US Department of Agriculture did a survey that said the average cost of raising a child born in 2013 is approximately $245,340. Note: this figure doesn’t even account for the cost of college! Make sure you are paying for your insurance, cell-phone, and other things if you can. Your parents have probably given you every opportunity to be successful on your own, show them that it was money well invested by becoming immediately independent!
CREDIT CARDS ARE A SLIPPERY SLOPE.
Two things are good about credit cards: they help you establish a credit history and some come with perks. Because you are a recent college grad, you probably won’t qualify for the ones with good perks without an excessive annual fee, so cross one good thing off the list. (A perk is like cash back or airline miles, not a temporarily low “teaser” interest rate) Establishing a credit history of good monthly repayment is really the only positive thing about credit cards for you at this point. Make sure you are paying it down monthly and don’t overspend. If you only pay the “minimum” monthly payment, it could take more than 12-years to pay off the debt. Don’t just pay the minimum. Force yourself to pay at least 20% of the balance so it only lasts six months (with interest).
You only need one credit card to establish a history, anymore will potentially work against you as you will collect outstanding balances that creditors deem you may not be able to support. Be very careful with credit cards and use them sparingly. Check your credit report annually at www.annualcreditreport.com, which by law allows you to receive one credit report free per year. Establishing a good credit history and record of repayment can help you out down the road when looking to finance the purchase of a home with a longer-term mortgage.
WORK HARD AND LIVE BELOW YOUR MEANS.
Your standard of living may be a little lower than you were used to when your parents foot-the-bill. That’s okay, you need motivation to work hard in life. It may also be more rewarding, too. It’s not going to be easy, but don’t make bad decisions that make life more difficult than it needs to be. Money isn’t everything, but you need it to live. So, when you are working hard for it, make sure it works hard for you by being smart with it. Good Luck!!!!!!
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.
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ABOUT THE AUTHOR
JUSTIN VOSSEN, CFP®, NAPFA + INVESTMENT ADVISER, PRINCIPAL
Justin Vossen is an Investment Adviser and Principal at Lutz Financial. With 21+ years of relevant experience, he specializes in providing wealth management and financial planning services for high net-worth families, business owners in transition, endowments and foundations. He lives in Omaha, NE, with his wife Nicole, and children Max and Kate.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- CERTIFIED FINANCIAL PLANNER™
- National Association of Personal Financial Advisors, Member
- Financial Planning Association, Member
- BSBA in Economics and Finance, Creighton University, Omaha, NE
- St. Augustine Indian Mission, Board Member
- Nebraska Elementary and Secondary School Finance Authority, Board Member
- St. Patrick's Church, Trustee
- Mount Michael Booster Club Board
- Lutz Gives Back, Committee Chair
- March of Dimes Nebraska, Past Board Member
- The Current Financial Health of the American Consumer
- A 100-Year Bet Gone Bad
- Personal Finances: Focusing on What You Can Control
- Planning for College Pragmatically
- Remaining Calm When Uncertainty Surrounds Us
- Am I Ready to Retire? Finding Your Sweet Spot
- 5 Retirement Strategies for Small Business Owners
- Outsmarting the Ivy League?
- An Investor's Year-End Wrap Up & Tax Prep
- Nobody Knows Anything
- Add "Brexit" to the Long List of Uncertainty
- Financial Planning for College Grads
- Fight or Flight - Lesson Learned
- Social Security: The New Rules
- Putting Volatility in Context
- The Asian and European Fronts
- Bubble Looming or a Bubble Popped
- Re-Emerging Markets?
- A Market Perspective
- Timing is Not Everything
- "Yellen" at the Fed
- Mind What Matters...Focus Efforts On What You Can Control
- What to do With a Financial Windfall
- Love Indexes - Hate the Indexes
- Do I Own a Market?
- A Practical Primer On Volatility
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