You have graduated college and entered the workforce. Congratulations. Now comes the tough part -- plotting a course for a smart financial future.
It may seem daunting at first, as you struggle with student loan payments and making a mark at your first job, but it is never too early to planning for the future. You are young, yes, and money is tight, but you can make financial decisions now to set yourself on the right path. You can even start saving for retirement and dip your toe into investing in stocks.
Managing student loans
The most daunting task faced by many twenty-somethings is paying off student loans. Over 65 percent of students use loans to help finance their college costs and the total debt for students have when graduating college is now over $35,000.
For most student loans, no payments have to be made while you are an actively enrolled student. But after you graduate, leave school or drop below half-time enrollment, that changes.
If you have a Federal Stafford Loan, you’ll be required to begin payments within six months of graduation. The grace period for Perkins loans is 9 months. For graduate students with PLUS loans, repayment begins after six months.
Once you graduate, your lender will begin sending you repayment information. The two most important questions to think about now are;
1). Should you consolidate your student loans?
This allows you to combine most of your small student loans from various lenders into one, fixed-rate loan, with one monthly payment.
The advantage of loan consolidation is that you will have the convenience of making a single payment every month, and the payment will be lower than the total of the payments on all of the individual loans before consolidation. While this makes it easier to repay your loans, you will be paying more in interest over the life of the loan because you will be extending your repayment time. Use the tools at the Federal Student Aid web site to learn about repayment options for your student loans.
2). How quickly can you afford to repay your student loans?
You generally have four options, ranging from 10 to 30 years. Of course the quicker you pay off your debt, the larger the monthly payment and the less interest you’ll pay. But it may be difficult to make large monthly payments on a low starting salary. And if tackling these debts keeps you from meeting other financial goals, like investing in your employer’s 401(k), or paying off your credit cards, you should definitely consider an extended repayment period with smaller, more manageable monthly payments.
Now that you are on your own, you’ll want to do things like rent an apartment and buy a car, without having to ask your parents for help. Doing these things requires a credit history and good credit. You can build credit by paying bills, like student loans, on time.
The new health insurance laws require health insurance plans to allow adult children to remain as a covered dependent on their parents policies up to age 26. But when you get a job, your employer might offer a subsidized health plan . Compare the cost and benefits between the health insurance offered by a new employer versus the coverage on your parents plan.
Start Saving for Retirement
That’s right, start saving now for a time when you will no longer be working. While it may seem a long way off, saving now and making this a habit will make the task more manageable. Start with joining the 401(k) plan offered by your employer. Consider investing for growth, which means to have most of your contributions being invested in mutual funds, in a diversified mix of the stock funds in the plan. If your employer’s plan offers personalized investment and savings advice, look into it and see what the professional advisor available in your employer’s plan has to say. If you are not eligible to join an employer’s retirement plan, then open an IRA and contribute to that.
Build a nest egg
Don't extend your debt. Strive to live within your means, and put money aside every month. Even small amounts can add up. Work towards establishing an emergency fund. Get into the habit of saving now, and down the road this can build into a substantial nest egg.
Summarized action plan for twenty-somethings:
- Start a debt repayment plan
- Establish your own credit now so that you’ll have access to credit when you need it.
- Learn to life off your net pay, and save money every month
- Enroll and contribute to an employer’s retirement savings plan
- Works towards to building an emergency savings account with 3 to 6 months worth of living expenses.