What you do with your first paychecks could determine the direction of your whole financial future. “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. However, the rest of the population needs to be a little more careful, Hanson says, adding, “They need to take responsibility since their actions after graduation can impact the rest of their financial lives.”
That responsibility looming can be very scary. “I think it’s a big transition,” says Michael Solari, a financial planner. “Especially coming from college, n
ot making any money, to coming home with a paycheck. People’s heads spin about what they should do.”
With a little thought and some good advice, it doesn’t have to be hard to take big steps toward building a solid, financial future.
Start at the beginning. Know your student loan details.
When making financial plans, you’ll need to know:
- How much you owe
- Your interest rate
- Who holds the note
- Your repayment term
Don’t wait until your lenders start billing you. Student loans often have a six month grace period before payments are required to be made. While this is helpful in allowing you to get settled and get an income flowing, the interest often continues to accrue and compound, leaving you owing even more. Start making payments immediately, even if they are small – it can really save you money.
“Figure out whether you have private or federal loans,” advises Solari, “and if you have federal, figure out how to consolidate them, and whether you qualify for programs like PAYE. If you have private loans that you took out when your credit score was lower, there’s the potential to refinance at lower rate.”
Action Step #1: Find out if your loans are federal or private.
Action Step #2: Write down the details noted above for each loan that you have. You’ll need them for the next steps.
Get an idea of how your income and your expenditures flow.
You will need to know how much money flows into your accounts in order to create a budget that helps you meet your financial goals.
If this is your first job, other than the occasional quick cash job, it may surprise you to find out that what gets deposited into your account isn’t the same as what you’re getting paid. For example, if you’re making $48,000 a year, you’re earning $4,000 a month. However, $4,000 isn’t what goes into your bank account. Things get withheld from your pay. Taxes, health insurance, & any contributions that you’re making to your retirement all get taken out before your paycheck ever makes it to your bank.
Next, figure your expenses. List any predictable necessary expenses for the year. Include rent/mortgage, car payments, student loan payments, savings, insurance policies not deducted from your salary, phone, etc. For expenses that aren’t as predictable, such as gas and electricity, include an average.
Once these necessary expenses are taken out, what is left over can be budgeted at your discretion to meet your financial goals.
Action Step #3 Track your income and expenditures for 1-3 months, including your cash spending.
Action Step #4 Decide your financial goals.
Remember to include your immediate, short-term, and long-term financial goals. Be specific and include a target date. For example – “Pay $5000 student loan by June 2017.” Calculate how much you’ll need in order to meet the goal. “Make $100/wk payments on student loan.” You’ll want to include this in your budget.
Action Step #5 Set up a budget.
Take care of necessities, even the ones you can’t plan.
You can’t plan for everything that happens. Your car blows a tire. You accidentally back into your neighbor’s car. You brother announces he’s getting married, next week, 5,000 miles away.
Action Step #6 – Fund a savings account.
Depending on your financial circumstances you may be able to put your savings into longer-term, higher-interest rate options, but even if you’re just saving $50 a week as a automatic transfer from your account to your savings account, it can have big rewards, when you’re able to pay for a new tire rather than charging it on a credit card and paying a hefty fee for the interest until you can get it paid off.
Action Step #7 – Get the insurance you need.
Homeowners insurance, renter’s insurance, car insurance, health insurance and life insurance all have a purpose. Talk with your insurance provider to determine your needs.