Friday, 7 August 2020

Reviewing your financial situation is a challenging but critical first step to getting ahead of your finances as a new college graduate. Think of it as taking a "financial selfie." 

Get started by gathering any information pertaining to your assets (what you own) and your liabilities (what you owe).

Assets are typically a car, cash deposits in checking and savings accounts, the value of investment accounts, stocks and bonds. Other assets, such as furniture and personal belongings, may be left out of this tally if you don't plan to sell them, if they have little monetary value or if they are not easily sold.

Liabilities are any bills that you are responsible for paying, such as housing, utilities, student loans, credit cards, etc. For any loans or credit card debt, make note of your current outstanding balances, payment amounts and due dates, annual percentage rate (APR) or the loan interest, the remaining loan terms and any prepayment penalties. Also, keep track of any documentation you have signed.

Assess your situation

Using this information, you'll want to determine your net worth by subtracting your total liabilities from the total value of your assets. Don't worry if you have a negative net worth. Many new graduates carry significant student loan debt and often credit card debt as well. The goal today is to understand and track this amount on a regular basis. As your earning capacity increases and you manage to gradually pay off your debts and intelligently manage your money, this number should move toward the positive.

Afterward, figure out your debt-to-income ratio—the total amount of your monthly bills divided by your monthly gross income. Many landlords and lenders will want to see this ratio at no more than 30 percent. You can actively manage this number through budgeting.

Your debt-to-income ratio also serves as a primary factor in determining your credit score. Becoming familiar with your credit score and credit report can help you better understand and manage your overall financial picture. You can request a free report from all of the major reporting bureaus. Keep an eye out for errors and fraud, and be sure to report them if you find them.

Set your priorities

Identify and rank the financial priorities you want to achieve in the short and long term based on what's important to you. Your own hopes and dreams may not fit with every piece of advice you receive. Do not be discouraged if it is not feasible to tackle everything you want to accomplish with your finances at once.

Use your financial selfie to help you determine these priorities and see where your money goes. Does it move in line with your priorities? If not, what actions can you take to change that?

For example, if you want to feel less anxious about the threat of a job loss, you may want to eliminate non-essential spending until you meet a savings milestone. If you plan on applying for more credit in the short term (like graduate school) or long-term (mortgage for your first home, for instance), reducing any existing debt, starting with the higher-interest loans and credit cards, may become a greater priority for you.

Here are some insights for organizing your next steps around a few common priorities:

Plan for emergencies.

Setting aside some money can help you better navigate unforeseen financial challenges. Aim to create two types of emergency funds:

  • Short-term: Try to quickly save at least $500-$1000 for smaller emergency expenses, such as car repairs or an urgent doctor's visit before health insurance benefits start.
  • Long-term: Strive to accumulate three to six months of expenses to cover the fallout from sudden unemployment, extended illness, etc. Think of a long-term emergency fund as a work in progress that will take time to build.

Automating the process can help you meet savings goals faster. Set up contributions to a savings account from each paycheck. Think also about allocating at least a portion of any boosts to your regular income—raises, bonus, overtime, cash gifts, income tax refunds, etc.—toward your savings goals.

Reap the advantages of investing early.

It can appear challenging to save and invest while earning an entry-level salary. However, by doing what you can as soon as possible, you gain critical advantages. Learn about what types of investing works best toward your goals and how factors such as interest compounding and capital gains can do some of the nest-egg growth work for you.

Do you have access to an employer-matched 401(k)? Try to contribute at least enough to benefit from the matching policy. Forgoing this benefit can be viewed as essentially leaving free money on the table.

Get ahead of student loans.

Effectively managing your student loans can be one of the best early financial moves you make. Prioritize them in your budget. Review the grace periods and carefully investigate opportunities to help stick to timely payments, such as income-based repayment plans available for some federal loans. Check to see if your employer offers student loan assistance.

Loan consolidation can be a helpful option to reduce your payments, but remember to carefully weigh the benefits and risks, such as lowered payments in exchange for higher interest rates and longer time to pay off the loan. Be aware consolidation can affect your eligibility for deferment options and income-based repayment plans.

Make your money work for you

It's common to feel overwhelmed about our finances, especially when starting out. Think of the work ahead as a new learning journey. Worry less about having all the answers right away. Take the time needed to educate yourself about personal finance and understand where you want your money to take you.


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