Financial Tips for Recent College Graduates and Early Career Professionals

July 29, 2013

I recently joined a group of friends in a discussion about our first jobs and reminisced about those innocent days of youth (mostly innocent at least).  My first job tapped into my entrepreneurial spirit as I traveled yard to yard in my little corner of suburbia mowing lawns. The boss was a free-spirited adolescent and that venture provided zero benefits, but I did learn a lot about the importance of having a solid work ethic and it gave me hands on experience with managing and saving money.

However, during graduate school I landed my first real job with employee benefits (although sweating in 100 degree heat sure felt real at the time). This opportunity provided me with some real challenges and it’s always a different ball game in the big leagues when so much more is at stake, including your financial future.  I was faced with some tough decisions and to be honest, I lacked confidence that I was equipped with enough financial knowledge at the time to make the right ones. So if you or a loved one is a recent college graduate faced with some important financial decisions, here are some financial tips to help along the journey:

1. Make a list of “SMART” (Specific, Measurable, Actionable, Realistic, Timely) financial and other life goals and put them in writing. Use a simple goal setting worksheet to focus on short-term and long-range goals and do this before doing anything else. (One of my friend writes about using a “dream board” to help visualize your goals.) Establishing meaningful goals and prioritizing them based on what matters the most to you will give tasks such as budgeting, saving, and investing more purpose and meaning.
2. Speaking of budgets, everyone needs one regardless of their net worth. Looking back to my twenty-something self, I had a tendency to reward myself when I graduated or moved on to a higher paying job with more spending.  The real reward was credit card debt that took years to overcome.If you are just jumping up to a different pay level then use some of the same frugal behaviors that helped you get through college on a shoestring budget. Online tracking tools like Mint and Yodlee are just some of the many tools available to help. Here is an easy spending plan using a simple spreadsheet approach.
3. When you’re in your 20’s, it is hard to find the balance between living in the moment and planning for the future. So rather than making the mistake of having intentions to save throughout the month and the money simply not being there, automate savings through payroll deduction or automatic transfers of at least 10% of your income. This is the essential concept of paying yourself first! A general rule is to try and maintain at least 3-6 months worth of basic living expenses in a separate account from your everyday checking account.
4. One exception to this rule is if you are burdened with high interest consumer debt such as credit cards or vehicle loans.  In that case, it is necessary to establish a “starter emergency fund” which may be 1-2k and then attack this debt with payments above and beyond the minimum required payments.  But a best practice financial behavior is to always pay the full balance on credit cards each month.
5. Save, save, save! It’s such a simple concept but so hard to follow through on at times. It’s especially difficult to save when there are other competing priorities fighting for the same limited financial resources. But the earlier you get into the habit of saving at least 10-15% of your income into a 401(k) at work or an individual retirement account (traditional and/or Roth IRA) the better off you will be down the road. Yes, retirement is likely a fuzzy concept during the early stages of your career. But even if you have no clue when it may occur or what your retirement may look like, get off to as fast a start as possible.
6. There is a high likelihood that recent grads may do some job hopping during their career.  Avoid the temptation to cash out retirement plans when switching jobs and take advantage of continued tax deferral with 401(k) or IRA rollovers. In my experience as a financial planner, this is one of the leading causes of IRS tax problems and a decision most people will end up regretting later in life.
7. Don’t raid the retirement accounts when you are ready to make that first time home purchase. With home ownership back on the rise, it’s amazing how easy it is to forget the lessons of our most recent economic crisis. It’s just as important now more than ever to set up a savings account of at least 3-6 months basic living expenses prior to buying a home. Saving for down payment on a home or other purchases like a car should not come from the emergency fund so be sure to establish separate accounts for this purpose as mental accounting often fails.
8. Take time to understand, even at a basic level, tax planning strategies to help you make the most of your wealth today and into the future. Contribute as much as possible to your 401(k) plan at work.  At a minimum, take full advantage of any matching contributions.  If a retirement plan isn’t offered, then contribute to a Roth IRA. If you are in a high deductible health care plan, contribute as much as possible to a health savings account (HSA) to lower your taxes today and be able to take out this money tax-free for health care expenses.

These are just some tips to consider if you are fresh out of college or simply in the early stages of your career looking to get your finances on solid ground. If you are in the early stages of your career, I want to hear from you – what are your biggest financial concerns when it comes to managing your personal finances. For those of you who have “been there/done that” already, what advice would you give your twenty-something self?  Add your comments below.