For many post-grads, a significant portion of their hard-earned paychecks goes towards the burdensome weight of student loans. Once those loans are paid off and that final payment is made, grads will often feel a newfound sense of financial freedom and the temptation to splurge may be hard to resist. But hold off on the celebration.
Before uncorking the champagne, and going to town to purchase everything in your cart, keep in mind these expert tips that are a better use of your money and sure to lead to long-term success. To help recent grads elevate their financial standing after bidding farewell to pesky student loans, here are five expert financial moves to get ahead.
Eliminate Other Debts
Now that you have conquered student loans, it’s important to also tackle other debts head-on in order to save on interest rates over time.
Clearing high-interest rates debts such as credit card balances and personal loans will further reduce your monthly budget and allow you to redirect your income toward savings, investments and other long-term goals.
In order to eradicate your other debts as fast as possible, start by developing a realistic budget that prioritizes debt repayment while covering essential expenses. Prioritize paying off the highest-interest debt first and don’t be afraid to consult with a financial advisor if you’re debts feel overwhelming.
Set Up an Emergency Fund
In an unpredictable world where financial emergencies and global pandemics can catch us off guard, it’s a better time than ever to take charge of your financial well-being. Post-grads should leverage their current increased budget flexibility to proactively build a safety net.
“Most financial advisors prescribe six months’ expenses for emergency savings,” said Robert Johnson, Ph.D., professor of finance at Creighton University. “This fund is meant to cover life’s unexpected black swans — like losing one’s job or a significant health setback. As far as where to invest the emergency fund, one is best advised to simply place it in a money market fund or savings account.”
To kick-start your emergency fund, follow the advice of experts and approach savings and budgeting with a disciplined mindset.
“The best way to build an emergency fund is through disciplined planning and budgeting,” Johnson said. “Budgeting is critical. Specifically, one should not simply budget and track expenses, but one should budget for savings. We accomplish what we prioritize. Prioritize savings and invest those savings.”
Join an Employer’s Retirement Plan
Establishing good financial practices after escaping student loans, means never leaving free money on the table.
“One of the most important financial decisions anyone makes in their life is the decision to participate in an employer-sponsored retirement plan,” Johnson said. “If one does not contribute enough in a 401(k) plan that has a company match to earn that match, one is basically turning down free money. Many people put such a high priority on paying down debt that they do not participate in their company 401(k) plan. Contributing the max to your 401(k) also reduces your tax bill.”
One of the most common financial setbacks people face is not saving enough–or not starting to save early enough–for retirement. Your future self will thank you for prioritizing employer-match benefits as soon as possible.
Pay Yourself First
Although I’m sure the espresso machine in your cart online and the newfound budget wiggle room may be tempting, it’s important to set yourself up for long-term financial success. According to Johnson, a great way to do this is through the practice of “paying yourself first.”
“Paying yourself first simply refers to the practice of setting aside some money for the long run before you do any other spending,” Johnson said. “The most common mistake is that people let their spending increase commensurate with their new salary. For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving a raise. What happens is they are unable to improve their financial condition because they spend everything they make.”
Instead, it’s wiser to maintain a similar lifestyle as before the raise and use the extra income to invest and grow wealth.
“Suppose one receives a $5,000 annual raise early in one’s career,” Johnson said. “If you simply invest that $5,000 annually into an investment account growing at a 10% annual rate, you will have accumulated over $822,000 in 30 years. You will have invested a total of $150,000 and have earned $672,000 from those investments.”
Take Care of Your Physical Wellbeing
While taking care of your physical body might not seem like a financial move, medical bills can quickly add up. Often, college students burdened with loans skip out on their annual dentist and doctor visits.
“Dental care and annual physicals are important to your long-term well-being and to the extent you’ve not kept up with checkups during your years of student loan repayment, now is the time,” said Patricia Roberts, COO of Gift of College.
Neglecting regular check-ups can lead to more expensive medical bills and issues later in life you’ll likely want to avoid.
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