Just graduated? Then you have six months to figure out the first big personal finance challenge of your working career: how to pay off your student debt. Because college costs are rising far faster than the rate of inflation, America’s graduates are struggling more and more with mountains of debt. Indeed, the class of 2016 is the most indebted in history. To say that’s a challenge is an understatement: A recent study found that 38 percent of students thought their debt would hold them back after graduation; 11 percent of graduates end up in default, a mistake that can haunt you for a lifetime.
Graduates: Congratulations, Condolences and a Game Plan
You don’t need to be a statistic. You just need a plan. And since debt is just a piece of your financial life, your plan needs to address more than just your repayment options. On the bright side, the plan can be simple and it sets you up nicely for a healthy financial life for now — and for always.
1. Clean Up
Before you fill out the first job application, go clean up your social media accounts. Lose the drunken photos, the outrageous and argumentative comments, anything profane and work-inappropriate. Not every prospective employer will check your social media presence before hiring, but an increasingly large number do. Also, update your profile on LinkedIn.
2. Get a Job
Duh, you say. You’ve been interviewing and applying for your dream job for months at school job fairs. It hasn’t happened yet; the job market is tough — that’s always true, by the way. But now that you’re out of school, you’re planning to make applying for jobs your full-time job. And stick at it for as long as it takes. Don’t.
Certainly, spend time researching where you want to work and why, apply for all of your dream jobs, and tap your network — and your parents’ networks — to see if anyone you know is hiring. Do that for a month with the vigor you’d apply to a full-time job. But if you don’t get something in the first month — particularly if you have little or no work experience to put on a resume — get a job. Any job. Make coffee at Starbucks. Fill shelves at Costco. Dole out samples at Trader Joe’s. Keep applying for that dream job, of course. But work while you’re filling out those applications.
Working increases your chance of getting good work, just like good grades in high school increased your chance of getting into a good college. The reason: If you work hard and responsibly at a place where you don’t plan to stay, prospective employers know that you’re highly likely to do the same — and more — when you get a job that matters to you. Every former or current employer who is willing to provide you with a good recommendation increases your chance of getting the job you actually want.
One of the great secrets of the working world is that there are a handful of things that successful people do consistently. You can learn those skills at any job.
What are these magical skills?
- Show up on time and appropriately dressed.
- Speak politely. To everyone: bosses, co-workers, customers, people who wandered in to use the restroom.
- Work. Hard. All day. If you find yourself with nothing to do, look around and see what needs doing and either do it or ask if you can help to get it done. People who don’t need to be told to help out are called “self-starters” and they’re indispensable in the workforce. Actually, everywhere.
- If you err, apologize. Don’t make excuses — even if you can think of a laundry list of reasons that it wasn’t your fault. Apologize and fix it.
3. Prioritize Your Debts
Once you have an income, figure out a spending plan that allows you to repay your debts. If you have a pile of loans to repay, prioritize them. You should repay the highest cost — and floating-rate — debts first. That would suggest that you first attack any credit card debt and any other high-cost personal loans. If you have private student loans, they’d be your second-highest priority to pay off. Your federal student loans can be repaid the slowest.
Why? It’s likely to be the lowest-cost and most flexible debt you have. No other lender gives you the ability to defer loan payments — for free — while you go back to school or are out of work. Student loans do.
Thus, if you must have some debt outstanding, make it those federally guaranteed student loans.
4. Sign Up for a Student Loan Repayment Plan
Even if you have a little time left on your grace period, go to the government’s repayment site and figure out which repayment plan to choose. A good answer for almost anyone is the government’s pay-as-you-earn or revised pay-as-you-earn plans. These plans set your student loan payments at 10 percent of your discretionary income.
Importantly, if you have no discretionary income, the payment is set at zero. If you have a lot, the plan allows you to repay your loans in an accelerated fashion — the revised pay-as-you-earn plan is a little faster than the pay-as-you-earn plan.
Both of those features are good for you. Paying off loans faster, when you can afford to, cuts the interest payments you owe over time. Making the payments a percentage of your discretionary income means that you can always afford to pay. That’s important because student loans are generally not dischargeable, even in bankruptcy. If you fail to pay your student loans, the government can tack on huge penalties and interest charges and garnish your wages and your tax refunds for as long as it takes. And, of course, the bad payment history will ruin your credit rating, too. Don’t default. Ever.
You can estimate your payment using your real loan data by logging into the Department of Education’s website.
5. Set Goals
There’s a separate story on my site about why you need to set financial goals. I won’t repeat it all here. But the short version is this: If you have a goal — a clear goal that’s precious to you — it’s far easier to make the day-to-day sacrifices that might be necessary to get it.
6. Start Saving
The best advice is to save as much as you can as early as you can. When you’re first out of college, you often have a perfect opportunity to be a prodigious saver, socking away a massive percentage of your income while you shack up with Mom and Dad.
Why not spend that money on a great apartment or going out and having fun with your friends? Well, do some of that. But the more you save now, the faster you can be free. Not retired; just free. Consider this: You get a job, thinking it’s your dream job, but after a year, a new boss comes in and he’s a massive jerk.
If you don’t have savings, you are faced with three choices:
- Frantically search for a new job and hope you get one quickly.
- Quit and move back in with Mom and Dad.
- Work for the jerk.
If you do have savings, you have a cushion that allows you to quit — politely, though, since you might still want a job recommendation from the jerk; you can bad-mouth him later — without having to move back in with Mom and Dad. And the longer you’re in the workforce, the more options you’ll find that having savings can provide.
A nice savings account can not only help you handle a stretch of unemployment; it can allow you to take time off with a new baby or to travel the world. It can give you the economic wherewithal to start your own business or handle an illness. Money in the bank is pretty much always a good thing.
And while we’re talking about saving: You need to save for two distinct priorities: emergencies and freedom, and retirement. We just talked about emergencies and freedom. You should be socking additional savings into a retirement account — ideally, a 401k plan offered with a match through work.
7. Save for Retirement — Now
The moment you are offered a 401k plan at work, you should start saving as much as possible. That does not mean save up to the matching amount — usually 6 percent of pay. It means save as much as humanly possible — and that’s more than you think.
Why is this so important? Again, it boils down to freedom. Someday, you might have kids and want to allow one spouse to stay home with them for a while. If you start saving now and save a lot, you can stop saving then without worry. Or maybe you get to middle age and your kid just got into Bucknell, one of the priciest private colleges in the country.
She loves Bucknell. You feel compelled to pay for it. If you have a fat 401k account at that time — which you will, if you start saving now — you’ll have two good choices: Stop making contributions to the 401k and use that money to make monthly payments to Bucknell, or borrow up to $50,000 from your 401k to pay a portion of the tuition.
Or maybe you decide that you want to retire early — say, at age 55. If you’ve been saving religiously until then, chances are you would have plenty of money to do that. That’s a luxury that your less foresightful friends will not be able to afford. Besides, a combination of government tax breaks and employer’s matching makes 401k plans an incredibly great deal.
This is best illustrated with an example: Let’s say you get a job at age 25 earning $40,000 a year. Your employer offers a 401k and you can contribute up to 25 percent of your pay, or $10,000. Because 401k contributions are contributed pre-tax, the $10,000 — that’s $833 per month, $416 per pay check — reduces your taxable income and the tax you pay through withholding. Thus, instead of finding yourself with $833 less to spend each month, your paycheck drops by just $625.
Now, let’s say your employer is also matching your contributions at a 50-percent rate up to 6 percent of pay. In this case, that would have your employer kicking in an additional $100 a month or $1,200 a year. You’ve got $933 going into savings each month, and it only costs you $625 — about one third less — in spending power. Assuming you earn 8 percent on your money over time — and you should if you’re invested in either the target date or the stock index fund options, which are both smart choices at your age — your savings will have grown to more than $65,000 within five years; to $172,000 at the end of 10 years; to more than a half a million by year 20. You become a millionaire at the tender age of 52; you have $1.4 million by the time you’re age 55. And when you’re ready to retire at 65, you have more than $3 million bucks.
Naturally, this all assumes that you never earn more than $40,000 annually; you never earn more on your money than 8 percent — and the historic average is higher, so these estimates are conservative — and you never save more than the original $833. That’s a pretty easy route to riches.
This article originally appeared on KathyKristof.com.