TL;DR: Building a strong financial foundation for recent graduates starts with developing smart money habits as soon as you enter the workforce. This guide covers practical ways to balance everyday expenses, student debt, savings, and long-term investing while working toward greater financial stability.
Main points:
- Start investing early: Take advantage of employer-sponsored retirement plans, matching contributions, Roth 401(k)s, or Roth IRAs to benefit from decades of compound growth.
- Stay ahead of student loans: Explore income-based repayment and other strategies if payments become difficult rather than risk falling behind or defaulting.
- Create a realistic budget: Track your income and expenses so you know where your money goes and can consistently spend less than you earn.
- Consider the 80/20 rule: Use roughly 80% of your income for expenses and discretionary spending while directing 20% toward savings and investments.
- Plan for emergencies and the future: Build emergency savings and consider professional financial guidance as your income and responsibilities grow.
Walking across the stage to receive your diploma is a rite of passage for many young adults. As soon as you graduate, it’s time to get a job. Many young adults are ready to start their careers, but aren’t ready to manage their finances. It’s critical to set a strong financial foundation as a recent graduate.
New workers must learn to handle their new jobs, manage their benefits, and keep up with their student loan payments. Learning how to manage money after college can help you make better financial decisions as your income and responsibilities grow.
If you’re a recent college grad, these tips for financial success can help you now and in the future.
Start Working Toward Your Financial Goals in Your 20s
The sooner you start planning for your financial future, the better. It could make a big difference in the amount of money you have when you reach retirement age. Once you get your first job out of college, take advantage of the employer-sponsored retirement account or 401(k) plan.
If they offer a match on investing, make sure you take it. The earlier you start, the more money you will have generated when you reach retirement.
When you’re young with a lower income, you may be in the 12% tax bracket. If your employer offers a Roth 401(k) option, you contribute money, pay 12% tax today and have it grown tax-free for the next 30 or 40 years.
You’ll get that same tax benefit by opening a Roth Individual Retirement Account. Try to put aside $300 a month into it. Think of that as a monthly car payment, set it aside and forget it. In addition to the tax benefits of starting a Roth IRA right out of college, you are taking full advantage of the snowballing effect of compound interest.
The earlier you start building wealth in your 20s, the more money you will have generated when you reach retirement.
Don’t Default: Explore Student Loan Repayment Strategies Before You Fall Behind
If you are struggling to make monthly payments on your student loans, the last thing you want to do is default on them. Missing just one payment can cause your loans to go into default.
Defaulting can have many negative impacts on your finances overall. It could lead to anything from negatively impacting your credit score to having your tax refunds withheld or a portion of your wages taken out to repay a defaulted loan.
If you feel like you are at risk of defaulting on your student loans, there are some student loan repayment strategies you can take. Try switching to an income-based repayment plan. This option restructures your payment based on your monthly income to a hopefully more manageable amount.
Another option that's a little less popular is to move back with your parents for a few months. This move can help you pay off debt faster by hopefully removing a few bills. A short-term sacrifice for a couple of months could set you up for a lifetime of financial freedom.
Prioritize Budgeting and Follow These and Financial Tips for New Graduates
Budgeting may have been something you relied on your parents for, but graduation is the perfect time for you to take control of your finances. Get into the habit of budgeting. Know how much money you have coming in every month and figure out exactly where it all goes.
The goal with budgeting is to make sure more money is coming in than is going out. If you want to adopt a simple budgeting plan, follow the 80/20 savings rule:
- 80% of your monthly finances goes toward your bills and any fun money you want to spend
- 20% goes toward your future finances, including savings and investments
A great way to learn more about your finances is to find a financial expert who can help you. You want to learn how to save, spend and invest your income while still paying down your student loans. No matter what stage of life you or your finances are in, at Asset Preservation Wealth & Tax, we help our clients find the right plan for them.
Frequently Asked Questions
How should I manage my finances after graduating?
Start with a budget. Know how much money you bring in, where it goes, and how much you can save each month. If your employer offers a retirement plan, consider contributing early. You should also plan for student loans and start working toward your financial goals in your 20s.
Is $200,000 enough to work with a financial advisor?
Yes. Many financial advisors work with clients who have $200,000 or less to invest. Some charge based on the amount you invest, while others charge a flat or hourly fee. Look for an advisor whose fees and services fit your financial situation.
What is the 3-6-9 rule in finance?
The 3-6-9 rule is a simple way to think about emergency savings. You may aim to save three months of expenses if your income is steady, six months if you have more financial responsibilities, or nine months if your income changes often. Choose a savings goal that fits your expenses and job situation.
Can you still get grants after graduation?
Yes, depending on your situation. If you return to school, you may qualify for certain grants or other types of financial aid. Eligibility depends on the program, your degree status, and the type of aid available. Check with your school’s financial aid office and complete the FAFSA when required.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
