Understanding financial planning
You need a financial plan because there’s more to money than next month's budget. College students can begin to plan their longer-term financial goals early on, but they should be prepared to practice a form of thinking that is more abstract than budget planning. Longer-term financial planning is abstract because it requires you to imagine your future not one semester at a time, but in whole years—or groups of years.
Smartaboutmoney.org provides guidance that can help you prepare for the bigger financial issues that await you in the years to come. Start planning for those events now by listing them and keep an eye out for classes, seminars, or information that can help you learn the basics.
As your life beyond college unfolds, try to think in terms of the following short-, medium-, and long-term goals.
- Debt Reduction. If you graduate from college with debt, paying down your student loans and/or credit card bills should be a top priority. Start with the debt with the highest interest rate first, as it will cost you the most money over time. For most students, that means paying down credit card balances first. Though it may take time to repay your debts, the good news is that by making timely payments to your lenders you'll build a solid credit rating for yourself for your future.
- Emergency Fund. When you graduate, land that first job, and are out on your own, you'll be responsible for paying all of your living expenses. Most expenses are fairly predictable and recurring, like rent for an apartment, gas for your car, groceries, and utilities. But some expenses will catch you by surprise, like buying a new set of tires for your car or getting the transmission repaired. For these unexpected expenses, you can begin building an emergency fund. A general rule of thumb is to have a minimum of three months worth of living expenses “in the bank,” so to speak. You can build your emergency fund a little at a time; start by building towards one month of living expenses, and go from there. Then when some unexpected expense occurs, you won't have to borrow money and go deeper into debt to weather the storm. Your emergency fund protects you.
- Spend Less Than You Earn. As you begin a new job, you'll have to make choices on how you will spend your income. If you want to be successful in life and learn to manage your money well, develop the habit of spending less than you earn on your very first job. A second life-success habit is to learn to pay yourself first, which means put a little bit of every paycheck away into savings.
- Employee Benefits. Many employers offer a variety of benefits to their employees, such as health insurance, retirement plans, life insurance, educational assistance, and other advantages. As a new employee, make time to learn about these benefits. Many of them will either save you money or help you make more money later in life. A great place to start is with your employer's human resources department.
- Transportation. Many jobs require that you commute to work. Before you immediately go out and buy a new car, examine all your options. While public transportation may not be particularly glamorous or even convenient, the cost savings can be tremendous, especially if you live in a large metropolitan area like New York City or Chicago. Be sure to account for all the costs of owning a car, if you choose to go in that direction. Since you are no longer a college student, you will probably need to pay for your own insurance as an adult, and you won't be eligible to stay on your parent's policy as a student. Consider parking costs, tolls, gasoline, and normal maintenance. In many cases, buying a good used car is a smart way for college graduates to meet their transportation needs.
- Work Attire and/or Equipment. As a new employee, you may need to purchase new clothing to fit your employer's standards. Your job may require that you purchase certain tools or equipment. If you go on to graduate school, you'll have tuition and text expenses along with all the normal living expenses of life.
- Getting Married/Starting a Family. Weddings can range in cost from relatively little to literally tens of thousands of dollars. A nice benefit of getting married is that your individual living expenses generally go down, as you can share an apartment or home with your spouse, share the cost of utilities and groceries, etc.
- Saving for a Home. To buy a home, you'll probably need a deposit, called earnest money, of at least $500. Earnest money lets the seller know that you are serious ("earnest") about buying the home. If you changed your mind and decide not to buy the house, you will likely forfeit any earnest money you've put down. Beyond the initial deposit, many lenders want to see a down payment of anywhere from 5 to 20% of the home's purchase price. For instance, on a $100,000 home, you'd likely need to make a down payment of at least $5,000.
- Saving for Retirement. Though retirement may be decades away, putting away even small amounts of money now can lead to big savings later. The key is to take advantage of time by getting started now or as soon as you can. Consistently saving small amounts of money over time can add up to bigger overall savings in the future, because of compound interest. Compound interest means that in addition to your savings earning interest, the interest you earn also begins to earn interest. Remember that your company may offer a retirement plan that you can participate in; doing so usually means extra money contributed by your employer for your retirement.
- Ongoing Education. While your first job is no doubt exciting and rewarding, many people end up changing companies and/or careers throughout their working years. To keep your options open, it's a good idea to be a lifetime learner. So plan for some educational expenses for online classes, graduate school, training seminars, and so forth.
- Saving for College. If you get married and have children, you will likely want to help pay for their college expenses. As you know from having just graduated, college is a significant expense. Get started now with investing even small dollar amounts for a newborn, and add to these college savings regularly (part of paying yourself first, as mentioned earlier).
- Caring for Parents. As you age and your own family gets started, your parents will be aging also. Depending on their financial situation, they may need some help from you financially at some stage in their life, such as entering a nursing home or needing long-term care.
The first step in achieving goals is deciding what they are—and then writing them down so they are real. Once you write them down, post them on the wall or your refrigerator, so you are constantly reminded of what you are working for. Use the Goals Worksheet to write down three short-term financial goals, one medium-term goal, and one long-term goal. Then start planning for at least one short-term goal.