My oldest daughter is graduating high school this month. And even though she still has four years of college to go through–and college graduation down the road–we’re already talking to her about how to be smart with her money and save for her future.
With so many college graduates entering the job market now, it’s not too late to offer them some college graduation advice of their own–namely how they can be smart with their money as well.
I recently spoke with ING Retirement Coach Holly Kylen, who is a financial advisor with ING Financial Partners, an author of a Retirement Planning for Women seminar, and serves on ING’s Women’s Advisory Network Board. She offered this college graduation advice with five financial tips for now and the future.
- Live on the 80/20 rule. Put 80 percent of your income towards living expenses and any other spending needs. With the remaining 20 percent, put it away into retirement savings–starting right away. If you start out making $30,000 and follow this rule, you’d save $6,000 annually. By maintaining this savings habit for 45 years (approximately when you’ll reach retirement age) and applying annual compound interest of 5 percent, you’ll potentially retire with $1,037,868.
- Set a habit of financial self-study. Commit to reading a financial magazine of your choice (get a magazine subscription–print or tablet so that each issue arrives on time for you to read), and buy at least one financial book each year–again, digitally or in print. The best way to feel in control of your finances is to educate yourself on key concepts, such as asset allocation, differences between roth and traditional individual retirement accounts (IRAs), as well as your employer retirement plan options and matching contributions. Financial education is a lifelong pursuit, so your studies should continue long after graduation.
- As soon as you start making money, start saving in an employer-sponsored retirement plan or Roth IRA. In addition, saving in a Roth IRA offers clear advantages as well. The money you put into a Roth IRA are after-tax dollars (as opposed to a traditional IRA or 401(k) which are pre-tax). The beauty of the Roth–and starting an account as soon as possible after graduation–is that earnings grow tax-free. The Roth does offer some flexibility as well – the principal (the amount you contribute) is liquid after one year and can be tapped for emergencies, while up to $10,000 can be accessed without penalty for education expenses or a first-time home purchase. One note of caution though: you should try as best you can to avoid touching that money until retirement.
- Set and maintain goals. Have one-year, five-year and “don’t-touch-until-retirement” savings goal. For your one-year goal you might aim to save $500 for holidays gifts, while a five-year goal might be to purchase a car loan-free. As part of following through on your one-year, five-year and retirement goals, figure out how much you need to put aside each month to reach that goal and set up an automatic transfer into a separate savings account. For your retirement goal, put the money in retirement savings vehicles such as your company’s 401(k) and a Roth IRA.
- Live and breathe your budget. Don’t make any financial decisions until you know your budget (how much it costs you to live day-to-day, how much is coming in and how much is going out). After putting away 20 percent of your money into retirement savings, consider 50 percent of your income for necessities (e.g. rent, transportation, food) and the remainder for other financial goals and “play.”