Since graduating, some of the most important research I have done is in regards to my finances. As a young adult with awful spending habits, I figured it was time to take them seriously (honestly, I should have done this a long time ago). By no means a financial planner, I have compiled a Financial Planning Checklist to keep myself on track. A lot of resources were used, but my absolute favorite would be
Dave Ramsey. He has built up a major reputation for this stuff, so if you're so inclined, I encourage you to check out his site. Here is what I have compiled:
Financial Planning Top 10 for Young Adults
- Understand How Your College Loans Work
- There are plenty of benefits of consolidating your college loans post graduating. There are some really good resources for understanding educational loans at finaid.org, and studentloanconsolidator.com has plenty of resources if you're interested in your options with loan consolidation. It would also be useful to make a debt repayment fund, which would take the money directly from your account without you having to remember each month.
- Pay Your Taxes
- If you haven't learned this before, start now. Having an income means paying taxes. NO if's and's or but's. Let's just say, if you don't pay your taxes, you're going to jail...the IRS means business! You should also understand how income taxes work. Paycheck City is an amazing site where you can calculate if your salary will actually be enough money for your financial goals and obligations. Basically it takes your gross pay and subtracts what goes into your taxes so you can see your net or take-home pay. Marginal tax rate is important if you decide to change your job for one with a higher salary, so you can actually evaluate home much more you would make each month. From my research, taxes are super complicated, so do your best to be informed.
- Save
- This is probably my weakest area, because I tend to look at savings as my spending account. There are so many important reasons to save your money, and most of them will correlate with your 5 and 10-year plans. Putting your money into a high-interest online savings account will allow you to make money on what you are putting away. Just don't put your savings in a mattress or other ridiculous location, or else inflation will erode the value of your savings. Most financial planners suggest having a savings of six months of living expenses (ideally), but for most of us that's not realistic. Instead, start with one month's expenses and increase as you go. When you get a raise, it's important that you also increase the amount of money from your salary that goes into your savings. One of my long-term goals is to own my own house without going into debt, so I really want to have enough in my savings to put a down payment on a home without taking out any loans.
- Get Health Insurance
- Health insurance coverage is provided by many employers, and can be paid for through payroll withholding. Being young may make you feel invincible, but chances are something is going to come up that will derail that line of thinking. I had an instance last summer where I had a corneal laceration and an infection on top of that. After an ER visit, there were many trips to an ophthalmologist. Thank God my parents were able to walk me through it all, but the medical bills were insane and that was with insurance. Disability insurance should be considered as well, as this coverage provides partial continuation of your income if you are unable to work because of a long-term illness or injury. You never know what could happen, but being prepared is a better plan than not. This also works for other types of insurance, such as car, home, or renters.
- Start Saving for Retirement
- This might sound totally premature, but saving now means having the freedom to retire early, and even have more to live off of in the future. A lot of companies participate in a matching program, and if you have the option you should definitely use it. Using an automatic withholding system allows you to put money away without even seeing it. Plus, compound interest is your best friend.
- Budget
- As Dave Ramsey says, "Your spending plan is like a treasure map. It shows you what to avoid and what path you should take, and it leads you to riches." This should be a written spending plan, because it's so easy to avoid looking at your bank account to track your spending. Writing down everything makes it so much more obvious that you spend too much money on iced coffee *cough**cough*. Dave Ramsey also has an awesome budgeting plan to get started with, but if you do it yourself, categorize your expenditures and that coupled with your income should equal zero. Every month is different, so don't do it once and think that it is going to work all year long. Making a plan and sticking to it is going to set up good spending habits that will last.
- Emergency Fund is a Must
- Insurance alone doesn't cover all of your problems, as learned from that eye catastrophe. Liquid savings are also needed on hand for an added precaution. This is different from a savings account, so don't treat your savings as an emergency fund. Building an emergency fund is useful if you get into a car wreck, or your house floods, and should be left untouched until something devastating like that occurs.
- Build Credit
- Taking on debt and showing that you know how to manage it well is how you build up that credit history and earn a good credit score. Credit is important when applying for a job, buying a car, renting an apartment, etc. When you take out a loan or use a credit card, you're establishing credit. The best way to obtain good credit is to pay off the entire balance each month. This may not be possible with larger purchases, but buying items that you can afford to pay back will keep you from taking on more than you can handle. I personally have never owned a credit card, but I'm considering a few currently, and I'll write a separate post on what I learn from that research before I pick one.
- Read the Fine Print
- Any contract you are instructed to sign, you should read the fine print. Recent years have taught me this, and it's probably the most important way to stay informed on your financial choices. Credit cards and loans may not have that fixed-interest rate that you though they did, and they may also require payments that they didn't state verbally. The only place you are going to find legal solace is within the confines of that fine print.
- Compile Your Key Financial Documents
- Some key documents that you should have in your possession by now are: birth certificate, Social Security card, and other official IDs. You should also keep records of all of your banking and investment accounts, household bills, insurance policies, leases, car registration and title, and any online usernames and passwords. At this point in your life, you should be familiar with encryption software to protect yourself. Also consider an actual safe for the hard copies of your important documents.
Whelp, that's my list, and I'm planning on making a post on credit cards, as well as investing, so be expecting those! I'll probably write a bit about some of my other new hobbies, such as learning to code, drawing, and mediocre photography.
Sources:
https://www.geico.com/information/life-stages/on-your-own/financial-responsibility-tips/
http://www.investopedia.com/articles/younginvestors/08/eight-tips.asp
http://www.kiplinger.com/article/saving/T063-C006-S001-10-financial-commandments-for-your-20s.html
http://www.daveramsey.com/blog/how-to-build-wealth-with-time/
http://www.ffscambridge.com/blog/post/financial_planning_checklist_for_recent_college_graduates/
