Graduating college and entering the job force is an exciting time – you are earning your first paycheck, and you probably have more money coming in now than you ever have before. That can be an amazing feeling, but it can also get you into trouble if you aren’t careful!
I recently received a question from a reader named “Alex.” He is just starting out on his career and wants more information about how he should go about paying off his credit card debt and student loans, and planning for retirement. Here is his question:
I am 22 years old and just starting my career. I am wondering what personal finance moves I should be making now and how to best prepare for retirement, etc. I am currently maxing out my 401K and trying to pay off some student loans to become debt free. I also have a small amount of credit card debt at 15%.
Managing money after college graduation
Alex, it looks like you are ahead of 99% of your peers – you are already saving a massive amount of money toward your retirement and you are proactively paying down your student loans and credit card debt. Too many people who are fresh out of school are content with making minimum payments on their student loans and credit cards and foregoing retirement investing in favor of buying a new car or filling their home with electronics.
Even though I think you are doing great, I think there are a couple more things you can be doing. For instance, the first thing I recommend is starting an emergency fund – ideally you would want to have several months expenses available in a high yield savings account, just in case something unforeseen occurs and you need some quick cash.
The next step is to get rid of that credit card debt! 15% is fairly high, so you might consider using a 0% balance transfer to transfer your current credit card debt from 15% to 0%. There may be a small fee involved, but it is usually 3% or less and will save you a lot of money in the long run if you pay your card off before the interest rates rise again.
My other recommendation is examining your financial goals. For long term goals, consider reading up about Dave Ramsey’s Financial Peace University, which is Dave Ramsey’s plan for financial freedom. For short term goals, ask yourself if you have any intermediate plans such as buying a house, getting married, having children, buying a car, taking a vacation, etc? You may consider allocating a portion of your income to cover any of these short term needs so the money is available to pay for these items outright or make a sizable down payment.
More money management tips:
plonkee from plonkee.com:
Ok, sounds like you’re off to a good start.
As far as preparing for retirement goes, take advantage of a Roth IRA if you can, and continue to invest in your 401(k), but also learn as much as you can about investing, including establishing your risk profile and picking a suitable asset allocation.
Otherwise, it’s probably good to pay down your student loans, but make sure that you have a 3-6 month emergency fund, and you’re also building up savings to things that feel unexpected, but aren’t really. At some point you’ll probably need to buy a new car, or find a deposit and first/last rent on a new apartment, or… These things are better coming out of savings than being put on credit.
Finally, think about how to get the most out of your career. Make sure you enjoy your job, and maximize the opportunities it gives you. Your ability to create an income is your biggest asset at this stage.
glblguy from Gather Little By Little:
You’re doing all the right things, just stay focused and pay off those student loans and avoid any further debt. Paying off the loans should be your #1 priority. Drive a paid for car, live in a cheap (but safe place) and live frugal. Once those loans are paid off, start saving.
In a few years you’ll be debt free, heavy on cash and able to begin buying those things you’ve been wanting. Just make sure you’re thinking long term and not short term. This is the biggest mistake young people make…including me when I was young.
Paid Twice from I’ve Paid for This Twice Already:
Being aware of your situation is really key. Knowing how much money you bring in, how much you spend, and how you spend it will serve you well.
I really recommend the idea of budgeting – or at least tracking all your money – at least for a short period of time. It will give you an idea of where everything is going and you can evaluate if the choices you are making reflect your monetary values.
Paying off debt and saving for retirement are two great paths to be following, and bravo for figuring them out so young!
Pinyo from Moolanomy:
I think you are off to a great start. Here are a few things I think you should consider.
1. At your age, Roth IRA may be a better choice. After you reach your company matching contributions max, you may want to consider maxing out a Roth IRA before maxing out the remaining 401k. The reason being that our tax rates at its historic low and there’s no guarantee that it will stay at this level. With 401k, you are at the mercy of future tax rates; however with a Roth IRA, you’re paying taxes now, but will enjoy tax-free withdrawal in the future. (More information about a Roth IRA vs. a 401k).
2. It’s nice and fun to save for retirement now, but you’ll have to think about your immediate future. More specifically, if you are planning to buy a house, you may want to set aside an amount each month that will go toward the down payment. Even if you have hundreds of thousands in retirement account, it won’t help you when you need money for down payment.
3. If the interest rates on your student loans are fairly high, you may want to consider knocking that off as soon as possible just to get it off your back.
Thanks for writing in, Alex! I hope some of our responses can help you formulate some ideas on where you want to take your finances in the next few years. We all wish you the best!