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Archive for Monday, May 17, 2010

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Financial advice for new grads

May 17, 2010

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It is the time of year when many young people move on from high school or college to begin life on their own. Starting your new career or job can be very rewarding and a giant leap toward new levels of responsibility. Although there is very little taught in school, developing strong financial habits early can help to ease this transition.

Have a plan

It sounds simple enough, right? You would think so, but there are very few people who actually sit down and put the pencil to the paper. Whatever entry-level position you obtain, you need to develop a specific plan to manage your expenses against your income. Many graduates focus all their efforts on landing a high-paying job right away. If you spend just as much effort on controlling expenses, the benefit is greater than just making more money. Every extra dollar you earn is subject to increasing levels of taxes, but what you save by spending more efficiently cannot be taken away by the IRS or other taxing authorities. Effectively planning can also prepare you for circumstances that may arise, such as extended periods of unemployment that are an unfortunate reality in the current job landscape.

Build emergency fund

One important piece of planning is to build an emergency fund. So many people overspend to the point of exhausting their income each month. When there is very little room for error, the risk increases that immediate cash needs will necessitate the use of debt. Start by building one month’s income with the goal of having three months or more. This fund can be used to cover your needs in short-term situations. Did you notice that I said “needs”? Do not use this account as a deferred spending account. This means you buy the things you want (HDTV, vacations, etc.) and then replenish it later. A problem could arise when the emergency funds are not there when you actually need them.

Understand debt

Although governments around the world are providing terrible examples, debt is not the answer to short-term issues. This is true for your cash flow needs as well. Effectively planning and having an emergency fund will keep you from accumulating some debt, but if you feel like it is necessary, weigh all of the consequences of these liabilities you accumulate. Even though it sounds appealing to pay minimum payments for years to have something you want now, you can end up paying many times over for something through the unbelievably high interest rates credit card companies are charging.

Ask for help

Pride often keeps us from seeking help, but if you need clarity on financial issues, ask someone. Even though it is often difficult to talk about specific situations with family and friends, there is always someone willing to share their experiences about how to get started on the right foot. In fact, many of us who started out years ago could provide you with a list of examples of what not to do.

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