New college grads… They’ve made it through their college years and now it’s time for the next stage and all that it entails, from securing a job to finding a place to live. And with all they have to handle, thinking about financial planning might just end up on the back-burner. But developing a workable financial strategy can help them successfully transition from student to full-time member of the workforce.
With that in mind, we reached out to James R. Moyer, CFP® for some advice on how they can get all their financial ducks in order. Moyer, a CERTIFIED FINANCIAL PLANNER™ practitioner at Schneider Downs Wealth Management Advisors, L.P., has some excellent recommendations for new college grads that he shared in our interview.
WHN: What are some of the financial challenges facing new college grads?
Moyer: They most likely have to deal with student loan debt while finding a good paying job without having work experience. Most grads will no longer be able to count on financial support from their parents for living expenses such as groceries, insurance and cell phone bills. Plus they will also have rent or mortgage payments that they might not have had before.
WHN: That’s a lot to juggle and it’s understandable that they may think financial planning is limited to figuring out how they can address their immediate needs. What advice can you offer to help them take the long view when it comes to their finances?
Moyer: I recently met with a client’s son who just graduated and is moving out on his own. Fortunately for him, he isn’t leaving college with any student loan debt, but he still had numerous questions that many other young adults might also be asking. Whether you do or don’t carry student loans, let’s walk through some helpful steps for entering this phase of life.
- Determine your long- and short-term goals— and immediate financial needs.
- Create a realistic budget including fixed expenses (i.e. rent, utilities, car payment, insurance premiums, etc…) and discretionary expenses (i.e. dining out, entertainment, clothing, travel, etc…), making sure to allocate a safe cushion amount for unexpected expenses.
- Set up an emergency fund. The amount will vary based on incomes per household and job stability, but a general rule of thumb for recent college graduates is to save six months’ worth of living expenses.
- Be sure to contribute to your company’s retirement plan. You should be contributing at least the amount that your company matches; otherwise, you’re turning down free money.
- If you do find yourself with extra cash, count yourself grateful and begin to tackle debt and save money for long-term goals such as buying a home, preparing for a wedding, and other large purchases. Allocating excess funds to higher-interest debt first, known as the “debt snowball,” should save you money in the long run.
WHN: What are the top three strategies that new grads should consider implementing when they are working out their financial plans?
- Complete a realistic budget and stick to it.
- Save, save, save. Save for retirement early in your career. The power of compounding interest is a real thing and not just made up in textbooks. And start a savings plan for your emergency fund. Don’t allocate too much as to avoid putting any money in your 401(k), but make this a priority.
- Determine a reasonable student loan repayment strategy, so you aren’t putting your entire paycheck towards repayment. College graduates often feel that they need to pay off all of their student loan debt immediately. While that isn’t a bad idea, it’s not always the best one. Unless the interest rate is very high, you may be able to earn a higher rate investing your money.
WHN: When it comes to important documents, what should they put in place for “just in case” scenarios”?
There are several documents that will make your loved ones’ decisions easier in the event that you become incapacitated.
- A will—a document that will direct your assets to beneficiaries of your choosing in the event of your passing. While it doesn’t seem important when you’re young and haven’t accumulated much, it could eliminate unnecessary stress for your family.
- A living will, or advanced directive, allows you to determine your wishes for end-of-life medical care.
- A healthcare durable power of attorney designates an agent to carry out the wishes listed in your living will.
- A financial durable power of attorney also assigns an agent, and gives them the legal authority to act with broad power over your finances on your behalf should you become incapacitated.
Also, designate the beneficiaries for your bank accounts, life insurance, 401k and any outside retirement accounts. These accounts will avoid the probate process if beneficiaries are assigned. By avoiding probate, your assets will transfer to the beneficiary of your choice in a more efficient manner.
WHN: Where should new grads go for financial planning advice: their accountant, their banker, a financial adviser? How do they know who they need?
When it comes to seeking out financial advice, always choose a fiduciary—a person who is required by law to act in your best interests. An easy way to figure out if someone is a fiduciary is by looking at their credentials. Certified Financial Planners (CFP®), Certified Public Accountants (CPA), and Chartered Financial Analysts (CFA®) all have to abide by the fiduciary standard, or risk being barred from the applicable accrediting agency and fined.
The financial services industry has become very saturated with salespeople; unfortunately, these salespeople aren’t always acting in the best interest of their client. Although they may try to persuade you that they are acting in their client’s best interest, their real objective is to make the next high commission sale.
A general rule of thumb is to seek help from a CFP®. These individuals have an in-depth understanding of investments, taxes, estate planning, and overall financial planning. If they don’t know the answer, they typically have an expert in their network they can refer you.
WHN: Where else can they go for information?
If your new job offers a retirement plan, schedule a meeting with your company’s 401(k) plan administrator. Depending on the company, they may provide one-on-one sessions with retirement planning consultants who will help you. If that’s not an option, seek help from a credentialed professional.
If you have any questions about the financial choices you’re facing as a recent college graduate, feel free to contact your local Schneider Downs representative.
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