April is Financial Literacy Month, and college graduation season is right around the corner. Now is the perfect time for graduating students to think about getting their finances in order for summer and beyond. There's a lot to think about: loan payments, health insurance, retirement savings, and the day-to-day concerns of paying for food, transportation and housing. Some graduates are lucky enough to have a full-time, salaried job right out of college, while others will still be working hard to achieve their dream careers. Regardless of their financial situation, each college graduate needs to utilize the same basic tools to set themselves up for long-term financial success. Here are six financial necessities for every new college graduate.
1. A sustainable budget
Post-graduation life brings a variety of new financial challenges, especially for students who may have to move to a different city to start a new job. They may have to budget for a new housing market, a different transportation system, and, perhaps, a radically different cost of living. It's important for them to create a budget that carefully balances these costs while allowing them to save for the future, but there's no one-size-fits-all formula. How much should one spend on housing, for example? One third of your post-tax income is the traditional rule-of-thumb, but that may not be realistic for someone starting their first job in an expensive city like New York or San Francisco. The smartest strategy is to keep all your costs reasonable, even if you can afford to spend more.
2. Checking account and savings account
A checking account is the most fundamental financial planning tool for any recent college graduate. Checking accounts are safe and secure, plus they make it easy to pay bills and manage your money online. Community banks and credit unions are more likely to have free checking without minimum balance requirements, monthly fees or direct deposit requirements. New grads should also open a savings account or certificate of deposit. You may find the best savings and best CD rates online, but it's important to shop around and find an account that fits with your lifestyle. Life happens, so no one can possibly plan for every expense. Having an emergency fund is essential for maintaining financial security.
3. Credit card
A credit card comes with the temptation to overspend, but it's also an essential tool for building credit when used correctly. Many people get their first credit card in college, but unfortunately, many students don't use it responsibly. The average college student graduates with $3,000 in outstanding credit card balances. Students that are having a difficult time making payments may find some relief by signing up for a balance transfer credit card. Students that already have a history of making responsible payments should sign up for a rewards credit card or travel credit card to earn cash back, points or miles while they're building credit. New college graduates that don't have a credit card yet should get one and use it responsibly.
4. Health insurance
Many colleges provide health insurance for their students, or at least offer a low-cost option for students to purchase their own. Once they leave school, many students find themselves without health insurance if their job doesn't provide it. Thanks to health care reform, young adults can be covered under their parent's health plan, for free, until they're 26. New grads that aren't lucky enough to have this arrangement may have to purchase their own insurance. Even though many plans range from $150 to $500 a month, it's still well worth the cost. Without insurance, something as simple as an ambulance ride can easily cost $1,000 to $2,000, depending on where you live. Even low-cost health care plans are worth it, if that's the only viable option. They may not cover doctor's visits or prescription costs, but they'll at least be able to provide financial relief if something catastrophic happens.
5. 401(k) / IRA
A secure retirement plan is probably the last thing on any new college graduate's mind, but that doesn't make it any less important. College graduates should start saving for retirement at their earliest opportunity. Ideally, they'll work somewhere that offers a matching 401(k), but even if they don't, they'll still have the option of opening a Roth IRA. How much to save is another matter entirely. While many experts recommend saving 10 to 15 percent of your income, that isn't practical for everyone, especially for students who still need to build a rainy day fund for themselves. The general rule of thumb is to save as much as possible, as early as possible. The next generation of retirees won't be able to count on company pensions or social security to cover all their expenses.
6. Student debt repayment plan
The average college student finishes school with more than $25,000 in student loan debt. That's an incredibly daunting number for most college students. Here's what's worse: 25 percent of students miss their first payment, or pay past the deadline. When tackling student loans, planning ahead is essential. Financial aid departments across the country offer loan exit counseling, which is a valuable resource for students that are just about the graduate. It's also a good idea to make payments ahead of schedule, if at all possible. All educational loans, both public and private, offer penalty-free repayment. The earlier students make payments, the less they'll have to pay back overall. However, there's nothing wrong with making consistent, regular loan payments for a long time, as this will help you build credit.