A College Graduate’s Guide to Financial Planning

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

May 22, 2024

You have your degree, now what?

College graduation is an exciting time.  It’s an educational milestone and a great time to celebrate with friends and family.  After the week or so of celebratory events, there is an inevitable realization that your first day or work starts soon.  It might be a role in your dream career, or it might be a job to pay the bills while you’re figuring thigs out, but no matter what, the real world is coming fast.

On the finance side of things there is a deluge of changes: student loan payments, rent, credit cards, 401(k) accounts, budgets, and job benefits.  All that information is new and can be pretty overwhelming.  Here’s the lowdown on things to consider after you cross that stage to receive your diploma:

  1. Understand gross versus net income. Maybe your offer letter said your starting salary would be $60,000.  That does not mean you should build your budget on $5,000 a month.  Yes, your gross pay is $60,000, but when you take out taxes (net), it will drop.  That drop varies based on the state you live in, marital status, income type, etc., but the point remains that not all your income is spendable. Some employer savings plans and benefits further reduce the amount you can take home, so understanding what you pay for at work after taxes is very important.
  2. Make a budget.  A budget is important to simply track what comes into your account every month, and what goes out.  As far as the outgoing, where is it going?  There are many systems to help with budgeting.  Some people enjoy apps, some prefer spreadsheets, and some use an old school system like the envelope method.  No matter, getting a basic understanding of how much comes in and out of your hands monthly allows you to make more advanced financial planning decisions. For more on budgeting, check out these other resources: https://thesteadfastfiduciary.com/2023/09/06/when-budgeting-simple-beats-complex/
  3. Student Loan Planning.  If you were fortunate enough to have familial help or scholarships pay your way through school, I am thrilled for you. If you are among the 70% of undergraduate or graduate students who accumulate some form of student loan payments throughout school, this is for you.
    • Set a realistic timeline for payback.  Say you land a job that pays $100,000.  If you have $100,000 of student loans, a one-year payback is unrealistic and will only set you up for disappointment.  Use calculators to come up with a realistic amount based on the budget you create. Paying back student loans is important and you do want to eliminate debt throughout your life to build flexibility in your plan, but the loans did afford you the opportunity to further your education and income earning potential. Becoming singularly focused on student loan repayment will likely narrow your vision causing you to miss other important planning opportunities.
    • Understand your payment options. There are fixed payment plans and income driven plans.  Deciding the right path for you is important. Your post-graduation career path is a large factor here. In a career like medicine, you will likely go for several years with a very low income and a lot of debt. Very quickly, your income will jump dramatically as will your ability to pay back that debt.  An income-driven plan could be a great option here. If you are an engineer or in finance, your income might be a bit healthier from the onset. Maybe not as much upside, but competitive and growing at a predictable rate. In this case, a fixed plan over a set number of years could be a perfect choice.
    • Avalanche versus snowball. Two main methods of debt repayment.\
      • Avalanche: Pay back the highest interest first, regardless of the balance. As balances are paid, roll that payment into the next highest interest rate loan.  This is mathematically the most efficient option, but with larger amounts, it can provide some problems of the human behavior side.  Discouragement can set in from seemingly slow progress. This method is great if the interest rates vary greatly between your various loans
      • Snowball: Pay back the smallest balances first. As balances are paid, roll that payment into the next smallest. This method leans into the positive feeling and encouragement you will receive when you pay off a balance in full.  It puts math in the backseat to emotion. It is a great fit when there is not a lot of difference in the interest rates on your loans.
  4. Build an Emergency Fund.  This is cash set aside in a savings account. The first step is to get $1,000 saved up.  This should be your primary savings focus until you have that threshold.  After that, you can spread your efforts out a bit to meet multiple goals.  The goal for an emergency fund is 3-6 months’ worth of expenses.  For example, if you spend $4,000 every month, $12,000- $24,000 should be the goal for emergency funds.  This varies based on career, income predictability, marital and family status among other considerations. A liquid high yield savings account is the best place for this account.
  5. Invest in your 401(k).  The first place you’ll want to look at is your employer’s retirement plan.  It is likely a 401(k), but could also be a TSP, 457, or 403(b).  These are all similar in many aspects. As far as young savers are concerned, the benefit is twofold: 1) these accounts are all tax-sheltered, and 2) there is a good chance your employer matches and contributes on your behalf.
    • The tax shelter means the account can grow and you do not have to pay taxes on that growth. It is not meaningful in the first couple of years but can make an incredible difference as your account grows year after year.
    • The potential for matching contributions superpowers your investment plan.  If you save $500 a month and your employer adds $500, that is an immediate 100% return on the cash you put away. That benefit can really add up over time. You should think of the employer match in a 401(k) as additional income deferred until retirement. The amount equal to your employer match should absolutely be prioritized within your budget.
    • Read more about 401(k)s here: https://thesteadfastfiduciary.com/2023/12/01/the-101-class-on-your-401k
  6. Invest elsewhere. 401(k)s are retirement specific.  Other types of investments can be used to supplement retirement savings (Roth IRA, IRA) or be used for anything else (brokerage account). Understanding what you can invest in and allocating amongst different time horizons is important. Save invest for 2-year goals, 5 year goals, 20 year goals, and those age 60 plus years. Here is a link to more on flexible investment accounts: https://thesteadfastfiduciary.com/2023/08/08/should-i-have-a-taxable-brokerage-account/
  7. Understand Credit.  A credit score is a lot like a body mass index measurement.  It can mean a lot, but it also can misrepresent quite a bit as well.  A healthy 200 lb. individual and a very unhealthy 200lb person at the same height both share the same BMI.  I’ve seen credit scores in the 800s from people who are ridden with debt and debt free people who are low 700s.  The important thing about a credit score is not having the highest one possible but growing the score and maintaining it within the confines of a financial plan. Debt is a tool, but must be used responsibly. Check out the graphic from FICO.  50% of the score is just having credit over time and making payments.
    • Here are some myths on credit scores:
      • You must keep a credit card balance. No, pay off the statement balance monthly. Do not pay interest. The timely payment is key, not the balance. Paying off loans early will hurt your score. No, time and timely payments are key. Paying off a loan is timely and will not hurt you.
    • Here are some good ideas for building credit:
      • Set up auto pay on bills.  This will make sure all payments remain on time.
      • Use a credit card for one or two budget items.  If you are new to a credit card, you want to avoid overuse. Pick out gas and groceries and let all of that be paid by a credit card, then pay it off the same month.  That regular usage over time will grow your score.
      • Once a year, request a credit limit increase on your card(s).  You don’t really need the higher limit, but usage is a factor in your score. A higher limit then lowers your usage without doing anything differently.
What is your credit score made up of?
  1. Understand your benefits package. In many cases, nearly 25% of your total compensation comes from your employer’s benefits. These benefits may include:
    • Health Insurance
    • Life Insurance
    • Long- and Short-Term Disability Insurance
    • Employee Stock Purchase Plan
    • Restricted Stock Units or Awards
    • Employee Stock Options
    • Paid Time Off
    • Retirement Account or Pension

These are all very important to your plan and it is imperative to maximize these. For a single worker perhaps the long-term disability insurance and stock purchase plan are more relevant.  For an employee with a family, health and life insurance could be far more relevant.

  1. Know yourself.  Do you like to spend a lot? Are you ultra frugal (perhaps even cheap)? Knowing your money habits is so important.  It is being true to yourself and that is very important as you begin your relationship with money.  Acting like you are a saver when you love to buy new clothes monthly is an unhealthy expectation that will eventually lead to a shameful spending habit.  Know what you tend to do and how you tend to feel about it when it comes to saving, spending, and investing.
  2. Know what you value.  Financial planning is a process of aligning your money with what you value.  Just like you must know how you tend to use money, you have to know what you value so you can ensure those values remain reflected.  If you value financial flexibility as soon as possible, perhaps buying a large house or expensive car is not the best way to grow more flexibility. If you want more time flexibility today, maybe more flexible accounts should be used for savings and investing. When you can identify what you value, how you should save and invest can become clearer.   https://thesteadfastfiduciary.com/2023/08/22/when-to-start-my-financial-plan/

There is lot to figure out as far as finances go. The moment you start making a paycheck, you’ll have to figure out how to split it between the various goals you have.  The good news is you have your whole life to work through this and odds are, if you are reading this, you are already at a decent head start when most people start planning. Know yourself, know what you value, and plan to use the tools you have to get you where you want to go.

Congrats on earning your degree and starting out on a grand adventure!

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