How to Take Control of Your Finances after Graduation

[Don’t miss the two free giveaways in this post!  Click here to access our new retirement calculator, and click here to download our comprehensive student loan guide!]

The first 90 degree day of the year (at least here in Philadelphia) means a lot of things to different people.  Memorial Day Weekend.  Weekends at the park or pool.  And, of course, graduation season.

Congratulations to everyone in Class of 2017! If you are finishing your undergraduate career this month, welcome to the working world!  If you are finishing a masters or professional degree program, congratulations on finally (probably?) being doing with school!  And if you didn’t graduate this year, stick around anyway- I have some information here for you, too.

As the excitement of your graduation weekend ends and you begin to take the next steps on your journey, whatever they may be, I recommend that you take a step back and take an assessment of your current financial landscape.  Your life is changing (for the better!), and as such, you should take some time to reflect and take action to set yourself up for financial success in your new endeavors.

There’s a lot to take in here – if you have any challenges in any of these areas, I recommend that you reach out to schedule a free consultation about a one time, quick start session!

Congratulations again, and let me know how you are doing as you progress through this list!

Negotiate Your Salary

If you’re still working on lining up your first job out of school, make sure you prepare yourself to negotiate your salary before you accept a job.  If you already have a job lined up, file this one away for your next performance review.

I’ve discussed this in much more detail before, but it’s absolutely critical that you negotiate your salary when starting a new job.

Over 60% of millennials aren’t negotiating with employers at all regarding their salary.  And the worst part?  Three out of four employers have room to negotiate salary by as much as 10%- but only if you ask for it.  And, truthfully, hiring managers and HR are expecting you ask for it.

I know it’s uncomfortable, but you have to do it.

Set a Student Loan Paydown Plan

The bad news? T-minus six months until your first student loan payment is due.

The worse news? The vast majority of millennials are told by their loan servicer how much they owe and automatically start paying the bill, without double checking to make sure they’re paying down their loans in the smartest way possible.

The good news?  You have the power in your hands to make sure you’re handling your student loans with the care they deserve.

I highly recommend downloading my free guide on managing student loan payments. In it, you will learn:

  • How to review each of your student loans and determine what payment plans each is eligible for.
  • How to know if you are eligible for a loan forgiveness program, and what you need to do to qualify for the program under current law.
  • When you should refinance your student loans, and when you absolutely should NOT refinance your loans.
  • How to set goals around your student loan payment strategy (i.e., should you try to pay down your loans as fast as possible, or should you try to minimize your monthly payment?)
  • … and much, much more!

Go ahead and grab your free copy of “13 Steps to Take Before You Make Your Next Student Loan Payment” today.  It will be worth your while to work through the guide in order to set you up for success with your student loans.

Set Financial Goals for the Next Five Years

I remember graduating college like it was yesterday.  The last thing I wanted to do was to try to imagine what the future was going to be like.  I just had the best four years of my life, and was scared to face all of the responsibilities that I knew would fall on my shoulders in the real world.  If you had told me back then to spend some time setting goals for my first few years in the working world, I probably would have laughed at you.

But, I wish I had taken that advice.  I’ve improved my own personal financial situation significantly after I started setting financial goals for myself. (Not too long after I started my first job, luckily!)  And I recommend you do the same.

Take some time and imagine what you want your life to be like in one, three, and five years from now.  Will you be going back to school to get a graduate or professional degree?  Do you want to buy a new car or, a little while down the line, a new house? Are you gunning for a quick promotion at work, or maybe even thinking about launching a business or side hustle someday?

All of these things are great, and they are much more likely to happen if you (literally) put pen to paper to clearly articulate what you want your life to look like.  And, once you have done this, you can manage your finances accordingly to begin to make progress against these goals.

Set Up Your 401(k)

It can be easy, in the flurry of paperwork that accompanies a new job, to accidentally forget or neglect to set up contributions to your 401(k).  Don’t forget, it’s critically important.  At a minimum, you should contribute at least to your firm’s matching point.

So, if your firm matches up to 3% of your salary, you should contribute, at a bare minimum, 3% to your 401(k).  Not contributing up to your firm’s matching point is, quite literally, turning down free money.

And unfortunately, it’s not enough just to set up how much you want to contribute to your 401(k).  You need to choose how you’d like to invest the money you put into your retirement plan, too.

Unfortunately, firms usually give very little guidance to their employees on how to do this.  Which is why I’ve wrote about how to choose investments in your 401(k) in more detail on this blog.

…And If You Can, Save Beyond The Minimum for Retirement

Retirement might be a long way away (spoiler alert: it is a long way away), but that doesn’t mean you shouldn’t start saving aggressively for it now.  In fact, due to the beautiful thing that is compound interest, the more you save for retirement in your early working years, the much better your retirement picture will be.

There are other things you should be saving for as well (we’ll get to that in a bit), but if you have some discretionary income, I can’t recommend highly enough that you put some of that into a retirement account.  What type of retirement account – either increasing contributions to your 401(k), opening a Traditional IRA, opening a Roth IRA, or even a nonretirement investment account – can vary significantly depending on your circumstances. This is probably something we should talk one on one about, if you have questions.

If you’re wondering how much you should be saving for retirement, I recommend inputting your data into the free retirement calculator I have right here on my website.  And, particularly, if there’s a big gap between the yellow and blue lines or if you portfolio is projected to run out in the early stages of your retirement, we should talk about ways to close the gap.

Build an Emergency Fund

Like I said, retirement isn’t the only thing you should be saving for.  It’s critical that you gradually build an emergency fund so that if you were to lose your job, you have a way to support yourself during the transition.

The rule of thumb is that you should have enough saved to support yourself for six months (living on reduced expenses, of course – you probably won’t spend as much as you are today if you don’t have an income, after all).  But, when you’re first getting started, I think it’s silly to dwell on six months of savings.  That’s a pretty big and intimidating number for most people.

So instead, start by trying to save up to cover one month of your minimum living expenses.  Once you’ve saved that much, make your next goal to be to save an additional month of living expenses.  And so on, until you’ve hit that six month goal.  By breaking it up into pieces like this, it gives you a very clear way to take small steps, starting now, to work your way up to this major goal in the future.

Keep Your Living Expenses at College-Level For As Long As You Can

If you’re like me, there’s a good part of you that’s sad to be leaving college.  College is hard, sure, but it’s fun!

Do you have that same bittersweet feeling I did about leaving school behind as you enter the real world?  Good!  Hold on to it.  Embrace it.  And channel it into how you manage your finances.

Simply put, if you had a blast in college living on a minimal income, there’s no reason to change that up now that you have a salary.

Sure, you can have some peace of mind that you have some discretionary money at your disposal if you ever were to need it. And there’s certainly nothing wrong with splurging every now and then.

But, since you’re used to keeping your living expenses low, you should continue to do that as much as possible.  Have friends in your new hometown?  Try to get them to sign on as roommates!   Have some more free time on the weekends now that you’re not constantly writing papers and completing homework?  Spend a little of that time learning how to cook so you don’t need to order takeout seven or eight times a week.

Simply put, it’s much easier to maintain your current standard of living today than it is to increase your standard of living, realize you’re overspending, and then try to cut spending back.  You’re better off keeping your monthly spending where it is today, and saving the rest, rather than allowing your lifestyle costs to rise with your income.

And Speaking of Spending…

Yes, you need a budget for yourself.

I’m not the type of person to go through my clients (or my own) spending with a fine-toothed comb, analyzing every little expense here and there.  It’s not fun; it’s not productive; and it’s not an effective, long term, healthy way to manage your finances.

Instead, you should set budget parameters for yourself to make sure you know where your money is going, and track against those.  A free tool like www.mint.com is great for this.

You don’t need to worry if you go a dollar or two over any particular budget category each month.  But, you should pay close attention to your biggest spending areas, and try to find ways to cut back on these highest impact spending areas first, if you’re having a hard time finding the money to save for retirement and build your emergency fund.

Budgeting should be a common-sense driven exercise.  Don’t drive yourself crazy with it, but know your budget numbers and stick to them as best you can.

Increase Your Available Credit (But Don’t Use It)

It can be hard to build your credit score while you’re in college.  After all, most financial institutions aren’t in the business of giving huge lines of credit to college students who have a minimal, if any, income.

But now that you’re out of school, that changes in a big way.  As soon as you have documentable proof of income, you should open up a credit card and use it wisely to start to build your credit score.

Whatever the bank gives you for a credit limit, always keep your credit card balance below 30% of this limit.  Always pay off your bill every month.  In other words, don’t rely on your credit card to bail you out if you don’t have the cash available to make a purchase.  Instead, use it as a tool to begin to build your credit history as an excellent manager of credit.  When you’re ready to buy a house several years down the line, you’ll be happy you did.

An even better way to do this?  Find a credit card that offers some great perks. If you like to travel, find a card that gives good points toward airfare or hotel stays.  If you’d rather just have the cash, find a card that pays you cash back bonuses when you use the card.  There are a lot of options out there, and some of them are fantastic.  If you want to get some more ideas on great credit cards to use, give me a call.

This Isn’t a One-Time Thing

As you can tell, there’s a LOT here.  As you transition in the work force, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide and plugging your numbers into my retirement calculator.  Create a budget, open a credit card, and manage your cash flow (both income and spending) wisely.

But ultimately, most of these things aren’t just for when you make the transition from school to a job.  You should periodically review each of these items to make sure you’re still on track.  Set up a free call with me to talk through how we can implement a system to address each of these items, and more.

How to Allocate Your Money Effectively

[Click here to register for my webinar, “How To Organize Your Finances and Create a Roadmap Toward Financial Freedom”!]

Ever since I founded Pacesetter Planning, I’ve worked with my clients on a wide range of financial topics.  I’ve gotten a variety of questions from clients and potential clients, and while everyone’s situation is a little different, generally they fall into the following categories:

  • How do I manage my finances with my husband/wife/fiance/significant other?
  • How much do I need to buy a house?
  • How much should I be saving for retirement?
  • How do I select investments?
  • Should I put extra money toward my student loans or should I direct that money elsewhere?

As you may have noticed, I’ve addressed a good number of these topics at a high level on this blog already (and will continue to do so).  But, you may have picked up on something else.

All of these Questions are Interconnected

It’s hard to make financial decisions in a vacuum.  Often times, the hard part isn’t answering these individual questions, but finding the right answer to them all at the same time.  It often isn’t practical to increase your saving for retirement and buy a house and pay extra on your student loans all at once.  These decisions need to be made together, and there’s usually not a clear right or wrong answer.

That, of course, is where I come in.  I help my clients develop plans to manage their finances, prioritize their goals, and help them allocate their money accordingly.  We set targets and track progress against these goals, updating as needed.

You Need a Framework to Make these Decisions

While everyone’s circumstances are a little bit different, I use a strict framework and process to help clients make these decisions.

And I’d like to share it with all of you.

On Tuesday, March 7 at 8 PM EST, I’ll be hosting a free webinar called “How to Organize Your Finances and Create A Roadmap Toward Financial Freedom”. You can register for the webinar here.

On this webinar, we’ll discuss:

  • How I recommend clients structure their accounts to keep track of their finances
  • How to implement a system to manage your income month to month to pay yourself first
  • How much money you’ll need to retire, and what it will take to get there
  • How to balance your everyday spending with your short and long term financial goals
We Face Greater Financial Challenges than our Parents and Grandparents.  Plan Accordingly.

Sometimes I get pushback when I say this, but I truly believe that millennials face much greater challenges than previous generations.  Think about it for a minute.

Most of our grandparents worked 40 years at the same job, retired and received a pension from their company to fund their retirement.  They have Social Security.  When they were our age and looking to buy a home, housing prices were about twice the average annual salary.

Many of our parents may have had multiple jobs over the course of their careers, but most of them only had one job at a time.  Some of them may still have a pension, but all will (barring some sort of catastrophe) receive Social Security.  And again, the average home price when they were in their twenties was around twice the average annual salary.

Now?  The average millennial changes jobs four times before turning 32. More than 1/3 of millennials have a side job.  The average price for a home has jumped to about 3.5x the average annual salary. Most of us have some type of student loans.

Pensions? Social Security?   ¯\_(ツ)_/¯

We have some big challenges ahead of us.  The good news is that these challenges can be beaten.  But, you need a method and a plan to get you there.  I’ve got it for you.

I Want to Teach You Everything I Know

I didn’t get into financial planning to only work with rich clients.  My goal is to help make all of my clients wealthy someday.  The more people I can help, the better.

Sign up for my upcoming webinar, and let me know if you have any questions you think I should address.  I look forward to sharing my methodology with you all.

How Much Home Can You Afford?

Let’s admit it- renting an apartment just isn’t fun.

Dealing with a property manager. Making (overpriced) rent payments month after month without seeing any return on your money.  There are a lot of traditional appeals of owning a home.  It’s the American Dream!  It’s a great investment! (Side bar:  it’s not always a great investment). It’s a place that’s truly your own!  Among the newlyweds I talk to, all of these emotional factors play a role in deciding to buy a home. That being said, the primary motivator often is a financial one- they’re just sick and tired of writing rent checks every month.

But does it always make sense to buy a home?  There are lots of reasons for me to say “no”, but one I want to focus on today is cost.  How much does it truly cost to buy a home?  And, relatedly, how much home can you actually afford?

Shocking Fact: Not Everything You Read on the Internet Is True

If you type, “How Much House Can I Afford” into Google, the first links that pop up take you to calculators where you can plug in a few numbers and it will tell you how expensive of a house you can buy and have your mortgage payment be the same as your rent payment.  Problem solved, right?

Wrong.  Wrong, wrong, wrong.

The most common mistake I see newlyweds looking to buy a house make is that they use these calculators to back into a house value they think they can afford just by looking at how much the mortgage payment is compared to their current rent.  There are a LOT of other costs, which we will break down later, that add up quickly when buying a home.

Let’s take utilities as an example.  If you’re buying house that’s four times as large as the apartment you’re renting right now, it wouldn’t be unheard of for your utility bill to be four times as high for your house as it is for your current apartment.  Even if it’s not quite that extreme, you can still expect utilities on a full family home to be much higher than on a single bedroom apartment.  These online calculators leave things like this out.

Long story short, your monthly mortgage payment should be significantly less than your monthly rent payment.  To look at it another way- your mortgage payment should be no more than 30% of your gross (before tax) monthly income, and 25% is even better.

Before You Buy, You Need an Emergency Fund

It’s no secret that it costs a lot to buy a house.  Even though you’re taking out a mortgage, you’re still going to need to make a down payment upfront. And a big one, at that.

But, you should never equate “make a large down payment” with “have just enough in my savings to make a large down payment”.

Simply put, you need additional savings in an emergency fund before you even think about saving to buy a house.  Typically, I recommend having enough in an emergency fund to cover six months of living expenses if you were to lose your job.  I know that’s a tough mountain to climb for many people.  Don’t focus on the total, but rather the small steps you can take, starting today, to get there over time.  So, start by focusing on saving enough to cover one month of expenses, then two, and so on until you build up to six.

Emergency funds are a topic for another day. The important point here is that you should never use your emergency fund to pay for your down payment.  As tempting as it can be to grab that pile of cash when you’re trying to save for a big down payment, leave it be.  If you happen to lose your job a month or two after you buy your house, you’ll be glad that you did!

Speaking of the Down Payment… How Much Do I Need to Save?

Before you can make serious decisions about whether you are ready to buy a home, you need to have enough saved to make a down payment.  This is the biggest upfront cost, by far, that will help dictate how much home you can afford to buy.

Generally speaking, 20% is the golden number for a down payment.  In other words, take the listing price of the property you’re looking at, and take 20% of that value.  That’s how much you should try to save, up front, to buy the home.

There are mortgage payment options out there that will let you get away with having less than 20% saved.  But the more you put down up front, the better your mortgage terms will be, which is a goal worth striving for.

Other Upfront Costs

Unfortunately, the down payment is just the beginning.  There can be many more “hidden” upfront costs to buying a home that you should be prepared for.

The biggest items here typically are the closing costs.  Closing costs can run anywhere from 2%-7% of the home’s value, depending on where you are buying and what is included.  Closing costs include a number of charges, including attorney’s fees, inspection costs, title costs, mortgage application fees, and others.

Sometimes, you can have these costs be added to the value of the mortgage rather than pay up front.  You may even be able to negotiate with the seller to have them cover a portion of the costs.  But, you should be aware of them, and plan accordingly.

Other costs up front that many people overlook include moving expenses and, perhaps more importantly, furnishing a home.  Houses can be quite a bit bigger than a one bedroom apartment!  You don’t have to do it all up front, but keep in mind how much it will cost you to fill all of those extra rooms.

Ongoing Costs

This is where it can really add up.  First and foremost, one of the biggest advantages to renting rather than buying, which you’ll give up the second you move into a home, have to do with property taxes.  While you can be entitled to some tax deductions when you buy a home, your tax bill will likely rise as you will owe property taxes to your state and local governments every year. These vary drastically from town to town, state to state.  Do some homework ahead of time so you know what you’re getting yourself into.

Of course, landlords can be a blessing and a curse when you rent.  As a homeowner, you’re now responsible for all the maintenance to the property that they handled for you before.  And of course, first time homes for a family typically are relatively cheap, which means there are more likely than not a good number of maintenance issues to be addressed.  I usually recommend that couples looking to buy a home set aside 1-1.5% of the total property value  every year for home maintenance.

Those are the two big ones, but depending on where you live and the type of property you buy, there can be many other “hidden” costs to keep in mind, such as Homeowners’ Association Fees.

The Bottom Line…

I’m not trying to talk you out of buying a home.  Really, I’m not.  I think owning a home is a great goal to shoot for and can be a great investment for your future (but, like any investment, its not a sure thing).

My point is that you need to be aware of the costs of buying a home up front.  It’s not just as simple as comparing your rent payment to your projected mortgage payment- you need to go deeper and get a good, honest feel for the “unexpected” costs of owning a home.  That way, when you buy a home and sign the mortgage, you can be sure that you’re really ready.