Two things new graduates can do with their money post-college to set themselves up for financial success.
Originally published and written April 6, 2021 by Elizabeth Gravier
Edited for brevity & clarity by Gleba & Associates
With graduation season right around the corner, the class of 2021 is gearing up for what their lives will look like post-college.
As they prepare to enter the workforce, this period is a significant time marking the start of their careers. For new grads, it’s also an opportune moment to make sure they start off on the right financial foot. The money moves you make in your younger years can have a huge impact on what your personal finances look like for years to come.
For grads-to-be, here are two things you should do with your money to help build a strong financial foundation.
Spend your money wisely using a starter credit card
The purpose of a starter credit card? To help you build credit.
Your credit history – or the length of time you’ve had credit – makes up 15% of your credit store. So, the earlier you begin building credit, the better.
A good credit score will help you qualify for an apartment, as well as get lower interest rates on a new car loan or future mortgage.
Recent grads who have a very short credit history, or none at all, should consider opening a starter credit card, also known as a secured credit card. Similar to using a traditional – or unsecured – credit card, a secured card allows you to charge purchases against your credit limit and then you pay your balance off in full each month when your bill arrives.
The big difference between secured and unsecured cards, however, is that the former typically requires cardholders to make a security deposit upfront (usually $200) that is equivalent to their credit limit. This deposit acts as a form of collateral in case the cardholder doesn’t pay their bill each month, which is why they’re great for beginners as they learn how to use credit responsibly.
Another credit card option is to talk with your bank – many have options for students who have accounts with them.
If you have student loans, you can build credit by paying them off. Student loans are a type of installment credit, similar to car loans and mortgages, which means they show up on your credit report. The good news is that paying your bill on time each month will help your credit since your payment history is the most important factor in determining your score.
Graduates with student loans typically have a six-month grace period before they have to start repayment. After you begin paying your student loans, it may take a few months for them to appear on your credit report.
Save your money in a retirement account
Yes, it’s never too early to start saving for your nonworking years.
For recent college grads who score a job that offers a 401(k) or other company retirement plan with matching contributions, make sure you prioritize putting your money toward it. Otherwise, that is free money you are leaving on the table. If you can’t afford to meet the match, work your way toward it each year by upping your contribution.
Many companies offer two types of 401(k) options: pre-tax and post-tax. Often, for someone just graduating college, your tax bracket will be low and you can take advantage of a post-tax, or Roth 401(k). This allows you to pay taxes on the contributions today at lower rates, rather than at higher rates in the future. Contributing as much as you can to a Roth 401(k) can mean paying less in taxes in retirement.
For those recent grads whose first job doesn’t offer a company retirement plan, you should consider opening an IRA to ensure you are putting away a portion of your paycheck for retirement. There is a post-tax, or Roth, option for an IRA as well, so you can get the same tax benefits as contributing to a Roth 401(k).
Please come to us to discuss your options, as everyone’s situation is different.