As a recent college graduate, taking control of your finances is one of the most important steps you can take toward building a great future. With student loans and living costs, it can feel overwhelming to manage your money effectively right out of school and achieve financial independence. This guide provides practical strategies specifically tailored to help new grads tackle debt repayment, create a sustainable budget, and start investing wisely. As wealth managers, we know that financial sustainability, and, in our view, financial success, is built by creating a plan, sticking to it, being patient, and wisely utilizing lucky breaks as they come. This roadmap is designed to help you gain financial literacy, and we believe it will put you on the path to long-term success.

Tackle Loans and Credit

Pay off loans strategically: If you have school loans, it’s crucial to develop a plan to pay them off effectively. Focus on paying down the highest-interest loans first and try to make extra payments to speed up the process. Use a loan calculator like this one to figure out how much faster you can pay off your loans with additional payments.

Build your credit: When used prudently and paid off immediately, credit cards can be a great way to build your credit. Having good credit makes it easier to apply for and receive loans for things like home, auto, or business purchases in the future. Avoid carrying a balance on your credit card as interest rates for consumer credit tend to be very high. A bonus for using credit cards is that many cards offer fun rewards like flights, discounts, and cash back. Make sure you understand the fees and restrictions on these cards before opening your account.

Develop a Spending Plan

Create a budget: If you’ve never set a budget before, now is the perfect time to start a habit that will benefit you for life. We recommend a bucketing approach for its clarity, control, and goal-oriented nature. Here’s a simple breakdown:

• Essentials Bucket (50%): Rent/mortgage, utilities, groceries, transportation, insurance, and other necessary living expenses.
• Savings Bucket (20%): Emergency fund, retirement savings, and both short-term and long-term goals.
• Discretionary Spending Bucket (20%): Dining out, entertainment, hobbies, vacations, and other non-essential items.
• Debt Repayment Bucket (10%): Payments for credit cards, student loans, and other debts.

Track Your Spending: Use tools like spreadsheets, budgeting apps such as Quicken Simplifi, and other online resources such as Schwab MoneyWise | Monthly Budget Planner to monitor your spending in each bucket. It can be helpful to set up a weekly budget if a monthly one doesn’t work well with your cash flow or seems overwhelming. Set up autopay for every recurring bill where possible. The less financial clutter that is in your life, the more you can focus on what matters. Treat your savings like a bill, and automatically set it aside.

Build an Emergency Fund: For peace of mind, set aside enough savings to cover 3-6 months of expenses for emergencies such as injury, illness, or layoffs. This also gives you staying power in the market in the event of unforeseen circumstances, which are inevitable in our wildly complex world. Staying power means you won’t have to interrupt the compounding growth on your savings. Compounding is the single most powerful force in finance; once you understand it, you’ll want to treat every dollar intentionally.

Start Investing Early for Long-Term Wealth

The Power of Compound Growth: The key to building long-term wealth is to start investing early. Compound growth allows your money to grow faster over time due to the “interest on interest” effect. The longer you leave your money to grow, the more significant the compound effect, leading to exponential growth.

For example:

You, a responsible and forward-thinking young-person start saving and investing $500 per month at age 25, and save this amount every month until age 65. Assuming your investment grows at 8% per year, you will have $1,745,000 by the time you retire.

Or, you could be a more traditional American saver, waiting until age 40 to save and invest $500 a month until age 65. Assuming the same 8% growth rate, your savings would be $475,000 in retirement. In order to amass the same $1,745,000 by age 65, you would need to save $1,835 per month. This is a great example of the power of compounding and time.

Investment Options

Employer-Sponsored Plans: If your workplace offers a 401(k) or 403(b), contribute enough to get the full employer match. This is essentially free money. Contributions grow tax-deferred, meaning you won’t pay taxes on growth until you withdraw the money in retirement. Remember, you generally can’t withdraw these funds without penalties until age 59½. If your employer offers Roth contributions and you’re in a low tax bracket, it may make more sense to go that route.

A Roth IRA: If you earn under $161,000 as a single tax filer, you can contribute to a Roth IRA in addition to your employer-sponsored plan. This is a great way to save for retirement tax-efficiently. Contributions are taxed before they go into the Roth IRA, but the growth and withdrawals are tax-free. For 2024, the max contribution is $7,000 for individuals under age 50.

Health-Savings Account (HSA): An HSA is a tax-advantaged savings account where pre-tax contributions grow tax-free if used for qualified medical expenses. The contribution limits for 2024 are $4,150 for individuals and $8,300 for families. One benefit of an HSA is that contributions do not need to be spent in the year they are contributed, meaning they can grow similarly to a retirement account.

A Taxable Brokerage Account: Once you’ve built an emergency fund and maxed out your retirement accounts, consider a taxable brokerage account for medium-term goals. You can add or withdraw funds as needed. However, dividends and interest are taxed as ordinary income, and you’ll pay capital gains taxes on investment gains.

How to Invest Wisely

Consider your appetite for market risk: there is no such thing as risk-free investing, and investing will always carry the risk of loss. With that said, certain investments tend to be much more volatile than others. For example, stocks tend to have much higher price fluctuations than bonds, but have a higher expected rate of return over the long-run. You will want to take into consideration your appetite for market risk in conjunction with your risk capacity and the magnitude of your financial goals.

Diversify your investments: Avoid putting all your money into a few stocks or speculative investments. It’s important to be diversified across asset classes such as US stocks, international stocks, and bonds. Mutual funds and ETFs are an easy and cost-effective way for new investors to achieve this diversification.

Create and stick to a plan: Invest at regular intervals and avoid trying to time the market. Dollar-cost averaging is a reliable way to build wealth over time. It involves investing a set amount regularly, regardless of market prices, which helps smooth out the cost of investments over time. Using a financial advisor or an automated investment platform can help you stay disciplined and avoid emotional decision-making.

By focusing on these strategies, we believe you can build a solid financial foundation, pay off debt efficiently, and invest wisely for a prosperous future. By living within your means, automating contributions, and investing through low-cost diversified funds, you can establish solid financial habits from the start of your career. For more helpful tips check out these helpful resources.