It’s been a busy spring for the topic of college funding, but now it’s time to focus on the more than 1.8 million 2019 graduates, who need to take control of their financial lives. The good news is that the average salary for newly minted grads is $51,347, 20 percent higher than what it was a decade ago, for the class of 2009, according to new study by recruiting firm Korn Ferry.
The bad news is that many of these grads will be carrying student loan debt, with an outstanding average balance of 30,000-$35,000. Of those who are making payments, Federal Reserve research has found that the typical monthly payment is between $200 and $300 per month, though for some the numbers are multiples of that range.
Regardless of whether you are graduating with debt or not, now is the time to step up and create a financial plan of action. If you are a parent, grandparent or friend, you can help in the process by highlighting these post-graduate goals, and maybe use the occasion to apply this advice to your own financial lives.
Track the Money: Every grad needs to know how much he/she is making and spending, to address all aspects of his/her financial life. This step is the core concept for ALL financial planning goals, because if you don’t know how much cash is coming in and out of your household, it’s hard to make informed decisions about your financial life. Given how important this step is, it was stunning to learn from the CFP Board that a whopping 59 percent of all adults say that they don’t do it!
Some expenses may be a shock to the new grads, especially if she will be paying rent, or for gym membership and now that she is off meal plan, food. There are lots of apps to help with the process.
Tackle the Big Three: With cash flow in hand, it’s time to address the three most important issues for any adult: 1) Reduction of consumer debt 2) Establishment of emergency cash reserves (6-12 months of living expenses) 3) Maximizing retirement contributions.
Debt Reduction: Create a list of each loan (credit card, auto, personal and student) and include lender details, like the interest rates associated with the loans, monthly payment amounts due and contact info.
For parents/grandparents/friends, discuss repayment strategies that will eradicate the outstanding debt as quickly as possible. Income will drive how much any graduate can allocate towards this goal, and as a result, how long it will take. Grads should focus on the highest interest loans and then systematically work their way down to the lower interest ones. Whatever amount will be going to pay down debt should be automatically sent to the lender so that no penalties or late fees accumulate.
And while many parents would like to help their kids pay off student loans, be sure that you can afford to do so, as it’s critical that you put your own retirement savings FIRST! A recent Bankrate survey found that half of Americans are sacrificing their own retirement savings to help an adult child. If you can afford to help the kids without jeopardizing your own financial security that’s fine, but no borrowing against the house or the 401(k) or shortchanging your own contributions.
Emergency Reserves: If there’s no debt to manage, then students can quickly aim to accumulate a safety net.
For parents/grandparents/friends: remind grads that this money cannot be put into risky investments, it needs to be liquid, in case there is need to access the funds, especially for any expenses that could arise within the next year.
Retirement plan: If the new job includes a retirement plan, contribute to it, at least up to the match, if one exists, or to the extent cash flow allows.
For parents/grandparents/friends: Review the investment options within the plan and steer your grad towards lower cost index funds, if they are available. While there may be some resistance, help them understand the power of saving and investing for the future by using this calculator to demonstrate how compounding works.
Housing: If grads are living independently, they need to review their leases. One thing to flag is the ability for the landlord to hike the rent in subsequent years. Remember, every time you move, it will cost money so there may be an incentive to sign a longer lease that has a slightly higher rate in the first year.
For parents/grandparents/friends: If your grad will be boomeranging back home with you (about a third of all 18-34-year-olds live with their parents), it’s a good idea to create ground rules, which may include how long the arrangement will last and whether or not you will charge rent. I recommend putting these types of agreements in writing to make sure you are both on the same page.
Health Insurance: Determine whether the recent grad has a health care option through his or her employer. If so, don’t assume that this is the cheapest option. Remember that under the Affordable Care Act, parents can keep kids on their own health insurance plans until age 26. This includes those who are married, attending school, or eligible to enroll in their employer's plan.
Pay Stub Review: Grads should understand the different items that are detailed on their paychecks, including: federal and state income tax withholding; Social Security and Medicare taxes, also known as FICA taxes; health insurance premiums; and retirement contributions.
Check Credit: As you develop your own credit record, it is vitally important to pay bills on time and to guard your personal information. Review your credit report every 12 months at annualcreditreport.com and if there are errors, correct them.