Planning your finances after college may not seem like an immediate priority when you graduate but it is the most important thing you can do to ensure your financial security. Fortunately, there are six strategies that can help.
1. Make a budget. While this might not exactly seem like investment advice, you have to have money left over each month in order to start investing. The best way to do this is to stick to a spending plan. It’s also good to know where your money is going each month. As soon as you have a budget, you’ll be able to determine how much you’re capable of investing.
2. Have some goals for your savings. An essential part of investing is knowing what you’re going to do with the money. Rather than throw money around at any investment that comes along, it’s a much better idea to have a goal in mind, then build an investment strategy around that goal. For example, someone who wants to save for a house will look for short to medium term investments that are low to medium risk. This could include mutual funds or bonds. Someone who is interested in saving for their retirement, however, has a much longer time span and would be able to stomach a lot more risk.
3. Pay off high interest debt. With the interest rates on credit cards and private student loans so high, it can be hard to find an investment with a similar return. That means you’ll get more out of your money by paying off your debt than by saving it. Furthremore, paying off large loans can help to improve your credit score, making you eligible for better loan terms in the future. The exception to this, of course, is any debt with a low rate of return and/or debt that is tax deductible such as mortgage debt.
4. Take advantage of your employer’s retirement plan. By starting to save in your 20s, it is possible to retire comfortably by saving just 10% of your salary. If you wait until your 40s to start, you’ll have to save at least 25% in order to have a chance at replacing 70% of your salary. Starting early also means that you’ll be able to take on higher risk investments that have the potential to lose money before returning large gains. Start by investing at least three quarters of your retirement assets in mutual funds and stocks until you become more familiar with the market. Leave the rest in bonds and cash. As you learn more, consider moving about ten percent of your retirement funds into commodities and/or real estate.
5. Use “safe” investments for short-term goals. You’ll want an emergency cash fund and eventually a savings account for a major real estate or higher education purchase. Use low-risk investments for this such as government bonds or CDs. While the returns aren’t high, you have a very small chance of losing money.
6. Avoid exotic investments for now. Investing in things such as pork futures or commercial real estate in emerging markets can bring a good return, but these types of investments typically require a large capital expenditure and a lot of experience in the market in order to be successful. For now, avoid them.