by Jared Bilodeau, MSFP, Associate Wealth Advisor
When it comes to financial planning, many people learn about it the hard way. Even as adults, they get into trouble by not sticking to a budget, abusing credit cards, and not taking advantage of opportunities to acquire free money. By educating our youth, we can prevent the financial mistakes that countless Americans are guilty of. The following tips are useful for high school and college students on the verge of graduating into the real world.
When people hear the “B” word, they stop listening — it’s a hassle to deal with. Living on a budget is not fun, but it is necessary for most young adults, especially those starting careers. Many graduates move out of their parents’ homes and end up living paycheck to paycheck, limiting themselves to spending a certain amount of money for each expense, from rent to cable to going out on the weekends. This is an absolute must. If they don’t follow a budget, post-grads can easily find themselves in debt, especially credit card debt.
Credit cards are both a blessing and a curse. They allow us to pay for everyday items without having to carry a large wad of cash in our pockets. Many of them even offer benefits, such as cash back rewards or airline miles. However, with great power comes great responsibility. If you are not paying your credit card balance IN FULL every month, credit card debt can quickly get out of hand. Many people make the mistake of only paying the minimum balance due monthly on their credit cards; as a result, they end up paying a very high interest rate. The average credit card charges 15% in interest, which is why, when paying off debt, the first thing you should pay off is your credit cards (unless, of course, you owe money to an intimidating loan shark).
Free Money / Employer Contributions
When someone starts their career, they will most likely have access to a retirement account through their employer, the most common of which is a 401(k) plan. Most businesses reward their employees by offering a match when the employee contributes to the plan. For example, if you earn a salary of $50,000 and your employer offers a 100% match if you contribute 3%, you’d need to contribute at least $1,500 to your 401(k) in order to receive a full match of $1,500 from your employer. That extra $1,500 in your retirement account is free money! Many people don’t take advantage of this opportunity, which ends up hurting their efforts to save for retirement.
Live at Home if Possible
This is something no college grad wants to hear, but it can be a huge help. Living at home and saving money to buy a house or a condo is more financially savvy than paying rent, which doesn’t gain equity. Many of my classmates had the opportunity to live at home, but chose to rent apartments right after graduating from college instead for the sake of independence. While there is nothing wrong with that choice, it makes it more difficult to save up for a place of your own. Every young adult should weigh their options and choose those that work best for them. There is no one way to view financial planning; a lot of the time, it’s more of an art than a science. No matter what age you are, it’s important to do what makes you most comfortable. Keep in mind, however, that your education, especially in relation to your finances, doesn’t end the minute you’re out of school – it’s really just beginning.