So you’ve officially embarked upon your postgraduate career – are you set to start saving? Okay, maybe stashing more cash isn’t the way you envisioned spending your paychecks. But if you want to set yourself up for financial stability, you’ll want to take note of these tips to keep your money worries away—for now, and for the future.
1. Fund Your Retirement Accounts
At this point in your life, you have a couple of options to prepare for retirement: a 401(k) and an IRA.
Basically, a 401(k) allows you to funnel a portion of your paycheck into a separate account. As of 2014, you can contribute up to $17,500 of your pre-tax income to your 401(k). Your employer can match, or even exceed, your contributions, as long as you don’t go over $52,000 or 100 percent of your annual salary – whichever is lower.
The IRA works the same way. The difference is you have to file your own paperwork with a bank or brokerage, instead of having an employer do it for you. Compared to the 401(k), IRAs have much lower contribution limits: $5,500 per year or your annual taxable compensation – whichever is lower. You can also choose between a traditional or Roth IRA.
Whether a 401(k) or an IRA suits you better depends on your financial needs. For example, if you withdraw from a 401(k) or traditional IRA before you turn 59.5 years old, you’ll be slapped with a 10 percent penalty, on top of your regular income tax. The Roth IRA, on the other hand, allows early withdrawals from your contributions, but not the earnings on those contributions, without any penalties.
2. Keep Your Credit Score Nice and Peachy
If your credit score isn’t as high as you’d like it to be, don’t worry. Collectively, millennials have the lowest credit scores of any other generation. That’s because credit scores – better known as FICO scores – are calculated according to five time-dependent factors: your payment history, the amounts you owe, the length of your credit history, the types of credit you have, and your newest credit accounts.
This means that for someone whose credit score is zero, there’s a Catch-22: You can’t borrow from most creditors without a credit score, but you can’t build your credit score without, well, creditors. To work around this, gradually build up small amounts of credit, then pay them on time. If you keep that up, your payment history – which comprises about 35 percent of your credit score—will be a decent one, and the rest will follow.
3. Use Your Credit Cards Responsibly
Speaking of credit, your “magic plastic” can be a double-edged sword. On the one hand, there’s the “Buy Now, Pay Later” benefit. On the other hand, there’s the “Borrow Now, Pay More Later” problem, because of how interest rates function.
The best way to handle your credit card is to use it only when necessary. Charge items like appliances and equipment to it, but use cash to pay for the rest.
4. Pay Off Major Purchases As Soon As You Can
If you’re buying a house, a car, or anything else that’s expensive enough to warrant installment payments, set aside a portion of your income for it. Start saving now for larger purchases you plan on making in a few years. Make your down payment as large as possible, so you won’t have to worry about being saddled with big payments for years to come.
5. Set Aside (At Least) 6 Months’ Worth of Savings
Whether the economy is on a roll or not, you’ll want to have enough cash to last you for at least half a year. That way, if you suddenly get hit by major events, like layoffs, medical emergencies or a sudden existential crisis resulting in your own personal Eat, Pray, Love kind of journey, you’ll be financially prepared and ready to concentrate on solving the problems at hand.
Although it’s the standard recommendation, 6 months’ worth of savings can be extremely daunting. If you honestly don’t think it’s possible between student loans or credit card payments, shoot for at least 3 months’ worth.
6. Keep Learning About Investments
Aside from IRAs, 401(k)s, bank accounts, and other basic savings vehicles, you can also invest in stocks and bonds. Most of these are riskier compared to savings accounts, but if you play your cards right, they have the potential to return your capital several times over. To get a feel for these investments, ask your bank about mutual funds—which are a mixture of bonds and stocks.
When it comes to your personal finances, never leave things to chance. If you research your options thoroughly enough, you’ll reap rewards beyond your wildest dreams.