This is the time of year when new college graduates start focusing on the rest of their lives. One of the best things that they can do as they start their careers is to establish excellent financial habits. Here are six tips that can get them headed down the right path:
Time is one of the biggest advantages that new college graduates enjoy. Grads who start saving a piece of their paychecks now won’t have to save nearly as much as a 50-year-old who wakes up one day and realizes he has to accumulate retirement cash in a hurry. What makes the early-bird principle so effective is the magic of compounding, which some call the eighth wonder of the world. Starting early allows the compounding time to build. Think of it as a snowball that rolls down an entire mountain instead of just one slope.
The Roth Individual Retirement Account is perfect for young working Americans. The main virtue of a Roth is that you don’t have to pay taxes on any of the money in retirement. A contribution to start a Roth would be a perfect gift for parents or grandparents to give a college grad who has sufficient earnings.
It’s human nature that Americans, whether they are young or old, want to spend whatever is within reach of their ATM card. Consequently, the best way to save is automatically. When setting up a Roth IRA, college grads should complete the paperwork that will allow for automatic monthly contributions from their checking or savings account.
The sheer number of investments available today is so bewildering that it discourages many from getting started. Choosing investments doesn’t have to be complicated if a college grad invests in a diversified mix of low-cost index funds. Initially a new investor may not have enough money to spread across many funds. As a nest egg grows, however, a young investor will want to spread money into different index fund categories, such as large-cap and small-cap domestic index funds, international stock index funds, and bond index funds.
Young workers should sign up for a 401(k) plan or other retirement account offered through their companies. If the workplace provides contribution matches, new employees should invest enough to capture the full match. We recommend that younger employees increase their contribution every time they receive a raise until they reach the maximum contribution limit.
One way to stay motivated is for young investors to occasionally check how much their nest egg will be worth in the future. An easy way to do this is to use an online financial calculator. A calculator from CNN/Money’s website answers the following question: How fast will my savings grow?