The Real World Financial Guide: Four Tips for Recent College Grads

Tax Planning This is an image of female graduates throwing their caps into the air

As a recent college grad moving into the full-time career space, you’re probably more than a little overwhelmed by some of the financial realities entering your life. The long journey to financial success comes with many milestones along the way –  this guide will help you make sure you don’t skip any of those steps.

Below is your financial to-do list! Each item here has the potential to fundamentally improve your financial outlook, and in less time than you might expect.

Start a 401(k)

According to the U.S. Bureau of Labor Statistics, 59% of employers offer a defined contribution plan. Typically, that’s either a 401(k) or a 403(b) plan. Many large employers will offer a 401(k) with a company match based on your contributions, which means they will match what you contribute (some at a 100% match). If yours does, take advantage of it!

You should contribute as much to the plan as you can comfortably afford, up to the allowed contribution limit of $18,500 ($24,500 if you are 50 years old or above) for 2018. At the very least, try to contribute enough to reach the maximum amount matched by your company’s policy.

For example, let’s say your employer will match 50% of your contribution, up to 6% of your pay. So if you contribute 6% of your salary, your employer will match that with 3% in “free” money. In this case, you should contribute at least 6% because you don’t want to leave that free money from your company on the table.

If you are self-employed, you can contribute up to the lesser of 25% of your compensation or $55,000 to a SEP IRA in 2018.

Your 401(k) contributions lower your taxable income and you won’t have to pay taxes on distributions until retirement when you start getting disbursements. It also has a chance to grow while you work so you can help prepare for a more comfortable retirement.

Prepare for Taxes

Once you start earning a living, taxes become a fact of life. However, even though you must pay taxes, you should also make it a goal to pay as little as possible.

For a young person, one of the best ways to minimize your tax bite is by making contributions to a retirement plan (such as the ones mentioned above). This is another compelling reason to make the largest retirement contribution you can. The more you contribute, the lower your taxable income will be.

If your employer doesn’t offer a plan, start your own traditional IRA. For 2018, you can contribute – and may be able to deduct – up to $5,500.

If you earn $50,000, making the full contribution may enable you to reduce your taxable income by 11%. If you are self-employed, you can contribute up to the lesser of 25% of your compensation or $55,000 to a SEP IRA in 2018.

Save 10%+ of Your Paycheck

A common question among new grads is “How much of my paycheck should I be saving?

The answer is “as much as possible,” but numerically there’s no hard rule that works for everyone. Your income, cost of living, and your debts will dictate how much you can save. If you want an exact number to work toward, try to save at least 10%.

Start by focusing on building up an emergency fund, which is a sum of money set aside for unexpected emergencies, like a medical bill or a car repair. Most financial planners recommend a dollar amount between three- and six-months living expenses (bills, rent, etc.). This will provide you with a cushion against unexpected expenses, as well as temporary disruptions in income. When you’ve saved a few months of expenses for that fund, earmark other savings for various needs you may have in the future (new car, big vacation, going back to school, and so on).

This 10% could also include your contributions to a retirement plan since that’s savings for your retirement. For those with debt, you can consider your debt payments as part of the number, too.

Whatever percentage of income you choose for your savings, plan to increase it down the line. For example, if you start saving 5% of your pay, increase it by one percentage point each year. You can also do this by increasing your savings rate whenever you get a raise. If the raise is 3%, you can allocate 1% to your savings, and the rest for living expenses.

Paying Student Loans

Did you know that 70% of college graduates have significant student loan debt? If you find yourself in this group, you can definitely expect your loan payments to impact your finances.

How much you owe, in relation to your income, will be a major factor determining how much you’re able to save, or even your overall standard of living. That means paying off the debt has to be built into your overall financial strategy.

There are two ways you can handle this:

  1. Make minimum monthly student loan debt payments, and go about your other financial plans, or
  2. Concentrate all your efforts and extra money on paying off the loans as soon as possible.

If your loans are large in relation to your income, the second option will probably be hard to manage. You’ll have to learn to live in peace with your debt, and one of the best ways to do that is to get the lowest monthly payment possible so you can spread your money across other priorities.

To help with this, income-driven repayment plans are available on federal student loans to reduce your monthly payment. For reference, an Income Based Repayment (IBR) plan can reduce your payment to 10% of your income.

If you can limit your student loan repayments to no more than 10% of your income, you might be in a position dedicate another 10% to savings. It might be a tight squeeze, but it will enable you to move forward financially while still servicing your debt.

And once your income is higher or you have fewer expenses to manage, you can consider paying off the student loan debts once and for all with larger payments. Be purposeful about incorporating all four of these strategies, and you may be able to do that sooner than you think.

Whether you need to pay off debt or are trying to save for retirement, Turbo can help you see where you stand financially. And don’t worry about knowing certain tax laws, TurboTax has you covered and will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers.

If you still have questions, you can connect live via one-way to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered.

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