College graduation is a major milestone. A time for celebration. But, it also can be a sobering reality when the major responsibilities of adulthood kick in.
Becoming an adult can be scary and confusing. Just ask Kelly Williams Brown, blogger and author of the New York Times bestselling book Adulting: How to Become a Grown-Up in 535 Easy(ish) Steps. Her how-to guide covers everything from what to look for when renting a new apartment and advice on picking out a used car, to creating a budget you can stick to and the secret to finding a mechanic that will not rob you blind.
When it comes to money, here are three smart tips every college graduate should know.
How to Create a Budget
The key to managing your money after graduation is to create a budget that covers all of your essential expenses, accounts for the future and still leaves some cash for you to have fun.
One option is the 50/20/30 method that helps you build a budget by dividing your monthly income into three spending categories: needs, emergencies, and wants. Allocate 50 percent of your income to essential living expenses like rent, utilities, car insurance and groceries. Apply 20 percent toward your financial goals, including budgeting for an emergency fund and paying off student loan and credit card debt. Use the remaining 30 percent on the things that you want like manicures, movies and travel.
If you don’t have enough income to cover your expenses or it doesn’t leave you any room to budget for your financial goals, then consider a side hustle. It beats moving home with mom and dad, right?
Another option is the zero-based budget popularized by personal finance guru Dave Ramsey. “It’s just a way of budgeting where your income minus your expenses equals zero,” he explains.
The first step is to write down your monthly income. Next, list your bills that are due that month followed by other expenses such as groceries, gas, entertainment and clothing. Every dollar you spend should be accounted for. “When you do that, you know that every dollar you earn has a place in your budget.”
How to File Taxes
The annual deadline to file your federal tax return is April 15. This is one of those adulting responsibilities that is stressful for everyone, but even more so for newly-minted grown-ups. Making a rookie mistake can cost you money.
Credit Karma has advice for avoiding some of the more common mistakes when filing taxes for the first time. They include:
- Not filing at all. If an employer withheld federal income tax from your paycheck, you could be eligible for a refund — but you must file a tax return to get it.
- Filing without all your tax documents. Start early to give yourself enough time to gather all of your necessary tax documents. Obtain your W-2 form, which your employer fills out to show the amount of taxes withheld from your paycheck for the year. If you held multiple jobs during the year, make sure to obtain W-2 forms from each of your employers. Companies typically send out these forms by January 31.
- Picking the wrong filing status. The standard deduction amounts for 2020 range from $12,400 for single filers to $24,800 for married couples filing jointly.
- Missing out on education credits or tax deductions. If you attend college or have recently graduated, you may qualify for an education credit or deduction, such as the American opportunity tax credit, the lifetime learning creditor the student loan interest deduction.
Additional tips about how to file your income tax return fast and free are available here.
How to Start Preparing for Retirement
What? I just graduated from college, you say! We get it. Preparing for a time in the future that seems like a lifetime away is hard, especially when you have student loans and credit card debt staring you in the face.
So, why start thinking about retirement now? Two words: compound interest. The sooner you start budgeting for retirement – regardless of how small the amount – the longer your money has time to grow.
Once you have a full time job, one of the best ways to prepare for retirement is to take advantage of your company’s 401(k) plan. This is a retirement plan sponsored by the employer that lets workers invest part of their paycheck before taxes are taken out. Think of it like a savings account that you put money into for the purpose of having that money to use when you retire.
Some employers offer to match the funds employees contribute to their plan. For instance, let’s say your employer matches 100 percent of your contributions up to $4,000 a year. You can get the greatest benefit by setting your pre-tax contributions to meet the $4,000 maximum.
Click here for more financial strategies to help you start preparing for retirement in your ‘20s.
Consider these three tips our graduation gift to get you started on a lifetime path toward financial security and independence.
Congratulations and best wishes for a bright future, said best by Dr. Seuss. “You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose. You’re on your own. And you know what you know. You are the guy who’ll decide where to go.”
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