Budgets, borrowing, spending, and saving all affect your financial future
Stretching a starting salary is tough work. Recent college grads are often just learning to manage their finances as they set up their first homes and make student loan payments. It all makes for difficult choices about lifestyle, paying bills on time, reducing debt, and setting aside money for emergencies and retirement. Here are steps to get on the right track:
■ Live on a budget. It’s a mistake to think of a budget as deprivation. Living within limits can help you save effectively to achieve goals.
Budgeting helps eliminate the anxiety of wondering whether you have enough money and makes it more likely you’ll achieve your goals, says Gregg Wind, a Los Angeles CPA.
■ Strike a spending balance. It can be difficult to decide how to spend your money. Still, it’s important to remember the advantages of beginning early to save for retirement. A primary benefit is that of compounding interest, or earning interest on interest.
Shedding college debt takes a serious commitment, too.
It makes more sense to pay off a student loan costing you 6 percent before piling lots of money in a savings account earning just 1 percent. However, the need for recent graduates to save some of their income should not be overlooked.
A new grad needs a car, a place to live, and a plan to reduce whatever credit card or student loan debt has been accumulated, says Eleanor Blayney, consumer advocate for the Certified Financial Planner Board. “You’ll need a reserve fund to support you if you lose your job, or have to relocate for a new one,’’ she says. “In short, you need cash in the bank before you need shares of Apple or Google.’’
Retirement may be low on the list for young workers. But if an employer offers a 401(k) match, set aside enough from the paycheck to receive the additional funds. The most common match is 50 cents for each dollar saved, up to 6 percent of pay. Essentially, it’s free money from your employer, with the additional benefit of reducing taxable income. The money is taken out before taxes.
■ Develop a debt strategy. If you need to cut costs to make ends meet, review your student loan repayment options. Some federal loans allow payments to be adjusted based on income. But reduced payments will extend the term of the loan and end up costing you more in interest.
■ Think twice about additional borrowing. Are you taking on debt for something that appreciates in value? The best reason to borrow is to pay for something that appreciates, as opposed to something that depreciates, or loses value. One example is usually a house. Cars depreciate, however, so borrowing to buy one makes sense only if the car is necessary to work or build a career.
David Pitt writes for the Associated Press.