The transition from college to full-time employment can be a chaotic one. It means the end of one life-phase and the beginning of another — a transformation from dependency to self-sufficiency (or some approximation of that!).
Along with that self-sufficiency comes a long list of new decisions you will be asked to make, and new skills you will have to learn. And the decisions you make during this critical period can mean the difference between a solid or shaky financial future.
The following is a checklist of four important things to consider as you head out to your new independence.
- Become familiar with the benefits offered by your new employer. These packages can vary widely, depending on such things as the size of your new employer, the industry you are associated with, and your geographic location. Also, it can include some form of health insurance, as well as a tax-preferred savings plan such as a 401(k). That said, make sure you schedule an appointment with your human resources representative or use any online tools available to you to make sure you understand the costs, benefits, and limitations of the programs offered to you, as well as any deadlines for signing up. At the very least, read any benefit books supplied to you. If you have additional questions after reviewing the benefit books, contact your employer’s insurance broker, investment adviser, or employee benefit provider for additional information.
- Sign up for health insurance. This is a critical issue not discussed in many advice articles for new college graduates. While the passage of the Affordable Care Act in 2010 requires plans that offer dependent coverage to extend that coverage to adult children up to the age of 26, this requirement does not apply if the adult child is offered coverage through his or her own employer (up to the year 2014). So even if you currently have coverage under a parental plan, you may not be able to remain on that plan if your new employer offers their own employee health coverage. Many healthy young adults feel they can skip health insurance completely and save on the premium costs; however, skipping health insurance now can make it much more difficult to obtain later. The area of health insurance is one of the trickiest out there — but like most insurance coverage, it is hardest to get when you need it the most. So if you’re offered coverage, jump at it. Many plans offer different amounts of coverage at different premium levels, with the ability to change coverage once a year during an “open enrollment” period. In that case, if you’re young and healthy, by all means investigate a less expensive, less comprehensive coverage option. You may want to consider a high-deductible plan that also allows you to contribute pre-tax dollars to a health savings account (HSA), which can be used at any time for out-of-pocket health care costs. And if for some reason your employer does not offer health insurance, consider purchasing an individual policy that is guaranteed renewable, is portable, and will cover pre-existing conditions. Information on the availability of these policies can be found on most state government websites.
- Establish a savings strategy. For so many reasons, the best time to begin saving is when you’re young. So learn to “pay yourself first” from the start. Take advantage of any savings vehicles offered by your employer, such as a 401(k) or 403(b). If your employer offers a contribution match (many of these were discontinued during the last recession), even better. Some planners will recommend that you pay off any student debt before beginning a savings program. But I believe it is better to start saving while you are paying off your debt. You learn to live within that income flow, and once the debt is paid off, you have even more funds available to save. At a minimum, try to set aside 10 percent of your pre-tax income as savings. If you need advice on allocating your investments, see if your 401(k) provider offers investment planning tools or counseling. Or check with a local financial planner to see if they will provide you with allocation advice for a flat fee.
- Develop a resource allocation plan. Also known as a “budget”, it’s so important to prepare a resource allocation plan from the get-go. This will help you track your cash flow so your expenses do not regularly exceed your income. Use an online service such as Mint, Bundle, or Quicken, or a spreadsheet to keep track of your income and spending categories (pre-made templates can be found at the Microsoft Office website, for example). Make sure you include the previously mentioned “savings” allocation, which is treated as an “expense” that is paid to yourself. Include in your resource allocation plan any goals you would like to fund, such as a vacation, car, home, wedding, etc. Once you put the allocation together, take a step back and look it over. Are all your expenses accounted for? Expenses plus savings should equal income — if they don’t, you may want to manually track all your expenses for a month or so to see where you might be missing something. Are your dollars aligned with how you want to live your life? If not, see what categories should be added, adjusted, or done without. This review should be performed regularly, with adjustments in spending made as appropriate.
While not all-encompassing, these four steps will set you on the right path as you begin your new career and your new life.
FPA member Leslie T. Beck, CFP®, MBA is one of the founders of Compass Wealth Management LLC, a fee-based financial planning and advisory firm based in Maplewood, NJ.