Grad Finances Part 1 - Investments & 401(k)s
It's never too early to cook up a plan to secure your future with smart financial planning.
Now that you've graduated, you're on your way to the life you always envisioned—working in your chosen profession, and making your way in the world on your own terms. But here's a secret they may not have taught you in college—you're in the perfect place to start having your money work for you, whether your goal is to buy a home, or to secure your retirement years.
Why you should start investing now
It's important to set aside money in a savings account so you're prepared to face life's emergencies, but creating an investment plan should also be on your financial to-do list. You probably aren't at your full earning potential yet, but every dollar you're able to put aside today will grow exponentially 40 or more years from now.
Here's an example using the Bellwether Investment Return Online Calculator on our website:
Use the Bellwether Investment Return Calculator to see how just $50 each month can add up to over $34,000 after 25 years (based on no initial investment and a 7% rate of return according to Standard & Poors reported returns for a 10-year period ending December, 2012.)"
Why you should take advantage of your employer's 401(k) plan
Here's the reason in two words—free money!
A 401(k) is a retirement savings plan provided by an employer. It allows an employer to deduct and set aside (in a savings vehicle) a pre-determined amount of your income before taxes are deducted. That means you're taxed on a lower income, plus earning money on the deducted portion. PLUS in most cases employers will match part or all of your contribution. Not bad, right? If possible, invest enough in your 401(k) to qualify for the full match (the amount your employer puts in as a result of how much you contribute).
According to this Forbes article "Workers under age 50 can contribute up to $17,500 to these programs in 2013. Your contributions, deducted from your paycheck automatically, can grow tax-deferred* until you take it out, ideally in retirement."†
So how should you start?
Here are 7 steps to follow when you're getting ready to start an investment plan, courtesy of SmartAboutMoney.org‡:
- Create a budget—Before you can save money, you need to to know where your money is going. (Try this Budgeting Spreadsheet)
- Scrutinize your spending—Is there anything you discovered when making your budget that you can cut back on? You may have more money than you think!
- Understand your debt—Make note of the debt you owe and make a plan to pay it down. Surprisingly, most people find they can pay down debt AND save money for investments at the same time. (Download this debt management App)
- Pay yourself first—Follow this key principal and earmark part of your earnings for reasonable levels of life and health insurance (top off your employer-supplied coverage if necessary), regular payments into your health savings account, your emergency fund, and debt repayment.
- Set goals—Do you want to save for a car, a house, or a comfortable monthly retirement income—or even all three? Knowing your goals will help you plan to achieve them.
- Create a spending plan—Give yourself some rules for day-to-day spending. This will let you stay on track to realize your goals.
- Talk to a professional—The staff at Bellwether can help you with your budget, your debt and your financial goals.
How Bellwether Can Help
While the above is a great start, there's nothing like sitting down with someone who understands your dreams and your goals, as well as the different options available, and how they'll best work for you. Contact us to arrange a time to help you get your future off to a solid start.
*Check with your financial advisor for specific tax information regarding 401(k)s.
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