New Graduates: Ramping Up For Financial Independence

New Graduates- Ramping Up For Financial Independence 05 20 2014Diploma in hand, you walk, skip, stroll, hop, run or lumber into “real” adulthood. What’s next?

Maybe you’ve got a job waiting for you or perhaps an internship opportunity; or you might, like many, be left with the daunting task of finding a way to fully support yourself—to finally secure your independence.

Being independent means different things to different people, kind of like defining what “rich” is. It could mean you cover 100% of all your costs, or maybe it’s 50% because your parents are helping out for a time. Ramping up for independence requires some planning, preparation and a—rational—budget.

Consider five basic elements to create the right budget:

1. Available income

2. Debt

3. Cost of Living

4. Cash Reserves

5. Thinking of the future

Available income means the amount you deposit into your checking account. It is not your salary before taxes, medical insurance and other deductions are withheld. Available income might include subsidies from relatives or gifts you know for certain you will receive. Side note: if you are receiving any income as a contractor, you are responsible for paying your own taxes, which means it’s time to consult a CPA.

Debt—aka credit cards, car loans and student loans—needs to get satisfied. The higher the interest rate, the quicker you should be paying off the balance. Student loans can be tied to your income for repayment purposes, so make sure you investigate fully before you decide what makes the most sense. Ask questions!

Cost of living covers your rent, food, transportation, dry cleaning, insurance, clothing and utilities costs. These are the basic necessities: what does it cost you to survive? You can impact this number substantially if you choose to share costs with roommates or head home to bunk with mom and dad until your economic situation improves.

Cash reserves mean an emergency fund. The general rule is to keep six to nine months of living expenses in the bank in case you lose your job or have another emergency. FYI—a great sale at Bloomies probably doesn’t constitute an emergency. Yes, grabbing that cash for something fun is tempting, but trust me, unexpected situations do happen. In fact, a safer bet is to bank a year’s worth of cash reserves, since sometimes finding a new job can take awhile. Being prepared gives you options should the worst happen.

Thinking of the future lets you decide when—and where—to make trade-offs. Let’s say you are eligible to participate in your company’s 401(k) plan. Since retirement feels a million years from now, it’s pretty easy to say “no thanks!” Instead, think ahead. Even a small amount of money deferred every month can pay back big time over many years. And, you can afford to take more risk than someone closer to retirement. When the market goes down, you’ve benefitted by your ability to purchase at a lower price. And of course you win on the upswings. It’s a good deal.

Another example of future thinking is how you manage your surplus income—the amount beyond your cost of living. You can expand your discretionary spending (vacations, entertainment, etc.), or you can accumulate—for a down payment on a home, for a wedding or other major expenditure. Choose wisely.

Building your life—and your wealth—is a process that is rarely a straight line from graduation (where would be the fun in that?) But I promise you that a thoughtful approach to your money is a much better gift to yourself than a Spring-break mentality.

Enjoy the journey from diploma to your definition of “the corner office,” and know that financial independence awaits you.

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