Entering the workforce after college is an exciting milestone, but it also comes with new financial responsibilities. While it may seem overwhelming at first, understanding key financial planning concepts linked to this stage of life can help make the period more enjoyable and set up recent graduates for long-term success.
Building a Budget and Sticking to It
Creating a budget is the foundation of financial planning. For many, this will be the first time that they are earning a steady paycheck and may be responsible for a larger portion (if not all) of their living expenses. Given the large change in cash flow, it’s important to track income and expenses, prioritize savings, and avoid unnecessary debt. Tools like budgeting apps can be helpful in managing finances effectively. Here are some general guidelines:
- Track Expenses: It may be helpful to keep track of every expense for a set period of time, no matter how small, to get a clear picture of spending habits. To do so, it may be helpful to use one source of payment (whether credit or debit card) and simply use monthly statements to review spending levels/sources.
- Set Financial Goals: Determine short-term and long-term financial goals, such as saving for a vacation or building an emergency fund.
- Use the 50/30/20 Rule: A common framework to ease into budgeting is the 50/30/20 budgeting rule, where 50% of income goes to necessities (housing, food, etc.), 30% to discretionary spending, and 20% to savings and debt repayment.
Saving for Emergencies
An emergency fund is essential for financial stability. Graduates should aim to save 3-6 months’ worth of living expenses to cover unexpected costs such as medical bills or car repairs. This fund can provide a safety net and prevent them from relying on credit cards or loans in times of need. Here are some guidelines:
- Start Small: Allocating small amounts of excess cash can build up over time.
- Automate Savings: Setting up automatic transfers to a separate savings account can make saving easier and more consistent.
- Be Strategic: It is also prudent to be strategic with any unexpected income, such as tax refunds or bonuses, to boost the emergency fund.
Managing Student Loan Debt
Many graduates enter the workforce with student loan debt. It’s crucial to understand the terms of the loans, explore repayment options, and consider strategies for paying off debt efficiently. It’s also important to ensure that payments are made in a timely manner to avoid excess interest charges and penalties to credit reports.
- Know Your Loans: Review and be mindful of the interest rate, whether the rate is fixed or adjustable, and all available repayment schedules. This information can be found at StudentAid.gov.
- Evaluate Repayment Plans: There are often several repayment options, and finding the one that fits best with the given scenario is important. For example, income-driven repayment plans can make monthly payments more manageable. In addition, if cash flow allows, one may consider allocating a greater amount towards their loans (above what the minimum payment options require) if the interest rate eclipses what one would reasonably expect to earn from their investments.
- Consider Refinancing: Depending on how interest rates have moved in the marketplace since the loans were originated, it may be advantageous to refinance some or all of the loans to lower monthly payments and the overall interest expense over the life of the loan. If pursuing refinancing, be mindful of the terms of the new loan and any costs associated with the refinancing, as well as any foregone benefits if the loan is federal vs. private.
Understanding Employee Benefits
New graduates should take full advantage of the benefits offered by their employers, such as health insurance, retirement plans, and other perks.
- Retirement Plans: Many employers offer some variation of a retirement plan (401(k), 403(b), pension plans, etc.). Enrolling in available plans and starting to contribute as soon as possible establishes a strong path towards building ample retirement savings. While excess cash flow may be limited at the start, we recommend contributing at least as much to the plan to take advantage of the full employer match (if offered), as it’s essentially free money.
- Health Insurance: All options should be thoroughly reviewed to decide what type and amount of coverage would be useful. While many graduates remain covered under their parents’ health insurance through age 26, it is still advisable to review all options in case there are better or additional coverages available.
- Health Savings Accounts (HSAs): If available, HSAs can be a tax-advantaged way to save for medical expenses, creating a pool of funds from which one can pay for doctor’s bills, prescription costs, and other health-related items. They are available only to those who enroll in a high-deductible health plan, and they have limits on annual contribution levels.
Planning for Retirement
To someone just starting out in their career, retirement may seem quite far off. However, it’s never too early to start planning for retirement alongside other financial goals.
- Start Early: Getting an early start on saving for retirement allows one to enjoy the benefits of compounding interest, the process by which the interest earned on an investment is added to the principal amount, and then future interest is calculated on the new total. This cycle repeats over each compounding period, leading to exponential growth.
- Diversify Investments: As the old adage goes, one shouldn’t put all their eggs in one basket. It’s important to create a well-diversified portfolio of assets based upon an appropriate risk tolerance, which will allow an investor to remain sanguine in times of market unrest.
- Diversify Tax Profiles: Many employer-sponsored retirement plans offer the ability to make contributions on a pre-tax or Roth basis. The main difference between pre-tax and Roth retirement accounts is the timing of the tax benefit.
- Pre-tax accounts offer a tax break upfront, while Roth accounts offer tax-free withdrawals in retirement.
- The choice between the two depends on one’s current tax situation and subsequent expectations for future tax rates. If the expectation is one of a higher tax bracket in retirement, a Roth account might be more beneficial, and vice versa.
- Diversify Account Types: In addition to a savings account, employer-sponsored retirement plans and IRAs, it’s important to contribute to taxable brokerage accounts, if discretionary income allows for it. A brokerage account allows one to save and invest excess cash above and beyond what is needed in emergency funds and what is permitted in retirement accounts. It allows investment in a wide array of assets (stocks, bonds, etc.) to enjoy appreciation, while also having the flexibility to withdraw as liquidity needs arise.
- Avoid Lifestyle Creep: As income grows, it’s common to start spending more on things that were once considered luxuries. As these expenses become part of regular expenses, the “creep” in lifestyle may not be noticeable. This can lead to financial strain, especially if income decreases or unexpected expenses arise. To avoid this common pitfall, consider saving a specific percentage of income (i.e., 20%) rather than dollar amounts to account for increases in income levels.
Building Credit
Establishing and maintaining good credit is vital for future financial opportunities, including buying a home, purchasing a car, or even obtaining insurance coverage for those items.
- Use Credit Cards Responsibly: Credit cards can offer great incentives through points or mileage programs, but they should be used with caution to avoid financial stress. Putting expenses that would normally be paid for with a debit card on a credit card to take advantage of rewards is fine, as long as the balance is paid off in full each month to build a positive credit history.
- Pay Bills on Time: One of the main drivers of a credit score is the percentage of bills paid on time. Any late payments can negatively impact a credit score.
- Monitor Credit Reports: Everyone is entitled to one free credit report annually at AnnualCreditReport.com. Services such as Credit Karma can also be leveraged to monitor scores regularly and be made aware of any suspicious activity.
Additional Considerations for Those Entering High-Income Fields
In addition to the planning foundation set above, those who will be earning a high income and therefore will have excess cash flow have other levers they can pull to further enhance future success.
- “Backdoor” Roth IRA Contributions: This strategy allows those whose income is too high for direct Roth IRA contributions to take advantage of the benefits of a Roth IRA. There are some important considerations to be mindful of, so be sure to consult with a financial advisor or tax professional before proceeding.
- Be Systematic with Excess Cash Flow: With a high income, it’s likely that there will still be additional cash for investment above and beyond contributions to an emergency fund and retirement savings. We recommend putting a systematic investment plan in place so that these dollars are invested in a set cadence, whether that’s weekly, monthly, or quarterly.
- Similarly, a strategy known as “dollar cost averaging” can help reduce the impact of market volatility by spreading out investments over time. By investing a fixed amount of money at regular intervals, more shares of an investment are purchased when prices are low and fewer shares when prices are high. This reduces the risk of making a large investment at an unfavorable time and helps to average cost basis.
Conclusion
Graduating college and starting one’s career is an exciting transition that also brings new responsibilities. By understanding and implementing key financial planning strategies, new graduates can set themselves up for long-term success. Building a budget, saving for emergencies, managing student loan debt, understanding employee benefits, planning for retirement, and building credit are essential steps in achieving financial stability. By taking proactive steps and making informed financial decisions, young professionals can navigate this exciting period with confidence and set themselves up for a successful financial future.
Wealthspire Advisors LLC and its subsidiaries are separately registered investment advisers and subsidiary companies of NFP, an Aon company. © 2025 Wealthspire Advisors
This material should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The information provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use.
Please Note: Limitations. The achievement of any professional designation, certification, degree, or license, recognition by publications, media, or other organizations, membership in any professional organization, or any amount of prior experience or success, should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results or satisfaction if Wealthspire is engaged, or continues to be engaged, to provide investment advisory services. Registration of an investment advisor does not imply that Wealthspire Advisors or any of its principals or employees possess a particular level of skill or training in the investment advisory business or any other business.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
