On behalf of the entire D.R.E.A.M. organization, I would like to congratulate the Class of 2012 on your recent accomplishment! All of your hard work and studying has paid off. And as you enter a new chapter in your life there is no better time to implement sound financial practices for your bright future!
I remember my graduation from undergrad like it was yesterday. The triumphant strut across the stage to receive my diploma and the countless photos with friends and family will always be warm memories of mine. I knew my graduation was "official" when I received my freshly minted copy of "Oh, The Places You'll Go" by Dr. Seuss (I wonder how many copies are sold between April and June ever year). But the best gifts were those plain white envelopes filled with cash and checks!
As the day came to an end, reality began to set in. After this point I would be 100% responsible for my finances. I would be joining the ranks of Corporate America and initiating my campaign to take over the world. (insert cheesy evil laugh here) Every action, or lack thereof, could greatly affect my pursuit of wealth. Was I ready? And now I had this mountain of cash from the gifts I received. Should I treat myself to something nice and make a lavish purchase? After all, I did work really hard and should be rewarded. Or should I be responsible and use this money wisely? I imagine many of you are having a similar internal debate. I strongly advise that you go with option two, be responsible and use the money wisely.
Taking control of your finances is no easy task. Here are 5 basic tips as you embark on this journey of financial independence:
1. Open a Savings Account - (No, the little piggy bank you've had since second grade doesn't count) If you don't own a savings account already, open up a new window on your browser and go to bankrate.com and find one today! The savings account you choose should meet two criteria: FDIC insured and bear interest (the account grows without you doing anything). This is a great place to stash all that gift money.
2. Establish a Rainy Day Fund - It's recommended that you save enough money to cover at least 9-12 months of your current living expenses. In a fragile economy, such as this one, a job loss is never out of the question. So be prepared! This is money you should not touch at all. Note: this money is separate from your regular savings. Do not combine the two!
3. Save for Retirement - Too often I see young people lose valuable years of retirement saving. (Not to mention "free" money from an employer if a 401k is matched. Those matching contributions are part of your compensation) Make sure to participate in your company or organization's 401k, 403b or 457 plan (public employees). If your employer doesn't offer a retirement package, don't fret. You can still save for retirement through an IRA (Traditional or Roth). Note: allocate at least 7% of your annual income to your retirement OR contribute at least as much as your company matches. For example, if your employer matches up to 6%, contribute at least 6%. The maximum contribution for 2012 is $17,000. Lastly, do not withdraw money from your retirement plan. This money should be used upon retirement, only!
4. Taxes - Not sure how much to claim on your W2? Seek tax advice from a certified professional to accurately figure out your tax liability. The last thing you want to do is owe money to Uncle Sam next year. Conversely, receiving a tax refund check from the IRS means that you overpaid your tax liability for that stated year. That could have been money you had all year to save or invest. Although receiving money provides a good feeling, it is wiser to know your correct tax liability from the beginning of the year. Note: if your income changes at any point during the year you will need to reassess these figures.
5. Live Within Your Means - This may be the most important tip of all! If you regularly read our blog, you are aware how often we preach this simple rule. We find that many people find this principle so difficult to obey. Now that you have a new job and regular income, do not rush out and spend every penny trying to live a lavish lifestyle. Seek cost effective living accommodations, eat out infrequently, and by all means avoid using your credit card for non-emergency reasons. (You may already have a ton of debt from college, why add to this amount?)
Refer to these tips as you begin to take your first steps down the path of your financial journey. Share these with your friends and classmates. (The financially savvy person is always the friend everyone wants to have) *wink wink*
About the Author: Femi Faoye is the Co-Founder and Chief Executive Officer of D.R.E.A.M. He’s a staunch and passionate financial literacy education advocate.
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