Congratulations, you’ve graduated from college and are working your first “real” job. Now what?
As your adult life unfolds, there will be many choices you will have to make, and developments both personal and professional. The one thing you can be certain of is that you must do your best to avoid high-interest credit card debt.
Here are three essential tips for avoiding credit card debt, saving for emergencies and retirement, and securing your financial future.
Tip #1: Save 10% of Income towards Retirement, Starting Now!
Retirement may seem a long way off to you now, but the years will fly by and upon retiring your future self will thank the person you are today for having the discipline to save 10% of income towards retirement.
If you have the opportunity to contribute to a 401K or 403(b) plan through your employer, do it! You contribute with pre-tax dollars, so your taxable income is reduced by that amount, putting you in a lower income tax bracket. This means that not only will your retirement plan grow over time, but you will save on income tax on the money you don’t contribute! That’s a win-win for you.
Most retirement plans offer opportunities to take out low-interest loans against them. This is valuable, as you are borrowing from yourself and paying yourself, and the interest rate will undoubtedly be lower than, for example, the interest rate on a car loan.
If your employer matches retirement account contributions up to a certain amount, contribute up to that certain amount, and if you have money to contribute leftover, open a Roth account and contribute the remainder to that. Diversifying investments is always a good idea, and while contributing to a Roth IRA does not save you in income tax now, when you withdraw from it, that amount will be taxable at your (presumably lower) retirement income tax bracket.
Tip #2: Create an Emergency Fund
You need an emergency fund. Why? Because if you have no emergency savings and must rely on credit cards to cover things like a big car repair or, heaven forbid, living expenses if you get laid off or sick or injured, you will pay exorbitant interest on that money. It is unnecessary to pay interest at all if you maintain an emergency fund.
Losing a job or suffering a medical emergency and having no savings is a recipe for disaster, says Philadelphia bankruptcy lawyer David M. Offen. Once people start relying on credit cards to pay living expenses, the amount they borrow quickly balloons out of control, and if they have no means to pay, they are forced into Chapter 7 bankruptcy.
These days, conventional wisdom suggests having an emergency fund that can cover 6-8 months of living expenses. Yes, amassing that amount will take time, so be patient. Starting now, after you contribute your 10% to your retirement fund(s), take another 10% and deposit it into a savings account. It will grow, albeit slowly, but you will have ready access to it when and if you need it.
Once you have that emergency fund established, continue to contribute to it. That way, in time, you can fund the downpayment on a car or even a house. In the alternative, if at that point you have young children, instead of continuing to contribute to your savings, open a 529 account to start saving for their future education expenses.
Tip #3: Live Well Within Your Means
On your remaining 80% of income, make a budget. Yes, write it down! All monthly expenses should be included, such as rent or mortgage, utilities, cable, internet, and cell phone, car payment and maintenance, auto insurance, health insurance, groceries, personal care, entertainment, tithing to your church, etc. Make sure to pay all monthly bills in full and on time, to create and maintain a positive credit history.
If you are looking to purchase a car, total your current expenses and take a look at what’s leftover. That’s what you can afford in a monthly payment. If you want a car that is more expensive than that you will either have to cut back on other expenses or, wait and save a larger down payment. Under no circumstances should you overextend yourself by taking out a loan you will struggle to pay.
If you are looking to purchase a house, bear in mind that the larger the down payment, the lower your monthly payment. You will have already established good credit history by heeding the previous tips, so chances are you have a good credit score and will qualify for a low-interest mortgage.
These tips will keep you out of credit card debt, help you maintain a good credit score so you can procure low-interest financing when you need it, and give you peace of mind about your finances, both present, and future. Good luck!
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.