“I need help,” I thought to myself as I stared blankly at my computer screen the week after my college graduation. I didn’t have a job, a permanent place to live, or any idea on how to conduct myself outside of the safe university bubble. I was crushed under the weight of a task list I couldn’t see and growing more anxious by the hour. “If only there were a syllabus for my life,” I sighed, instinctively reopening my Facebook and Netflix tabs.
As a recent graduate, it can be overwhelming to look true adulthood in the face. You may feel the distinct impression that you should be taking action to establish your financial and professional footing, but have no idea how to start that process. This “How to Adult” three-part series will provide a few checklists that may assist you in developing a stable foundation for your financial, professional, and personal future. These checklists are not exhaustive, but are meant to provide a jumping off point for young adults and recent college graduates.
Part One: The Financial Checklist
Pull your Credit Score and Reports. Establishing a strong credit score is among your highest financial priorities as a young adult. A higher credit score will make it simpler to be approved for major purchases and help you secure a lower interest rate on loans.
Credit reports from the three major agencies, Experian, TransUnion, and Equifax, reveal the data used to develop your credit score. They show how long you have been establishing credit and whether your payments have been on time, among other things. You are entitled to one free credit report per year from each agency. To pull your credit report, visit www.annualcreditreport.com and follow the instructions. They will ask for your social security number and use a series of financial questions to verify your identity. Make sure to visit only this website, and do it from a secure, personal internet connection. Your credit score is not found on your credit report.
Your credit score is a specific number, generally between 300 and 850, that indicates your riskiness as a potential borrower. This score is available on certain credit card statements or through a number of external websites. Discover is currently providing credit scorecards free to customers and non-customers alike through their website,https://www.discover.com/free-credit-score/. They use Experian’s data, and so credit scores from the other agencies may vary slightly.
Save each of your credit reports and scores to consult throughout the year. Lenders and potential landlords have the ability to pull your credit score, and it is always good to know what they might find.
Set a Budget. “Budget” is a word we hear often while growing up, but very few people actually have one. I’ll be the first to admit- it’s slightly harder than it sounds. In college, I never spent my whole paychecks, and so I didn’t worry about budgeting. That was wrong. Budgeting is not about restricting how you spend money, it’s about understanding where your money goes.
If you sit down to make a budget today, never having had one before, you may feel lost. How am I supposed to guess what I will spend on food? Every month is different! The first step is to track your spending habits. There are great apps and websites that allow you to track your transactions. I personally use the free “Spending Tracker” app for iPhone. You enter the money spent, pick a category, write any notes you want about the purchase, and then the app creates a bar or pie chart. It also keeps a running tally of whether you are in the red or green (do you spend more or less than you’re bringing in) and separates purchases into categories.
After a month (or two) of tracking your expenses, it’s time to sit down to budget. Websites like everydollar.com allow you to create a budget using categories you name yourself. Remember to be honest. In the beginning, it’s easy to be too ambitious- I’ll save half my income, only spend $10 a week on food, never buy clothes. Underestimating categories will leave you feeling limited and disappointed at the end of each month. If you have categories that you irregularly spend on (birthday presents, movie tickets, travel), feel free to lump these into a larger “Miscellaneous” category.
Of course, your budget may reveal things you do need to change- that’s okay! At the end of each month, you should sit down to see what you overestimated and what you underestimated. Feel free to change amounts, or even category names, to develop a better fit. Many experts use the 50/30/20 rule as a starting point for new budgeters.
- 50% Fixed Costs- Rent, Cell Phone, Utilities, Car, Groceries, Minimum Debt Payments
- 30% Discretionary- Clothing, Donations, Restaurants, Travel
- 20% Savings- Emergency Fund, Extra Debt Payments, Retirement
The rule is a great place to start, or a fantastic goal to move towards. No matter how your budget manifests, make sure you have a plan for saving money and paying off debt.
Open a Credit Card. There are a million different credit cards on the market today, and it can be hard to know which option is best for you. The only wrong choice, is no choice. In today’s financial market, it is a near imperative to have a credit card. It’s the simplest way to develop a healthy credit score, and it allows you flexibility while making purchases. So where to start?
If you have a healthy relationship with your bank, that’s a great place to begin. Many banks (even local ones) offer credit cards and may be more lenient with certain requirements for an established client. Beyond this, there are three major factors for young adults to consider when picking a first credit card.
- APR. This indicates the interest you’ll have to pay if any of your balance carries over into the next payment cycle. The higher the interest rate, the more you have to pay. APRs for first time cardholders generally range from 13% to 24%. However, if you pay off your entire balance each month (as you should!) you do not pay any interest to use your card.
- Annual Fee. Many cards with great rewards (airlines, hotels, retailers) have an annual fee for use. You should only select one of these cards if you know that the rewards you will collect will exceed that fee. If not, there are plenty of reasonable cards that have no annual fee. Note: Very few landlords accept housing payments from credit cards, so make sure to exclude your housing expenses when estimating how much money you’ll put on your new card.
- Rewards. Rewards are what really set each card apart. When researching cards, try using keywords to find the cards with the best deals for the things you enjoy most. Common reward focuses include travel, cashback, hotels, and card credit (they’ll knock money off your bill).
There are, of course, other things to consider. Some cards allow you one or two late payments before bumping your APR up, others let you set your payment due date, and still others allow you to appeal for a credit limit increase after a set period of consistent payments. The takeaway here is to research thoroughly.
Sign Up for a Healthcare and Dental Plan. Now we’re getting into the real adult problems. Healthcare and dental plans are often provided through an employer. If that is the case for you, your employer will take money from each paycheck to fund these plans. You may be asked to choose between a few options at your date of hire, so what should you look for?
- Monthly Premium. This is how much you pay for your healthcare plan, whether you use it or not. A higher premium tends to indicate more coverage and lower deductibles and copays, while a lower premium may indicate less coverage.
- Deductibles and Copays. This is what you will pay when you use your healthcare plan. The deductible is the amount you have to pay out of pocket before insurance kicks in to assist with the costs. Many plans do help cover preventative care or doctor visits before you reach the deductible, though you may still have a copay. A copay is a fixed amount you pay for certain services, for example, you might pay $30 at every doctor’s appointment. There are also other fees you may need to pay, like coinsurance (you cover a percent of your medical costs).
- In Network/Out of Network Coverage (HMO, PPO, EPO, POS). Most healthcare plans prefer you use a limited number of doctors in their “network.” If you go to a doctor or specialist outside of that network, you may need a referral and it will likely cost more. These plans are often separated using a series of acronyms.
*Health Maintenance Organization (HMO). You must stay in network unless it is an emergency, and you will require a referral to meet with a specialist.
*Preferred Provider Organization (PPO). In-Network care will be cheaper, but you are free to visit providers out of your network without a referral.
*Exclusive Provider Organization (EPO). You must stay in-network unless it is an emergency, but you can see a specialist without a referral.
*Point of Service (POS). You’ll need a referral to go out of network, but it is an option. You’ll also need a referral to visit a specialist.
- Other. If you have specific health conditions, require regular prescriptions, or travel often you may want to evaluate if the plan will cover your care. The best way to find out, is to call the provider.
What if you don’t have a job that offers health care and dental? First, if your parents have insurance, you may discuss staying on their plan until you are 26. However, this isn’t a fit or option for everyone. Your next best option is to visit healthcare.gov to view plans and see if you can enroll. There may be limited enrollment periods or other restrictions, but it’s a great place to start. Follow the instructions to select your state and compare plans from the site. A word to the wise, this website is a bit unwieldy and frustrating for a first time applicant. Make sure you sit down with a lot of patience and access to google.
There are a number of private dental plans available through companies like Delta Dental Insurance, Humana, and Ehealth- again, your best option is to research, ask questions, and compare.
Contribute to Retirement. Another scary adult financial decision- retirement. As with health and dental insurance, your retirement plan is often set up by your employer. They contribute, you contribute, and everyone is happy. The only decision you generally have in this one, is how much to put in. It’s best to select the maximum matched contribution, which generally ranges from 3-6% of your paycheck. As a young adult, you may want to contribute even more while you have fewer expenses (You’ll thank yourself later, and besides, you’re still making more money than in college!). You will have the option to raise or lower your contribution each calendar year. Your contributions are deposited into a 401K that will send you regular reports to let you know what your money is being invested in. As a young participant, your funds will likely be placed in high risk-high reward options.You should also have access to a company website that allows you to monitor your account and make changes.
If you don’t have a plan through an employer, but still want to save for retirement, you have a few options. You can open an Individual Retirement Arrangement (IRA) with your bank or other financial institution. The money you put into this account is tax deductible as long as you (or a spouse) are not covered by a traditional employer plan. There are also Roth IRAs. You don’t get the tax deductions, but you won’t have to pay taxes on the money when you take it out at retirement (unlike traditional IRAs). These accounts are not meant to be your only means of savings, and eventually joining an employee 401k is still the ideal in most cases. That being said, these are great places to start. If those seem like too large of a commitment, you may choose to start small. Purchase a few CDs (certificates of deposits) or buy a few stocks- just to see how it works. As with any major financial decision, it’s best to consult multiple sources and professionals to make the best decision for yourself.
It’s easy to feel alone when making these financial decisions. I felt like any wrong move, and I’d be destroying my chances at financial prosperity for life. It wasn’t, and isn’t, true. There are people along the way willing to help when you reach out. If you do make a mistake, you can nearly always fix it at the next calendar year or by contacting your employer or provider.
The right step, is forward.
- Open a Checking and Savings Account. Everyone should have a bank account. Pick a bank you trust, be wary of fees, have round the clock access with apps and web portals, and shoot for the highest return possible.
- Start Saving for a Down Payment on a House. This may not be relevant in every city, but eventual home ownership is a goal for many people. Look at the average price of first-time homes in your area and try to save 10-20% of that price.
- Donate 10%. It sounds counter intuitive, but many studies indicate that individuals that donate ten percent of their income are happier than if they were to make more money. Whether that’s true for you personally or not, donating is an important part of giving back to your community.
- Create your My Social Security Account. While you may not need social security for quite a while, it’s good to sign up and claim your social security number. You can do this by visiting ssa.gov/myaccount. Remember, it’s extremely important to visit the correct website, and only on a server you trust.
- Know your Student Loan Debt. If you have student loan debt, you probably participated in an exit interview prior to graduation. You should know when you are expected to start paying them back, how much you’ll be expected to pay each month, the interest rate, and what your total balance is. To find this information, visit nslds.ed.gov.
Nerdwallet.com– Offers great comparisons on credit cards and bank accounts, as well as providing various articles related to the financial market.
MoneyUnder30.com– A finance website geared towards young adults. It features articles answering general questions as well as providing in-depth analysis of various credit cards and accounts.