Graduating College

AS YOU LEAVE COLLEGE and enter the work world, money will likely loom large—or, to be more precise, the lack thereof. Still, don’t let a modest paycheck deter you. With the right steps, you can put yourself on the fast track to achieve two of life’s most important financial goals: buying a home and retirement.

Live beneath your means. As you consider what sort of place to rent and what other expenses to take on, aim to keep your cost of living low. That’ll give you more financial breathing room, make your life less stressful and, as the pay increases come through, you can start socking away serious money for a house down payment and other goals.

Pay all bills on time. We’re talking about things like rent, utilities, student loans and credit card bills. Where possible, set up automatic payments, so you are less likely to be late. Paying your bills on time is typically the biggest factor affecting your credit score. If you nurture your credit history and credit score now, you should be in good shape when you apply for a mortgage.

Take on debt cautiously. You likely already have student loans, and you might need to borrow to buy a car. If you can, avoid taking on other debts, so mortgage lenders won’t have any concerns when you ask for that hefty home loan. One rule of thumb: Limit your monthly non-mortgage debt payments to no more than 10% of your pretax income.

Use credit cards sparingly. To build a good credit score, it’s helpful to charge a small sum every month and then pay off the credit card balance in full. Try not to let that small monthly charge become a large one. If you use too high a percentage of your available credit limit, it’ll make you appear financially stressed and it could hurt your credit score. More important, if you charge too much, you may not be able to pay off the balance in full—and you’ll likely incur steep finance charges.

Contribute to your employer’s retirement plan. With retirement so far away, this might seem like a low priority. But be sure to contribute at least enough to get any matching employer contribution. You will soon get used to living without the money. The earlier you start saving, the more you’ll potentially accumulate, and you could set yourself up for early retirement.

Open a Roth IRA. If you have the cash to spare, set up a a Roth IRA. Not only will you get tax-free growth, but also you’ll enjoy added financial flexibility: You can withdraw your regular annual Roth contributions at any time for any reason, which means your Roth could double as an emergency fund or as the down payment for your first home. There’s more on IRAs in the tax chapter.

Next: Starting to Invest

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