Five money musts for college grads

One more lesson for recent graduates: How to manage money.

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Key takeaways

  • Spend your money wisely
  • Take good care of your credit
  • Consider saving for retirement
  • Pay down debt—but make sure to save, too
  • Get invested

While you were socializing, studying, and generally learning how to be an adult in college, you may not have gotten a lot of exposure to basic money management. Now that you're in the real world, you need money to do a lot of the things you want to do in life. Managing your finances so that you can do everything you want and save money for the future takes some skills and discipline you may not have picked up in school.

To help get you started, Fidelity created a program called "Five money musts," which covers the basics of budgeting, managing debt, building credit, and saving and investing. "We know you’re not thinking about retirement, but it's never too early to start thinking about your future," says Kelly Lannan, director in the Women and Young Investors group at Fidelity.

Here are the highlights:

Money must #1: Spend your money wisely

If you're like most people, keeping a roof over your head takes up most of your money; housing can be expensive. But if too much of your paycheck goes to housing, that leaves less money to spend on food and fun, and that's not good. Plus, it is critical to save for emergencies and the future.

That's why Fidelity came up with saving and spending rules of thumb:

  • No more than 50% of your after-tax pay should go toward your essential expenses. That includes housing, food, health care, transportation, and debt payments.
  • Consider saving 15% of your salary before taxes are taken out (pretax income) for the future—that includes any employer match in your 401(k) or other workplace retirement saving account.
  • Think about saving 5% of income (after tax) in an emergency fund. Once you've amassed a comfortable cushion equaling three to six months' worth of essential expenses, it's still a good idea to keep saving 5% of your income for unexpected expenses.
  • Anything that's left over is yours to spend and save as you see fit.

Money must #2: Take good care of your credit

Credit cards are an expensive way to borrow, and you should try not to charge more each month than you can pay off by the time you get the monthly statement. But credit cards can still be a powerful financial tool. They can help you build up a track record of borrowing money and paying it back on time, which can save you money in the future, by helping you get lower interest rates on loans—like for a house or a car.

How to build credit
In order to build a credit history, you need to borrow money. Applying for a secured credit card—a credit card that is secured with a deposit—is one way to start working your way up. Making a few purchases each month and then paying off the bill can help you build your credit history.

You can check your credit reports from each of the three credit reporting bureaus—TransUnion, Experian, and Equifax—for free once per year at Your credit report shows you what lenders see when you apply for a loan. Keeping an eye on your credit history can also help you spot fraud or identity theft, as well as catch and fix incorrect information.

Money must #3: Saving for retirement

Your first job out of college probably won’t pay a ton of money. Even if you're earning a good salary, you may have student loans and other education debts. Plus, you may be grappling with the costs that come with getting started on your own, like buying furniture or a car. Saving for the future may not seem like a priority when you feel as though you’re just scraping by.

How you can save
Saving from the first day of your first job, however, gives you a big head start on your savings. That's thanks to the power of compounding returns. It begins when your investment earns a return that is then added into your original investment. Now you have a bigger amount of money that could potentially earn a return. When those returns are added to your investment, it grows even more and it can continue to snowball—but the key ingredient is time.

Where you can save
When you invest in a tax-advantaged account like a traditional 401(k) or an IRA, your potential earnings aren't taxed until you take a withdrawal in retirement. 1 In the case of Roth 401(k) or Roth IRA accounts, you pay taxes on the money before you add it, and earnings grow tax-free, which means you may owe no taxes on withdrawals in retirement. 2

If your employer doesn't offer a retirement plan, consider opening an IRA on your own. You can deduct up to $5,500 in 2017 for money saved in an IRA.

Money must #4: Pay down debt—but make sure to save, too

Even if you have a lot of student loans and other debts, you have to pay yourself first to make sure you have money in the future and for emergencies. It may seem counterintuitive, but before you tackle debt, make sure you have some "just in case" money and save for retirement. Always make at least the required minimum payments on all debt as you build up your savings and tackle individual bills.

Here's a guide (in no particular order):

  • Establish an emergency fund. Work toward saving at least enough to cover three months of essential expenses. Think of it as a monthly bill to prepay for your future.
  • If your employer matches money you put into a 401(k) or 403(b), don't pass it up: Contribute at least enough to get the entire match. Think of it as "free" money. Let's say your company matches 50 cents on every dollar you contribute, up to 3% of your salary. If you make $60,000 a year and contribute 3%, or $1,800, your company kicks in another $900. If you do that every year, in 10 years that $2,700 a year could grow to more than $37,000 (assuming a hypothetical return of 7% per year).3
  • Pay off credit cards with the highest interest rate first. Simply paying the minimum amount due may not be enough to cover interest charges each month; so pay more than the minimum if you can.
  • After you've knocked out credit card debt, pay down private student loans by making more than the required payment. Private student loans usually have higher rates than federal student loans—and they won't allow you to access federal programs that could help you if you're having trouble making payments.
  • After you've paid off credit cards and private student loans, bump up your 401(k) contributions. Even if you're still paying a mortgage, car loan, or government student loan, save as much as possible for retirement. Because these types of loans typically have a relatively lower interest rate, you may not need to pay them down as aggressively—plus some, like student loans from the government and a mortgage, may offer some tax benefits.

Money must #5: Get invested

You don't need a ton of money to start investing and you don’t have to be genius. It's a little like exercising: To reap the benefits of running, you only have to go outside and start at the pace you feel comfortable.

How to start investing
Let's stick with the running analogy. You wouldn't run a marathon the first time you put on running shoes, and you don't have to study balance sheets and financial statements when you first begin investing. Of course, you can if you want to.

Instead of looking at individual stocks, you can consider investing in mutual funds or exchange-traded funds (ETFs) that let you invest in many different companies all at once. There are many funds to choose from, so if you're not sure where to start, you can pick from a variety of ready-made solutions. Or consider a digital money manager like Fidelity Go, which is a managed account that can make investment choices for you, based on your goals, time horizon, and tolerance for risk.

The important thing is to start early; use money you won't need for at least a few years so that it can stay invested; and invest in a way that lines up with your goals, time frame, and emotional tolerance for the ups and downs of the stock market. For young people, investing for the future can mean easing in to the stock market with a diversified mix of investments.

Start right

You may not always feel like you're leveling up in life, but getting a few key money things right could set you up for success. Keeping an eye on your spending, cultivating good habits with debt and credit, saving, and investing will help you make smart decisions today and tomorrow.

Take the next step

Now that you know the Five Money Musts, download our action plan to help you start managing your money.

Learn more

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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

© 2017 FMR LLC. All rights reserved.

Investing involves risk, including risk of loss.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

1. For 2017, full deductibility of a contribution is available to active participants whose 2017 modified adjusted gross income (MAGI) is $99,000 or less (joint) and $62,000 or less (single); partial deductibility for MAGI up to $119,000 (joint) and $72,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who file jointly with a spouse covered by a workplace plan but are not themselves covered by an employer-sponsored plan if their MAGI is less than $186,000 for 2017; partial deductibility for MAGI up to $196,000.
2. For 2017, if you're single, or file as head of household, the ability to contribute to a Roth begins to phase out at MAGI of $118,000, and is completely phased out at $133,000. If you're married filing jointly, the phase-out range is $186,000 to $196,000 for 2017.
3. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pretax contributions are subject to taxes when withdrawn. Distributions before age 59½ may also be subject to a 10% penalty. Contribution amounts are subject to IRS and Plan limits. Systematic investing does not ensure a profit or guarantee against a loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for 7% annual rate of return also come with risk of loss.
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