You’ve worked hard and accomplished a major milestone. Now, it’s time to celebrate your achievement and look ahead to new beginnings. As you embark on this next chapter, it’s important to get a solid grasp on your finances. Here are five essential tax and money tips to help recent grads set themselves up for success.
1. Understand Your Tax Obligations
As a new graduate, your income may come from various sources like jobs, freelance work, investments, etc. Keep detailed records of all money earned. This includes pay stubs, invoices, bank statements, and other documents. You’ll need these records when filing taxes. An online pay stub is one easy way to access pay information. Filing taxes for the first time can seem daunting. However, it doesn’t have to be scary!
You need to file if you earned more than the standard deduction – $12,550 for singles in 2022.
- Tax forms can be confusing, but taking your time and reading carefully will help. The 1040 is the main personal tax form.
- You can e-file taxes yourself using reputable tax software or work with an accountant.
- Save all tax documents, like W2s and 1099s. These provide the income information you’ll need.
- Tax deadlines are normally April 15. File for an extension if more time is needed.
- Set aside money to pay any tax liability you may have. The IRS charges interest on late payments.
Staying on top of your tax obligations from the start helps avoid headaches down the road!
2. Build Up Your Emergency Savings
As a graduate, one of your top financial priorities should be establishing a solid emergency fund. Here’s why:
- Having 3-6 months’ worth of living expenses saved provides a safety net in case of job loss or other crisis.
- Without emergency savings, you may be forced to rely on credit cards or loans if the unexpected strikes. This can damage your finances.
- Aim to regularly contribute to your emergency fund each month until you reach your goal amount. Even small additions help it grow.
- Keep emergency money accessible in a savings account. Don’t invest these funds since they may dip in value when you need them most.
Making emergency savings a habit now leads to greater financial stability as you progress in your career.
3. Manage Student Loan Debt
For many graduates, student loans are an unavoidable reality. Stay on top of your student debt by:
- Knowing total loan amounts owed and monthly payments. Login online to view federal and private loan details.
- Sticking to the standard 10-year repayment plan if possible.
- Looking into income-driven plans if standard payments are too high relative to your income. These base payments on what you can afford.
- Paying extra on highest interest loans when possible to save on interest fees.
- Seeing if an employer offers student loan repayment assistance. Some companies will make contributions.
Handling loans wisely takes discipline but prevents credit damage while maximizing resources available for other goals.
4. Begin Investing
It’s never too early to start investing, even with limited extra income. Making it a habit can really pay off down the road due to compound interest over decades. Ways to begin investing:
- Open a 401k or IRA and contribute a portion of each paycheck.
- Research low-fee index funds or ETFs. These offer broad market exposure for beginners.
- Use a robo-advisor app for automated, diversified portfolio management. Makes investing easy.
- Contribute spare cash each month to a regular, non-retirement investment account.
- Learn investing basics – compound growth, dollar cost averaging, and asset classes. Education fuels smart decisions.
Starting early and sticking with it is the key to building substantial retirement savings.
5. Maintain Good Credit
While you’re getting financially established, maintaining strong credit should be a priority:
- Pay all bills on time each month to avoid late payments on your record. Set up autopay as a reminder.
- Keep credit card balances low and pay in full each month if possible. High utilization hurts scores.
- Limit new credit inquiries by only applying for what you need. Too many dings your score temporarily.
- Consider becoming an authorized user on a parent/partner’s account. It can benefit your score if they have a good history.
Building credit takes patience but pays dividends when you eventually need financing for major purchases.
The transition after college brings many financial firsts. While it can feel overwhelming, taking things one step at a time and building smart money habits from the start will pay off tremendously in the long run. With a little planning and discipline, any recent grad can establish solid financial footing.
Tips to Get Organized
Here are some additional tips to get your finances organized as a new graduate:
- Create a budget. Track your income and expenses to get a handle on cash flow and spending habits. There are various free budgeting apps and templates online.
- Set financial goals. Know your short and long-term money goals. This provides focus and motivation for smart planning.
- Automate savings. Arrange to automatically move money to separate savings and investment accounts each month. Removes temptation to spend.
- Consolidate accounts. Keeping finances in one place makes monitoring easier. Move to a single bank if you have multiple accounts.
- Manage documents. Online pay stub access and secure cloud storage make retrieving tax and financial records convenient.
- Review insurance needs. As you transition off family policies, look into health, renters, auto, and disability coverage.
Strategies to Reduce Taxes
New graduates can utilize some savvy strategies to trim their tax bills:
- Harvest tax losses. If you have investments declined in value, selling can realize losses to offset capital gains and reduce taxable income.
- Contribute to retirement accounts. Money added to 401ks and IRAs reduces your current taxable income. A great 2-for-1 benefit.
- Claim above-the-line deductions. Recent grads may qualify for deductions on student loan interest, certain moving expenses, and more.
- Use education credits and deductions. It can help lower tax liability on tuition, fees, textbooks, and other school expenses.
- Look into gig economy tax perks. Ridesharing and rental income may provide mileage deductions, expense write-offs, and other breaks.
- Understand tax-advantaged savings options. HSAs, FSAs, and MSAs provide tax-free savings for medical costs.
|Type of Account||Key Benefits|
|401(k)||Tax-deferred savings and growth. May get an employer match.|
|Roth IRA||Tax-free growth and distributions. Flexible options.|
|Health Savings Account (HSA)||Triple tax benefits for medical expenses.|
With some smart planning and proactive tax management, graduates can maximize the resources available to pursue personal and financial goals. The key is staying organized, thinking long-term, and learning how to work the tax code to your advantage.