According to the National Association of Colleges and Employers’ April 2013 Salary Survey, the average starting salary for a college graduate is $44,928. When you go from earning just enough to pay for your half of the rent to earning five or six times that amount, you feel you have the most money in the world. It is critical to establish good financial habits early, as these are the habits most people retain their entire life.
As you may remember from my previous columns, the place to begin is to be sure your income allows you to maintain your spending level. Create a budget so you know your expenses, and know where your money is going. Secondly, prepare for the unexpected by having the equivalent of about six months of basic living expenses available as emergency reserves. Next, take control of any debt you have, whether it is student loans, mortgages or credit cards.
Once you’ve taken care of the basics, you should begin saving money for your long-term life goals, such as retirement. I know you just graduated from college, but retirement is not as far into the future as you think. It also takes more money to retire than you think.
The first place you should start is your employer’s retirement plan(s). Most companies offer a 401(k), 403(b), SEP plan, SIMPLE plan, or other type of retirement plan. Employer-sponsored retirement plans have many benefits. Savings grow tax-deferred; contributions are generally pre-tax, so they lower your current income tax liability, and many employers offer a match on your contributions. For example, an employer may offer to “match” 50% of the first 6% you contribute to the plan. This means if you invest 6% of your salary into the retirement plan, your employer contributes or matches 3%. You are basically giving yourself a raise.
Once you contribute enough to your employer’s retirement plan to receive the match, you may want to consider establishing a Roth IRA, as your next place to save. The rules for Roth IRAs are one of the least complicated sets of rules that the IRS has established in some time. You must have earned income and be under the income limits. For 2013, these limits are 127,000 for single filers or $188,000 for married filing jointly. You can save $5,500 to a Roth IRA in 2013. Additionally, contributions grow tax-free, and income taxes will not be due on distributions from the Roth IRA, provided they meet a few criteria.
If you still have money in your budget to save, consider contributing the maximum allowed to your 401(k) plan. The maximum amount a person can contribute is set each year by the IRS. For the year 2013, employees can contribute up to $17,500, as an elective deferral to their employer’s 401(k) plan.
If you have maximized retirement plan contributions and made your Roth IRA contribution, but still have funds available to be invested, a regular brokerage account is the next best place for your savings. This is an account with no tax benefits, but also without any restrictions regarding when you can access the funds in it.
At Henssler Financial we believe you should Live Ready, which includes understanding which accounts will allow you to save the most for your future. If you have questions regarding your savings strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
