The new 2024 college graduates and their families have a lot to celebrate! As these graduates kick off their new jobs and start transitioning into their post-college life, our team of financial advisors has put together our top financial planning tips to help set them up for financial success.
In addition, parents and grandparents of recent college graduates, if there are funds left over in your student's college savings plan, there are important things you must do too.
Financial Tips for New Grads
Book recommendation: “The Richest Man in Babylon.”
- This is a great book for new college graduates to read and apply the principles outlined to their financial planning.
Participate in your employer’s retirement plan –
- When starting a new job, find out if they offer a retirement plan, usually either a 401(k) or Simple IRA, and be sure to sign up to participate. If the company offers a retirement contribution match, you should try to contribute enough to receive the full match, if cash flow allows. For example, if the company offers a 4% of salary match, you should contribute at least 4% of your salary to receive the most benefits.
- This is a great starting point for your future retirement plan, and getting started early will help you be more successful over time.
Understand your cash flow –
- A lot of times, young college graduates get sucked into using their credit cards for purchases. The drawback is they lose track of what they put on the credit card, and then at the end of the month, there is a huge bill. If they can’t pay it all at once, then they must maintain a balance and incur more and more interest. It’s important to understand cash flow – meaning how much money is coming in each month and going out each month. This will help them budget and be able to understand what they can and cannot afford.
Set a budget framework and stick to it –
- Setting a simple budget will help new college graduates understand their money, live within their means, and set aside funds for their future. A popular and simple budgeting framework is the 50/30/20 rule. The rule is simple: 50% of your after-tax income goes toward things you need, 30% goes toward things you want, and 20% goes to savings.
- 50% Needs: Rent, utilities, groceries, transportation, debt repayments
- 30% Wants: Entertainment, eating out, shopping, vacation
- 20% Savings: Emergency funds, retirement
Tools –
- There are great tools new grads can use to learn more about money and financial planning. We encourage all new grads to play an active role in their financial planning to create a secure financial future for themselves.
Are there funds left over in the college savings plan? If so, reach out to us today to help navigate the next steps for these funds.
Parents and grandparents of new college graduates, depending on the college education savings account that you created, you will need to act soon to ensure those funds are handled in the right way to reduce potential tax burdens on yourself as well as your student.
- Uniform Transfer to Minors Act (UTMA) - UTMA allows minors to receive gifts and other transfers of property without the need for a trust or appointed guardian. Some parents or grandparents may have created a UTMA for college savings. Every state is different, but when the minor reaches the age of majority (outlined by the state and usually age 21) the UTMA account and the funds within it, legally become the minor’s. If there are still funds left in this account, we recommend you connect with our team to avoid any potential unexpected taxes. Your Couto DeFranco Wealth Management financial advisor can help you and your student navigate ways to harness these funds and reduce any potential tax burden.
- 529 College Savings Plan - A 529 plan is a state-sponsored investment plan that allows parents or family members to save money for education expenses for a beneficiary. If there are left over funds in a 529 college savings plan after the beneficiary graduates, there are two options to consider: 1. Save the unused funds in the 529 plan and roll over to a Roth IRA, with certain limitations. 2. Transfer the 529 plan to another beneficiary. There is no time limit on when you must use the funds in a 529 plan, so this is a good opportunity to consider legacy planning too. Our financial advisors can help you navigate what to do with unused 529 plans and how to align it with your goals, so you don’t incur penalties.
- Coverdell Educations Savings Account (ESA) – A Coverdell ESA is another education savings account. If you have left over funds in a Coverdell ESA, we recommend you connect with our team soon. If there are funds left over in the ESA when the student turns 30, then the account must be distributed, and the funds will be taxable to the student. There are several ways to roll over these funds to reduce the taxable burden, but we recommend you connect with our team to help navigate these next steps.
Feel free to reach out to your Couto DeFranco financial advisor if you need guidance on what to do about leftover college savings, or if you’d like to set up a time for your recent graduate to connect with us for financial planning. We’re always here to help you and your family.