As a college graduate with a new job, how should I structure what I do with my income?
I'm a recent college graduate and recently returned Peace Corps volunteer. I just began a temp job as an accountant making $13 an hour. I have $35,000 in student loan debt. I have the option of enrolling in a 401(k) through my employment. How should I structure what I do with my income? Should I focus it on the loans and wait to enroll in the 401(k) later?
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As with many things in the financial world, the best answer is "a little of everything." You should get in the habit of investing in your retirement from day 1, even if it is a small amount. Those who put off contributing to their retirement for 'a little while' often find themselves 10 or even 20 years into their career with no retirement savings. To catch up they need to contribute huge portions of their income to retirement accounts. Here is my recommendation for what to focus on:
RETIREMENT INVESTING
If the 401(k) matches your contributions, then invest enough to get the free money from your employer. It is common for a company to match contributions up to 3% of your income, so start there. If the company does not offer a match, then open your own IRA and contribute at least 3% of your income to the account. You may need to wait until you have a few thousand dollars saved to open the account, or you can contact us and we will open an account with no minimum. Your goal should be to increase your savings rate each year to get to 10% of your income within 5 years. While 10% might seem high now, it shouldn't be hard when you get a full-time accounting position.
EMERGENCY FUND
Depending on your current expenses, you may not need a massive emergency fund at this time. If you live with your parents or could easily move back in with them, your emergency fund can probably safely be between $1,000 to $2,000 based on your income. If you don't have the parent safety net, then you will want approximately 3 months take-home pay saved to ensure an emergency doesn't send you into credit card debt. Once your emergency fund is saved, devote the extra money toward your retirement account.
There is no need to build the emergency fund first, and then invest for retirement. Do them both at the same time and build them slowly over time. I know many advisers will be surprised by this advice, but a 3% contribution to a retirement account is $65 per month. Adding $65 into your emergency fund isn't going to make a massive difference.
STUDENT LOANS
Your student loans are the least of my worries, assuming they are Federal student loans and have a reasonable interest rate. The math proves you will be better off working on multiple goals at once than rapidly paying off your student loans.
You have a very low student loan balance compared to your potential earnings as an accounting major. And until you get a full-time job, you can go on an income-based repayment option, which will offer very low monthly payments. Also keep in mind, some jobs will offer student loan repayment assistance as an employee benefit and there are government forgiveness programs, so you might see your student loans disappear faster than expected.
SEEK PROFESSIONAL HELP
Consider finding a fee-only and fiduciary financial adviser to help you early in your financial journey, especially once you get a full-time position. While most financial advisers won't work with you until you have significant savings to invest, some advisers are very willing to work with a young person at the beginning of their career. Purposeful SP offers Launch, a financial planning service designed specifically for recent college graduates and currently priced at $35 per month.