Five steps to give college graduates a strong financial start

Today's grads face serious financial decisions that can pay off—or punish them—for years to come

Published: May 13, 2015 06:00 AM

As this year's crop of graduates prepares to start life outside of the college cocoon, are they ready to face the financial decisions of the "real world?" A recent survey found that barely half (58%) of college freshmen felt prepared to manage their money. Over the past three years, the percentages of freshmen planning to stick to a budget and pay their credit card bills on time have steadily declined.

For many of today's grads, the coveted diploma comes with a heavy debt burden. And once they enter the workplace, they're confronted by myriad financial decisions–and serious mistakes – that can pay off or punish them for years to come. Here are five steps that can help college grads get their new lives started on firmer ground.

For more information on this subject, read "Ramp Up Your Savings: Start with These 5 Strategies" and "Simplify Your Financial Life."

Don't ignore your credit score

Your credit score–a number that represents your creditworthiness–will resonate throughout your life, affecting everything from the interest charged on your credit cards to your ability to secure an affordable mortgage. Maintain a healthy score by charging a small sum to your credit card each month and paying off the balance in full and on time. Also pay off other bills, such as utilities, cable and cellphone service; under a new approach for people with limited credit history, these bills can now be factored into your credit score.

Don't delay–save today

Thanks to interest compounding, smaller amounts of money saved sooner will outstrip larger amounts of money saved later. Family members who helped fund a 529-plan might be willing and able to contribute to a Roth individual retirement account. At the same time, regularly set aside money to build up your emergency savings stash. HelloWallet's new free website calculator provides personalized guidance about how much you'll need.

Invest simply and cheaply

Index funds that track a market benchmark can be much cheaper than actively managed funds, which aim to beat a market benchmark but often miss the mark. Funds such as Vanguard Total Stock Market exchange-traded fund (VTI) is a low-cost one-stop option for investors looking for a domestic stock fund that invests broadly across sectors, styles, and capitalizations. Both Charles Schwab and Vanguard Group have low minimum investments of $1,000 to open a brokerage account.

Say yes to free money

Take advantage of your employer's 401(k) plan by setting aside enough from each paycheck to get the full "employer matching contribution." That match is free money–and how often does that come along? Contribute even if your employer doesn't offer a match; the money is taken from your paycheck pre-tax, so the dent in your take-home pay is negligible, while your savings grow tax-free. Similarly, sign up for other workplace plans that cut your tax bill by using pretax dollars to pay for health and commuting costs.

Leverage your apps

Use your smartphone to track spending with a budgeting app or check your credit card balance each month. Arrange to receive alerts when your bank balance is low, so you don't get charged overdraft fees. Set up autopay for bills to avoid late fees, or schedule payments as soon as you get a bill.

— Catherine Fredman