Editorials

Financial Pitfalls – What to Avoid After Graduating

money growth - @NWTC

Credit: @NWTC

Many seniors are graduating at the end of Apr., while the juniors are heading towards the final chapter of their college experience. Once they start working, however, there are many common pitfalls that young adults make when joining the workforce.

For many people who did not work during college it is new to have a steady paycheck filling up their bank account. This incoming money from working after college may be tempting students to spend it on things that are not necessary. It seems that almost everyone knows somebody who bought a new car, new phone, a big TV, or other things that are not absolutely needed.

“Students often overspend on an auto or apartment. Students often try to live a lifestyle like their parents enjoy, but their parents have worked and saved for decades to afford that lifestyle,” said Rick Scott, Saint Leo assistant professor in the accounting, economics, and finance department.

This spending might have fatal repercussions on the financial security in the future of someone. One step that everybody can do is making a monthly payment plan to pay off the most important things before spending money on anything else. One of these things might be paying off a student loan. Not doing so can ruin the person’s credit score, which could limit the person’s ability to buy a house, car, or get a rental apartment. Incidentally, there are loan specialists that focus solely on making payment schedules and helping people to get out of debt.

Another financial obstacle that adults may face is saving too late. Most individuals will retire some day; therefore, they should have sufficient funds for a financially comfortable retirement. This is especially important, since Social Security does not provide enough retirement funds and Social Security is not guaranteed anyway. According to The Washington Post, the Social Security fund will be empty in less than 20 years, as more people of the baby boomer generation will retire.

When people start waiting too long before they start to save it will significantly decreases the funds that will be available at the time of retirement. Some of the common retirement plans are the IRA, the 403-b, or the 401-K. Through the effect of compound interest, the money that is paid into these accounts increases every year.

“Paying off a student loan is usually more important than starting to save for retirement unless it is a very low interest rate loan. On the other hand, if you work at a company that will match your contributions to a 401k or 403b, it is of the highest priority to contribute as much of your salary as the company will match to your retirement plan. Not doing so is the equivalent to turning down free money. In other words, it is crazy for most people to pass matching funds up,” said Scott.

However, one major disadvantage of these pension plans is that the owner is not in control of his/her money. Although for some people it might seem uncomfortable to self-manage their money, it can be a big disadvantage. The managing companies of these pension plans take a big share of the profits that is made from the money, while the risk is carried by the pension holder.

During the 2008 financial crisis, the owners of a retirement plan had to take a big hit. Even though the portfolios of these plans were diversified in different industries, most people lost lots of money. However, the companies that manage the plans did not lose any money, since they don’t take the risks, whereas these companies make the majority of the profits when the investments are doing well.

Many people realized these flaws in the system after losing money in the crisis and switched to a self-managed pension plan. These plans allow the owners to manage their money themselves. While many people are scared of doing that, it can also be a big opportunity. Also, unexperienced investors can learn how to manage their money in a safe way through books and seminars on investing. This way the investor carries the same amount of risks, makes all of the profits, and is being able to control their investments themselves.

“I advise recent graduates to keep your debt levels down. Avoid using credit cards unless you can pay off the balance every month to avoid interest charges. Start a regular saving plan to build up your rainy-day fund and make a budget,” said Scott.

With these tips future graduates can live a good life, while also planning for a future that is financially secure. The road to financial success might not seem easy, but it is worth it.

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