Category : debt

Class of 2016 – Change the world, but try this first!

Change the world. Find your passion. Make a difference. The number of cliché phrases used as words of advice in commencement speeches would provide for a pretty great drinking game…which I’m sure already exists (à la, drink every time you hear a cliché). The truth is that yes, all of those encouraging words are inspiring, but there is no actionable first step for a graduate to take to accomplish those things. Life is complicated and there are far too many words of advice to fit into a blog post.

One of the areas in a graduate’s life that can be the most confusing is finances. So while we can’t help you or your grad “reach for the stars” or find the “road to success” on a map, here are some quick tips to help 2016 grads get started on the right path financially.

Tackle debt head on

There is no greater financial burden to a graduate in 2016 than their student loans and credit cards. The average graduate this year will owe about $35,000 in student loans and $3,000 in credit card debt. Get those credit cards paid off as quickly as possible using Dave Ramsey’s snowball method, and then start making extra payments to those student loans. Get it all out of your life as fast as you possibly can!

Don’t fixate on salary

Understand that a job is about far more than salary, especially in 2016. Now that millennials have become the largest generational group in the workforce, employers are changing the way they approach culture and benefits. Healthcare costs are rising and an employer that offers a Health Savings Account (HSA) with their group plan should really grab your attention. Financial wellness is huge for young workers as well and voluntary benefits that help workers with their financial lives are worth far more than you may realize right now. Consider voluntary benefits and salary as just two pieces of an overall compensation package. And of course, don’t expect to find that perfect job right out of school. It takes time and different experiences to really find what you love. Don’t beat yourself up if you haven’t found your passion by 25.

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Don’t Sacrifice Your Future

Don’t sacrifice your future: retirement vs children’s education

Every parent, at some point, has made a decision to put their children’s needs ahead of their own. Starting from the moment your child becomes a part of your family, you’re putting aside your need for sleep, to feed and comfort your tiny bundle of joy…Every. Two. Hours.

And, this continues throughout parenthood with decisions to miss that once-in-a lifetime concert because your little one has a fever or to buy the minivan over the sweet two-seater you’ve absolutely fallen in love with. We make these “sacrifices” without regret because we love our children unconditionally.

There is one decision, however, where your children’s needs should not supersede your own…that’s the decision between saving for your retirement or saving for your children’s education. For many the decision normally comes down to which one to save for, not how much to save for both. When you’re pressed with making a choice between the two – your children’s future or your own future – placing yourself first will give your family a long-term benefit.

In a 2016 Parents, Kids and Money survey conducted by T. Rowe Price, more respondents had saved for their children’s college than saving for their own retirement. And, in this same study 16 percent of those questioned indicated they used their retirement savings to pay for their children’s education.

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Drowning in Student Loan Debt!

One of the frequently asked questions we get from our blooom clients is – “I am still paying on my student loans, how much should I contribute to my 401k, if anything?” Unfortunately, piles of student loan debt are hindering retirement savings for a huge segment of millennials and Gen Xers. Paying down your student loan debt instead of being in a position to put those dollars towards your retirement savings can translate into hundreds of thousands of less dollars in your 401k by the time you reach retirement. If anything this problem has been getting worse as the average student loan balances have risen steadily over the past 20 years from less than $10,000 owed upon graduation in 1993 to $35,000 for the unfortunate class of 2015. (source Mark Kantrowitz, wsj.com) Personally, when I walked down the Hill at my college commencement in 1995 I was also dragging along $29,000 in student loans. My point is, you are definitely not alone with this burden.

For those of you in the workforce with access to participate in your employer sponsored retirement account such as a 401k or 403b you are likely juggling your student loan re-payment and retirement contributions, potentially wondering what balance should be struck between these two. Fortunately, the advice is fairly straightforward when it comes to this subject. IF your employer offers a match on contributions that you make into your 401k, – PLEASE, PLEASE DO NOT miss out on this free money! So even if you are saddled with student loan payments, I still strongly encourage you to contribute to your 401k but ONLY enough to get the maximum employer match. Although the employer match can take on many different shapes and sizes, often times it looks something like this: For the first 6% that you contribute to your 401k, your employer will match $0.50 on the dollar. In other words – if you contribute 6%, they will match another 3%. Put in different terms, if you make $50,000 per year and you elect to put 6% of your paycheck into your 401k that would mean you are saving $3,000 towards your retirement (6% of $50,000) AND your employer is contributing another $1,500 into your account (3% of $50,000). Try this one on for size – your $3,000 contribution just received an automatic 50% return before any investment return!

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When to Start Contributing to your 401k?

At blooom, we are huge advocates for starting to save early and often for your retirement. We are commonly asked the question – I still owe money on my student loans –is it OK to start contributing to my 401k?

Often times people are advised to pay off all of their debts (other than a mortgage) before beginning to save for retirement. I disagree with that strategy.

If you work for a company that offers a pre-tax retirement savings account like a 401k, 403b, or similar AND that company offers a match based on your contributions I think it would be foolish to pass up this free money while you are busy paying off debts. You would be missing out on a guaranteed return on your money by not contributing to your 401k. If you are still saddled with student loan debt, credit card debt, car loans, etc – my advice would be to contribute just enough (and not a penny more) to get the maximum match from your employer. All other excess funds should be aggressively applied to paying down your debts from smallest balance to largest balance – the Debt Snowball method that Dave Ramsey has advocated for years. Once these debts are paid off you can ratchet up your contributions to 10% or more.

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