A Financial Conversation for your soon-to-be Graduate
I was chatting with a friend the other day about launching our kids into adulthood. We seemed to have the same issue with our soon-to-be graduates; the kind of work they want to do doesn't meet the reality of how they want to live. So what my friend decided to do was brilliant. She created this spreadsheet for her daughter to show her what it costs to live at twenty-one.
The Reality of the Cost of Living
To corroborate these numbers, I asked my two sons, who moved out a year ago, what it cost them to live. "It's expensive as hell," was one son's answer. Interestingly my friend's breakdown was very close to both sons’ experience. The Seattle son's expenses total around $40,500 a year, and the Bay area son's costs are approximately $35,000 per year. (Click here for a detailed breakdown).
I was curious about the difference in their living costs and found that the company you choose to work for can affect your expenses. For instance, the Seattle son works for a start-up that doesn’t offer extra perks but offers equity incentives. In contrast, the Bay area son works for a company that offers additional perks such as paying part of gym memberships, cell phone bills, etc.
Helping our graduates understand the actual costs of living and the impact different company perks have on their finances can hopefully guide them to a job that will enable them to achieve a good balance between their desired lifestyle and desired work.
Fortunately, this is an excellent time for graduates. Currently, there are more jobs than people to fill them, which usually translates into a better starting salary. However, after getting hired, they will have a lot of paperwork to sort through, and most likely, their new employer will not walk them through all the hiring documents.
Tips to get through new employee paperwork:
Company Retirement Plan
Enroll in the program as soon as you can.
Consider contributing at least enough to receive the full employer match, if any. For instance, if your employer will match your contribution up to 4% of your salary-then, you may want to contribute 4% of your paycheck. So, in real money terms, if your monthly salary is $6,250.00 a month (annual salary of 75k), you would contribute $250 pre-tax to your 401K, and your employer matches the same making your contribution $500 a month! ($250 of free money).
Be sure to read the fine print. For example, will your employer match your contribution right away, or do you need to have a year of employment first? If there is a waiting period, you may decide not to contribute quite as much until the waiting period is over.
What investments to choose from within your 401K? I recommend choosing the most aggressive (highest potential growth) funds offered. As a young person, stay away from bond funds and target-date funds. You have a lot of time ahead of you, and since the stock market has historically returned 9% a year over the last 40 years, you should take advantage of this growth potential.
Healthcare Benefits
If your employer offers a high deductible health care plan (HDHP)- choose it. You will have to pay more out of your pocket for doctor visits; however, you may only visit the doctor two or three times a year as a healthy young person. To offset your out-of-pocket costs, contribute to an HSA. HSA stands for Healthcare Savings Account, and just like a 401K, you contribute pre-tax money from your paycheck. You then use these funds to pay your medical bills. Or, if you don't visit the doctor much, you can treat the HSA as an investment account and potentially earn tax-free growth. Many people never touch their HSA until they retire. Then they use the money to pay for medical expenses during retirement. You may be able to contribute as much as $3,650 a year to your HSA account.
Read the health care benefits closely to determine if your employer offers a health and wellness plan, such as paying for part of a gym membership.
Taxes-W-4
This form determines the amount of taxes that are withheld from your paycheck. If you are single or married to a spouse who doesn't work, don't have any dependents, and have only one job, filling out your W-4 is straightforward. All you must do is fill in your personal information and sign the form.
Pay attention to your first tax filing with the I.R.S. while at your new job. Did you owe money to the I.R.S.? Or did the I.R.S. owe you money? You might want to tweak your withholding amount if either amount was substantial.
If your marital status changes and if you take on a second job or start a family, revisit your withholdings on your W-4.
One last tip, be sure to fill out your paperwork as soon as possible. Some of the choices are time-sensitive, and you may not be able to participate after a certain amount of time has passed.
Starting a new job can be daunting, and as a financial advisor, I help my clients choose the best company benefits for their situation. To learn more about how I can help, feel free to contact me.
