Graduate Finances

Check your income tax withholding

Students who work part-time usually have no federal income tax withheld from their pay. This is done so students can earn up to $4,300 (one standard deduction) without paying federal tax. If you graduate in May and start working right away, you may find that your income is such that you will owe tax on your part-time income. So, make an estimate of your total taxable income for the year, calculate the tax and compare the result to your estimated withholdings for the whole year. If it looks like you will owe additional tax, increase your withholdings right away.

Start a systematic savings plan

I believe that saving a little from each paycheck is an excellent idea. I encourage everyone to establish an emergency fund and then to start saving for your long-term goals. If you have some savings put aside, you can weather any storm.

Another reason for a savings plan is so you can plan appropriately for a long-term goal, such as a down payment on a house or condominium. Remember, as your income increases, so too will your income taxes. Rent payments to your landlord provide no income tax benefits and the same amount in mortgage interest payments and real estate taxes are tax deductible.

Join your employer's 401(k) plan

If I could make only one recommendation to a recent graduate, it would be to participate in an employer's 401(k) plan. Since many employers no longer offer pensions to their employees, it is important to contribute to a 401(k) plan. A 401(k) plan is an optional benefit, and you'll need to qualify in order to participate. In some companies, that may mean you need to be a certain age. With others, the qualification may mean that you first have to work a specified number of months with the company. Most companies will match an employee's contribution to their 401(k) up to a certain percentage.

Your 401(k) plan contributions are immediately vested. That means that if you change jobs, you can take your contributions with you. Your employer's contributions, however, probably have a separate vesting requirement, meaning that you need to stay with the company for as little as a year or as many as seven before you are entitled to the employer's contributions.

Don't fall into the credit card quagmire

When you graduate and get a job, the credit card offers will come. Since everyone wants to lend you money, it can be hard to resist the temptation. Why not? With a credit card you can buy, buy, and then buy some more. The problem comes when the credit card bills pile up. Credit card interest rates can be as high as 18 percent or more per year. With rates this high, an unpaid balance will grow every month, and it may become difficult to pay even the required minimum.

Before you make any big purchases on credit, make a plan for how you will pay it off. Don't charge more than you can afford to repay. Many young people fall down the credit card hole at least once in their life. Don't let it happen to you.

All it takes is a little planning and a commitment to save when you start out to make sure you're headed toward a sound financial future.