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5 money moves to set up new college grads for financial success

"Right from the start, day one, you need to make a budget."

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If you graduated from college this spring, you likely sat out in the sun with your gown and mortarboard and listened to inspiring words from some luminary of business or academia or the arts. "Don't be afraid of failure," they told you. "Dare to dream and to achieve and to change the world for the better." 

And then after you turned your tassel and met your parents for eggs Benedict, you may have begun to wonder whether it would have been more useful if your commencement speaker had skipped all the shoot-for-the-stars stuff and told you how to build credit. Or save for retirement. Or do the whole, you know, living as an adult thing.

If that's the case, you're not alone. Virtually no one graduates from school with a complete financial playbook, and many grads get their first job and rent their first apartment without receiving much of a financial education. Where to begin? How about here: Read on for the first five things financial advisors say every new grad should do to put themselves on track toward financial well-being and success.

1. Make a spending plan

"Right from the start, day one, you need to make a budget," says David D'Eredita, an investment advisor and founder of Rise Private Wealth Advisors in Tucson, Arizona. "You have to lay out everything in your life that you're going to be putting money toward."

There's no one perfect way to make a spending plan, but many experts say to begin by sorting your monthly income into buckets. Start with essentials, such as the costs of living, working, and feeding yourself. These areas will be your biggest expenses, and efforts to lower them will go the furthest, says Brian Kennedy, a chartered financial consultant and president of KCA Wealth Management in Camp Hill, Pennsylvania. "If you're driving 50 miles a day to get to work, for instance, it might be cheaper to move closer," he says.

2. Save an emergency fund

You should divert a portion of your income toward building an emergency fund. Most financial advisors recommend holding 3 to 6 months' worth of living expenses in a savings account, but some, like Kennedy (and financial guru Suze Orman), say you should aim higher. "In this environment, I'd say to shoot for 6 to 12 months," Kennedy says. "We hope that Covid isn't coming back, but you have to be prepared. If there is another shutdown, there is no guarantee that the government will provide you financial support."

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Suze Orman explains emergency savings

Video by Stephen Parkhurst

If that all sounds daunting, start with a small goal and work your way up. Begin by trying to get to $1,000, which would cost you only $36 out of every biweekly paycheck for a year. Or transfer $125 from each check for a year to get to $3,500 — the amount that the average emergency costs, according to Bankrate.

Balance bolstering your emergency fund with paying down debt, such as student loans, says D'Eredita. "The faster you can pay your debts, the faster you start generating free cash flow that you can start putting toward other things," he says. "It's psychological too — you can do more of the things you want to do if you don't have this thing hanging over your head."

3. Invest for retirement

When it comes to building your savings and saving for retirement, the key is to do it early and often, experts say. "It's so important to start early with retirement savings, because you can harness the power of compounding," says Brooke V. May, a certified financial planner and managing partner at Evans May Wealth in Carmel, Indiana. "Somebody who saves $250 a month for 40 years with an 8% return will have $872,000."

The easiest way to make sure you're investing consistently is to contribute to a workplace retirement account, such as a 401(k). If it's offered, choose the Roth 401(k) option, which is funded with money you've already paid tax on, May says. "Chances are you aren't in a very high tax bracket if you've just graduated," she says. "Money in these accounts grow tax-free, and you won't have to pay tax on money you take out when you retire."

It's OK to start your retirement savings with small contributions, but make sure you're putting enough into your 401(k) to get any matching contribution your firm may offer, says D'Eredita. "That's free money," he says. And regardless of the vehicle you invest through, consistently contributing is key. "Set aside any number to contribute and do it automatically," he says. "That way it's not a choice. If you treat it as a choice, at some point you're not going to do it."

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4. Build good credit

If you want great deals on big-ticket items later in life, like your car payments and your mortgage, it pays to establish a strong track record now of paying people back when you borrow money. Getting into the habits that will earn you a high credit score will earn you better rates when you borrow down the line.

If you don't already have one, a no-annual-fee credit card is the place to start, says D'Eredita. "Once you have your budget established, start funneling a couple of bills toward your credit card with a huge red flag to pay it off in full," he says. "You're only sending payments so you can show creditors that you're paying it off every month. But make sure you start small, so you reduce your possibility of failing and going into debt."

Once you've gotten the hang of paying off your first card, it may make sense to diversify your credit by opening another card. "But keep your oldest card open," says Kennedy. "Credit bureaus look at your whole credit history, which shortens when you close that first card."

You can keep tabs on your credit score by signing up for a free monitoring site such as Credit Karma. Some card issuers, such as Citi and Capital One, also offer monthly credit score updates.

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5. Set up insurance coverage

If you're just graduating, no one could blame you if you've never even thought about paying for insurance. "When you're in college and the world can't touch you, it's not likely to be something you're thinking about," says D'Eredita. "But it will become extremely painful if you don't have it when you need it. That's the thing with insurance — it's never needed until it's needed."

You have the option to stay on your parents' health insurance until you're 26, but it still pays to consider what it will cost you and your family for you to be covered when you're applying for jobs, D'Eredita says. And even as a 20-something, you could also benefit from considering disability and life insurance — which are often available through your workplace — especially if you have a friend or relative who cosigned your student loans.

And it's not just you that needs protection. Make sure your stuff is covered too. If you're renting, it's essential to get a renters insurance policy, which will cover the loss of your possessions in the case of theft or damage to the home, May says. Policies also usually provide liability coverage in case someone gets hurt in your home or accidentally causes property damage. Typical policies cost about $15 per month for $30,000 in property coverage and $100,000 in liability coverage.

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