9 Ways Recent Grads Can Achieve True Financial Freedom

Start Planning Early for Retirement by Focusing on Financial Independence

group of college graduates in caps and gowns posing for a picture
Photo: Dan Kitwood / Getty Images News

If you are a recent college graduate you likely have some major life transitions coming your way in the not so distant future. Despite all of the financial uncertainties that may be looming over the horizon it is important to have a financial plan to guide you during the transition.

Financial plans are essential whether you are getting started in your career, moving to a brand new city, or simply trying to upgrade your home or apartment. However, if you are like many other recent graduates you may have trouble thinking about retirement since you may be beginning your life after school. Using the concept of beginning with the end in mind, here are some tips to help you achieve true financial freedom (a.k.a. “retirement” in some circles):

1. Establish a Written Financial Plan That Is Flexible

Just remember that your financial plan will not probably look anything like your parents’ financial plan. You can begin the creation of your written plan by making a list of “SMART” financial goals. But don’t stop there! Be sure to create a list of other important life goals and put them in writing. Some people find that creating a “dream board” is a helpful way to visualize your goals and stay focused.

When you are creating your list of life goals you can also include a separate list of possible life events that may be just over the horizon. These possibilities could be those major unknowns in life that you want to eventually be prepared for and work into your financial planning. A few examples include buying a first home, getting married, having a child, going back to school, or taking a brief sabbatical to travel the world.

Taking the time to create a written list of your life goals will help you stay focused on what matters the most to you during this important season of life. A written financial plan also gives seemingly mundane tasks such as budgeting, saving, and investing more purpose and meaning.

So, how can you make sure that your financial plan is more impactful than “traditional” plans of the past? You can start by keeping your plan short and simple and it doesn’t need to be any longer than a one-page financial plan.

2. Create a Realistic and Flexible Budget or Personal Spending Plan

If you really want to achieve the authentic financial freedom you have to dare to be different than the average person. The average American does not follow a spending plan. Budgeting doesn’t have to be an overly complex or frustrating person. In fact, you simply need to have a plan that provides some general spending guidelines before the month begins.

There are many different budgeting systems that work. Online tracking tools like Mint and YouNeedABudget are just some of the many tools available to help. Here is an easy spending plan using a simple spreadsheet approach. No matter how you choose to create your budget it is essential that you use this spending plan as a guide regardless of your income or net worth.

3. Make Savings Automatic

When you examine your spending plan you should strive to put savings as a top priority. Always strive to save as much as you possibly can, but focus on saving in the right type of accounts. An emergency fund is one of the first places to direct your savings efforts. Most financial planners recommend trying to maintain at least 3 to 6 months of basic living expenses in a separate account from your everyday checking account. This is an ideal long-term goal but it can be a very difficult goal to reach if you are just starting out in a new career after graduation.

During your 20’s and 30’s, there is a tendency to let present bias make it difficult to find the balance between current spending and planning for the future. That is why you will have more success in reaching your goals when you choose to automate savings through payroll deduction or automatic transfers of at least 10% of your income.

4. Realize When It Is Okay to Prioritize Paying off Debt Ahead of Savings

There are a few exceptions to the ultimate goal of keeping 3 to 6 months of living expenses in an emergency savings fund. One of those exceptions is if you have high-interest credit cards or other personal loans. In that case, it is necessary to establish a “starter emergency fund” which may be 1-2k and then make extra payments on that debt with that are above and beyond the required minimum payments.

One of the best financial habits to create early in your career is to always pay the full balance due on credit cards each month.

5. Avoid Future Temptations to Remove Money From Your Retirement Accounts

The days of working for one employer throughout an entire career are long gone. So it’s no surprise that your first job after graduation will not be your last. Many people make the mistake of cashing out retirement plans when switching jobs instead of benefitting from continued tax deferral through 401(k) or IRA rollovers. Not only are 401(k) withdrawals subject to the 10 percent early withdrawal penalty they also rob us of future retirement savings. From my experience as a financial planner, I’ve found early retirement plan distributions to be one of the leading causes of IRS tax problems and a decision most people will end up regretting later in life.

6. Recognize That Your Credit Score Is Important but Does Not Guarantee Financial Freedom 

Yes, it is important to consistently monitor and review your credit…but don’t obsess over it. That being said, you shouldn’t wait until you are ready to buy a car or house to check your credit score. If you haven’t started building your credit while in college, don't worry. You may have to shart small—like with a fixed-limit credit card—but it is something you can do.

You can visit free sites such as the Annual Credit Report.com website to obtain credit reports from Transunion, Equifax, and Experian. Other no-cost resources such as Credit Karma and Credit Sesame. These reports will allow you to view your credit score. The sites and also provide free credit monitoring services that can help alert you when anything unusual happens to your credit. 

A best practice financial action step is to always check your credit report at least once per year and take steps to protect your credit and your financial identity. Just remember that a good credit score will help you qualify for competitive interest rates on future mortgages and can even help you consolidate existing debt to a lower interest rate. True financial freedom will occur when you have eliminated debt and no longer need to rely on a credit score.

7. Focus on Financial Priorities Rather Than Letting Student Loan Frustration Guide Your Decisions

According to recent estimates, the average student loan debt for federal loans is $36,406. Student loans definitely appear extremely overwhelming when you first graduate from school. However, there are a variety of payment options available and it’s essential to recognize that student loans aren’t the only form of debt to be laser-focused on.

Other important financial priorities such as paying down high-interest consumer debt (e.g. credit cards, personal loans) are often viewed as a higher priority. In addition, it is important to establish your financial freedom fund (a.k.a. the “emergency fund”) prior to making extra payments on your student loans.

8. Define What Financial Independence Means to You

I’ve had the opportunity to speak with recent graduates in my role as a financial educator. While many of these financial workshops are focused on saving and investing for retirement I don’t use that word “retirement” too much. After a 16 year career as a financial planner, I personally find the word retirement to be a very difficult concept to define. The reality is that every one of us should have our own unique definition of retirement. But it is extremely difficult for recent graduates to consider the idea of life after work since most grads are just launching new careers.

Instead of focusing on a long-term goal and trying to predict what your future self will be like, place your emphasis on defining what financial freedom looks like to you in the here and now.

What do you look forward to doing the most? How do you enjoy spending your time today? What are some future life goals you want to achieve?

Unfortunately, not all of us are innately programmed to plan for the future and it is easy to let the YOLO principle guide financial decisions. Don’t let present bias derail your good intentions or prevent you from doing any planning for the future.

9. Use the Tax Code to Legally Avoid Taxes and Increase Your Savings

Not everyone has the time, energy, or desire to master the IRS tax code. But if you devote enough time to understanding the basics you will be on the fast track to financial freedom. Start by contributing as much as possible to your 401(k) or retirement plan at work. At a minimum, you should always take full advantage of any matching contributions offered by your employer. Then focus on choosing the right asset location for your retirement savings. The pre-tax vs. Roth 401(k) decision is primarily based on whether you need the tax break now (pre-tax) or in the future (Roth).

If you don’t have a retirement plan available to you through an employer you have the ability to contribute to a traditional or Roth IRA. If you are in a high deductible health care plan that is HSA eligible, contribute as much as you can in order to lower your taxes today. The good news with HSAs is that you will be able to take out this money tax-free anytime for health care expenses and they can help supplement your retirement savings.

From a financial planning standpoint, the years following graduation are an important time to begin laying the foundation to achieve real financial freedom as quickly as possible. Unfortunately, not all schools teach these important financial lessons and experience is often the best way to learn. If you or someone you care about is a recent graduate be sure to celebrate your accomplishments and set the stage as early as possible for an even bigger task—true financial independence.

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  1. Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."

  2. EducationData.org. "Student Loan Debt Statistics."

  3. Internal Revenue Service. "Publication 969 (2020), Health Savings Accounts and Other Tax-Favored Health Plans."

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