more, spending less, paying for college. These might be
some of the financial resolutions you make for the New
you meet these goals will depend on what lies ahead for
2016. What will you be studying in college? If you’re
working full time, is your job secure? And does your
employer make matching contributions to your 401(k)?
and longtime personal finance writer Jonathan Clements
(his latest book, Money Guide, has been updated for
2016) recently explained in a phone interview why these
questions matter. What follows is an edited version of
If your financial resolution is to build an emergency
fund in 2016, how much should you save?
No. 1 reason for an emergency fund is if you lose your
job. So how much money you need depends on how secure
your job is. If you work as a teacher or government
employee, saving three months’ worth of expenses is
probably fine. If you work on commission, your job is
probably less secure and so you might want to go for six
months of expenses.
up an emergency fund is one of the least exciting things
to do financially, but it should be a high priority
during the first few years that you’re out of school.
Once you have it, you’re set for the rest of your
What if you want to buy a home?
about how long you plan to stay in a home because the
cost of buying and selling property is exorbitant. Round
trip, you will pay roughly 10 percent of the home’s
value once you figure in closing costs, legal fees,
moving fees and, most importantly, the brokerage
commission you’ll pay when you sell the house. So if
you’re in a home for less than five years, there is a
good chance you won’t make any money, even if property
prices appreciate at a moderate rate.
What’s a good way to squeeze out more savings from
is a piece of advice I give to people in their 20s all
the time: If you can, keep your fixed living costs —
including housing, car payments, insurance premiums,
groceries and utilities — to 50 percent or less of
your pretax income. Do that and you’ll have money to
save and money to go out on Friday nights.
What if your goal is college this year? How should you
decide what school you can afford?
need to think really hard about how much student loan
debt you’re going to take on given the earnings you’re
likely to have over your lifetime. It makes sense to
take on debt when you’re young because you have
decades of paychecks ahead of you to pay back those
loans, and college itself is a great investment. But you
should not be taking on $80,000 in debt if your
prospective lifetime earnings are low. To figure that
out, use the new CollegeScorecard.ed.gov, which shows
you a school’s costs, graduation rates and salaries of
graduates. It’s a really cool tool.
Should saving for retirement be a resolution for 2016?
you’re a freshly minted college graduate, age 22, it’s
really hard to look ahead four decades and think about
retirement. But the fact is, retirement should be a
priority from the day you enter the workforce. At that
point, you may not be able to afford to put away the
recommended 10 percent or 15 percent of your income
toward retirement. But if you work for an employer that
offers some sort of matching contribution to the 401(k)
or 403(b) plan, be sure to put in at least enough to get
the full match. The matching contribution is free money.