New Beginnings, Lasting Success: Financial Tips for the Class of 2025

Graduation season is here, and with it comes a celebration of ambition, hard work, and bright futures. The Class of 2025 is stepping boldly into a world full of opportunity, and we couldn’t be happier to join in recognizing this significant milestone.

Whether you're a graduate, a parent, a grandparent, or a mentor, this is a moment worth honoring — and a perfect time to share practical wisdom for the journey ahead.

In honor of the Class of 2025, we offer our congratulations and a few timeless financial principles to help pave the way for a strong and confident financial future.

Rule #1: Spend Less Than You Earn

The first financial rule is simple yet powerful: spend less than you earn. New graduates often receive many enticing credit card offers. It is important to remember, relying on credit for daily expenses can quickly lead to unmanageable debt. Focus on budgeting carefully, paying off high-interest debt, and building healthy financial habits from the start.

There are many ways to earn more income – including getting a part-time job in addition to your full time job or having a focus on professional development and continuous improvement with goal of earning a higher income. Small steps in the right direction can go a long way.

Rule #2 Build An Emergency Fund

Unexpected expenses are a part of life. Creating an emergency fund with three to six months’ worth of living expenses is one of the best ways to protect your financial health and avoid dipping into savings meant for future goals.

Rule #3 Start Early

Time is one of the most valuable tools in building wealth. Many grads will have the opportunity to open and contribute to a retirement savings such as a 401k or Roth IRA after graduation. Even small, regular contributions can grow significantly over time thanks to the power of compounding.

"Two things work – people and money – and the sooner and harder money works, the sooner people can be done working," shared G. Ward Keever IV, CLU, ChFC, RHU, AEP, CFS, AIF, CKA, CEPA®, President and CEO of Covenant Wealth Strategies.

Spotlight: Why a Roth IRA Matters

A benefit of using a Roth IRA is that it provides tax sheltered growth and tax free withdrawals of that growth once you reach age 59 1/2, because Roth IRA contributions are made with after-tax dollars.

To use an agricultural analogy, if you were given the choice to 1) get a tax break on the seed that you plant in the ground and then harvest the entire crop and pay taxes on that, or 2) pay tax on the seed before you plant and then gather the entire harvest with zero taxes, which would you choose? A Roth IRA is like the tax free harvesting of the entire crop! 

Rule of 72

Have you heard of the Rule of 72? The Rule of 72 is a formula that calculates approximately how long it'll take for an investment to double in value based on its assumed rate of return. The Rule of 72 applies compounded interest and can be applied to anything that increases exponentially, such as GDP or inflation.

For example, if you invest $5k into a Roth IRA at the age of 21, and that investment earns approximately 10% over the life of the investment, by age 28 you should have approximately $10k. You can follow the pattern below:

Age 35 = $20k
Age 42 = $40k
Age 49 = $80k
Age 56 = $160k
Age 63 = $320k
Age 70 = $640k! 

This illustration* above is only reflecting the initial $5k investment and does not include additional contributions that one could make. Additionally, withdraw earnings could be taken out tax free after the age 59 1/2 since it is a Roth IRA.

If you waited only 7 years to begin, you would have $320k less at age 70. Important lesson here - Don't wait!

Dollar Cost Averaging

Another concept that new investors should familiarize themselves with is called dollar-cost averaging. This is a technique that entails investing a fixed amount of money into the same investment at regular intervals over a long period of time. This is particularly relevant and important to keep in mind as the market fluctuates. Contributing regularly each month to a 401k plan is a good example of dollar-cost averaging.

It has been stated, "the best way to predict the future is to create it." We encourage you to share our best practices with the recent graduates and young adults in your life that you care about.

On behalf of our entire team at Covenant Wealth Strategies, we would like to congratulate this year's graduating class for their accomplishments and hard work! We encourage you to Contact Us to learn more about "Strategies for Your Success".

Disclosure:

*This illustration is hypothetical and does not guarantee future results.

The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.

Qualified withdrawals of earnings from the Roth account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

With Dollar Cost Averaging, an investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

This material is for general information only and is not intended to provide specific tax, legal advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. The content is developed from sources believed to be providing accurate information.

Source
https://www.investopedia.com/terms/r/ruleof72.asp