Best budgeting strategies for college grads, 20-somethings

GenWealth Financial financial advisor Teresa Arrigo joins Yahoo Finance Live details the best strategies to begin saving, avoid debt, and prioritize investing for recent college grads and younger U.S. workers.

Video Transcript

RACHELLE AKUFFO: Well, it's graduation season. And the young people entering the workforce now are coming into an uncertain macroeconomic environment. But how can they best set themselves up for financial success? Our next guest has some tips for you. We have Teresa Arrigo, GenWealth Financial financial advisor.

Thank you for joining us this morning, Teresa. So as we're seeing a lot of these new grads perhaps getting ready to get their first paycheck, when you think of budgeting and saving, you immediately think restricted. Your eyes glaze over. You're like, no, I just want to spend my money and have fun. What are the biggest selling points in really getting your budget and your savings plan sort of fortified right out of the gate?

TERESA ARRIGO: Yes. Thank you so much, Rachelle, for having me. I love that you guys are taking some time to focus on this, because there's such a great opportunity when you've completed your degree or your training program to set some good boundaries in place. So I think of a budget is kind of like a fence. If you are building your house, you're likely to put up a fence to create some boundaries.

That's the beauty of a budget is it creates some boundaries to align your spending habits with your values. And if you do that properly, then that opens up a lot of other opportunities for you through savings, whether that's having emergency savings to avoid debt and build really healthy habits, or if that's getting started on investing. And what I love to think of when we talk about investing is small steps really do add up. So those day to day decisions in your budgeting help you create margin for saving.

And imagine this. If you started at age 22 saving for retirement in a Roth IRA, and you put $100 a month, so we're not going crazy with numbers here, but if you were able to do that until age 65 and earn 7% average return, which is not anything fancy, you would have over $350,000 saved up already just through that one small move. And if you got 8% return instead, then you're up to $489,000. So even just a small step like that over the long haul can really add up over the long term. And by the way, you would have only invested a little over $51,000 to get there. So that's a huge benefit of that.

And then the next thing that I would encourage you to consider-- oh, go ahead.

RACHELLE AKUFFO: Well, I was going to ask, since you brought up a Roth IRA, so you have like traditional IRAs, Roth IRAs, your potential employer offering you a 401(k). How do you weigh out the best option for you?

TERESA ARRIGO: So that's a great question. When we're talking to our clients about the priorities of investing, first you've got to have savings because you don't want to have to dip back into your investments. Second thing you want to do is really maximize your employer plan. Some employer plans do have a Roth option in them. Some just have pretax, which is OK too. But you want to make sure you're getting the full match before you do anything else.

And then if you have the option of doing a raw because there are some income requirements to that, so if you have the option of doing a Roth versus a traditional, the biggest difference is that at retirement all that money is tax free. Of course, you're giving up the tax benefits on the front end when you do the Roth. But usually when you're first starting out in your career, you're getting a refund anyway. So there's not a huge benefit of using the pre-tax if you don't have to.

RACHELLE AKUFFO: And so what are some of the common traps that can derail your savings and investment goals, especially when you're just sort of starting out and trying to figure out how you should prioritize your money.

TERESA ARRIGO: So one of the biggest ones that we see is overspending. I think in general Americans have this habit of living right up to their means or just past it, which is why we have so much debt here in the United States. So the first thing is not having emergency savings or not having good spending habits in general. Another one we see is what we call lifestyle inflation.

So as you get new jobs, you increase your expenses in kind of in alignment with that. And then another huge opportunity missed is if you have moved from one employer to another and you liquidate that old employer plan, and you use it, you're going to pay some penalties on that. The general penalty if you're under age 59 and 1/2 is 10% of the withdrawal. And then it's also taxable as income to you.

A lot of people don't realize you can take that employer plan and move it to the new employer, if they'll accept rollovers, or you can transition it to a traditional IRA or a Roth IRA depending on how it was sitting in the old employer and keep it invested for your goals.

RACHELLE AKUFFO: And you certainly don't want to leave money sitting on the table, especially with those taxes coming in as well. A big thank you there to Teresa Arrigo, GenWealth Financial financial advisor. Thank you for your time today.