Hey all you soon-to-be college grads: Congratulations! Whether you have a great job lined up already or not, there’s no doubt that the real world is eagerly awaiting you! Even if you majored in finance, however, there is at least one big challenge waiting for you, too: handling your personal finances.
The truth is that being a wise steward of your resources is rarely taught in college, let alone high school. And sadly, most of our parents don’t have the best skills in this arena, either. Rather than learning through costly trial and error, you can put these 8 tips in action to ensure that your transition to the “real world” goes as smoothly as possible.
1. Keep living like a starving college student.
For the past four+ years, you’ve probably had to get by on a relatively small budget. Which is good. It will be easier to be frugal with your money, since you already have been. You aren’t used to eating at the finest restaurants or buying the most expensive clothes. Hopefully you have already landed a job — and if you have, it may seem like you are rolling in the dough. But by keeping your daily living expenses low, you will have greater flexibility to tackle other personal finance goals, such as debt repayment and savings.
2. Learn how to budget.
Before you spend a dime, sit down and make a budget. You can find great budgeting tools online for free, such as Mint.com, or you can make your own budgeting spreadsheets on Excel. And the truth is that a pad of paper and pen will work just as well. The important thing is to be intentional about how you will spend your money. Right it down and let that piece of paper become your spending manifesto. If it’s not on that piece of paper, it doesn’t get spent. Period.
3. Create an emergency fund.
Remember when your grandparents used to say, “Pay yourself first”? That was great advice! The first step to following that advice is to create an emergency fund. You should put aside three to six months worth of expenses in a relatively liquid savings vehicle, such as a short-time CD or money market fund. Whether you have $10 or $1000 to save each month, the important thing is that you are forming the savings habit. The easiest way to do it? Set up an automatic deduction from your checking account.
4. Start saving for your retirement today.
You just graduated from college. You have your whole life ahead of you. Retirement is a good 40 or 50 years down the road, so the last thing on your mind is probably saving for it. Don’t make that mistake.
Let’s say you are 21 years old and you can afford to put $30 a week into your 401K Plan. You do this for the next 14 years, and then at the age of 35, you stop contributing and never save another dime. Assuming a 10% rate of return, you will have $572,000 by the time you retire at the age of 61. Now let’s look at the save later model. Say you don’t save a dime for the next fourteen years, but then you hit 35 and realize that retirement isn’t so far away after all. You start putting aside that same $30 a week for the next 26 years. (Not 14 years, like in the first example, but 26 years!) When you retire at the age of 61, guess how much money you’ll have? $187,000. That’s a loss of $385,000. Still think you can afford to put off saving for your retirement?
5. Be smart about your student loans.
I have covered this topic extensively here on the Financial Aid Finder, so rather than reinvent the wheel, I’ll just suggest that you check out some of these links:
- What you need to know about repaying your student loans
- What happens when you default on your student loans
- Do good deeds. Pay off your student loans.
- The real cost of paying back your student loans
- 10 steps to prevent defaulting on your student loans
6. Check your credit report annually.
Once a year, you can and should check your credit report for free at annualcreditreport.com. Your credit report will include your debt to income ratio as well as your repayment history on all loans, from credit cards to student loans to car loans to mortgages. If you find any irregularities, report them immediately to the credit bureau and make sure to follow up with the reporter. For more on how your score is calculated and what it can mean to you in the future, visit whatsmyscore.org.
7. Buy your cars with cash.
Sure, you could take out a loan to buy a car (assuming your credit score is decent — see Tip #6.) But if you want to live below your means, then you need to start by living within your means — which means paying cash for your car. If all you can scrape together is $1,000, then drive a $1,000 car for now. It’s not forever.
8. Insure yourself properly.
Assuming you are renting, you need to take out renter’s insurance. Premiums are typically cheap, but in the event of a catastrophic loss, you’ll be glad you spent that $12/month. Hopefully your job provides health insurance, but if not, make sure you get some. Look into a high deductible plan with a Health Savings Account (HSA) to keep your costs to a minimum. And finally, buy disability insurance. Not convinced you need disability insurance? Chew on these facts: One in three Americans will become disabled for more than 90 days by the time they reach the age of 65. One in seven will be disabled for more than five years.
Do you have a question about your personal finances post-graduation? Do you have a great money management tip to share? Please post your questions, thoughts and ideas in the comments section.