When people graduate from college, they typically have little experience managing their personal finances. While some schools do offer financial literacy classes, these courses are generally not required, and many students have no access this type of resource. After graduation, young people often join the work force and bring home their first paycheck, which proves both exciting and overwhelming for someone whose budget was likely always given to them in the past. Below are some of the most helpful tips for new graduates to help them get a head start on a healthy financial life:
Start saving money right away.
Having some savings to fall back on is perhaps the most important part of being a financially responsible adult. While most people understand the importance of saving money, not everyone understands how to actually accomplish it. The easiest way to save money is to automate the process. In other words, have the bank automatically divide any paycheck between a savings account and a checking account. While the amount someone can save will depend upon his or her salary, amount of rent, and living expenses, the main goal is to treat the savings account as an untouchable source of money so that it is there when an emergency arises.
Perhaps an even better strategy is to create two different savings accounts and split all savings between them equally. One account serves as a rainy-day fund that cannot be touched, while the other is a sort of vacation fund. With this strategy, savings becomes rewarding, and individuals will often stretch the budget to save more. However, even $10 from each paycheck can add up quickly, especially when everything happens automatically.
Begin saving for retirement immediately.
Sometimes, graduates think that they can put off saving for retirement because they are so young. However, people who save longer usually end up with more money and less stress in their old age. A great way to start is by taking advantage of any employer-sponsored retirement savings plans, even if someone only intends to stay at the job a short period of time. Sometimes, circumstances change, and most people regret not taking advantage of savings opportunities earlier. It is also important for people to keep in mind that all retirement contributions can be rolled into an individual retirement account (IRA) or into a plan with a new employer.
Avoid accruing credit card debt.
Even before people graduate, they will receive multiple offers from creditors, and these solicitations will only become more numerous as workers begin to make more money. Getting a credit card to use in emergencies or to accumulate miles or other benefits is a good idea—provided that one pays off the balance each month. However, it can be tempting to use the credit card as a crutch, especially as young people move into new apartments and need furnishings or want to splurge on a vacation. Credit card debt adds up very quickly, and people are better off waiting a few months and avoiding interest charges than getting that new couch early. If some crisis arises in the meantime, the cost of the couch could end up sitting on the card for much longer than the cardholder expected.
Understand the implications of existing debt.
New graduates often have to start repaying student loans after a six-month grace period. People should attend to this debt in a strategic manner, which means paying attention to the interest rate of each individual loan and noting whether that rate is fixed or variable. New graduates should focus any additional money beyond the monthly minimum on those loans with the highest interest rates. While this strategy may seem obvious, very few individuals take the time to research the details of each loan, and some loan servicers make it difficult to do so. The online account should state the interest rate of each loan and give debtors the ability to allocate payments differently to each loan. This strategy can save a lot of money in the long run.
Of course, individuals who have other types of debt, such as a car loan or credit card debt should also look at the specifics of those accounts. Because credit cards tend to carry very high interest rates, people should pay them off first. However, car loan interest rates can vary quite a bit, so sometimes it might also make sense to focus payments on them or shop for a new loan with a better rate.
Create and follow a monthly budget.
While budgeting is not a trending topic among young people, it is crucial to maintaining financial stability. When new graduates do not make a budget a priority, they can fall into the habit of just spending what they want and thinking that they do not need guidelines. People enjoying the novelty of their first disposable income need to be especially diligent about figuring out how much they want to spend on frivolity and how much they want to save. The other important aspect of establishing a budget is that it must be updated whenever a change occurs. If someone purchases a new cellphone that requires a more expensive plan, then that person needs to update his or her monthly spending for utilities and subtract the difference from another budget category, like entertainment or eating out.