Graduating from college and entering the workforce is an exciting endeavor, but it can also be a stressful one. For many college graduates, it is the first time they will be taking on full adult responsibilities. Some of the biggest responsibilities they will face are related to finances. Unfortunately, the American education system offers little in terms of required financial education for students in high school or college, and some new graduates can feel like they are unsure of what they are doing.
Understanding a handful of personal finance basics right off the bat can help you make smart money decisions that set you up for success down the line. Moreover, this knowledge can empower you to reach your financial goals faster. Some of the key things for college graduates to know include:
1. Budgeting is extremely important.
The concept of budgeting can seem frustrating or limiting, but it is actually a powerful habit that can be very freeing. Budgeting simply means ensuring you live in a way that allows you to reach your financial goals. In addition, budgeting forces you to think about what is important to you so that you do not waste your money on frivolous expenses that will only impede your goals. College graduates should create a budget at graduation and then again whenever a major financial shift occurs, such as a new job or a raise. While it is possible to use apps to create a budget, you can also just stick to pen and paper if that works better for you. Figure out your preference early and stick to it.
2. You should live below your means.
Many college graduates are excited to finally have a salary, so they can be tempted to create a lifestyle that consumes all the money they earn. This approach to personal finance is, of course, unwise. You should always be prepared for an emergency, but beyond that, you need to have savings to help you achieve your goals. Living below your means lets you put money aside to deal with unexpected expenses; it also allows you to invest so your money can grow toward your goals. The worst decision is living beyond your means, which means you will accrue debt that is difficult to pay off and will force you to live below your means later in life. Starting at that point now puts you in a much better position later.
3. Credit card debt is hard to pay off.
Because new graduates often need to buy clothes, furniture, and more, using a credit card can be extremely tempting. Credit cards are a great way to establish a positive credit history, but you will need to be smart and avoid carrying a balance.
While credit can seem like free money, the interest on these charges will accrue quickly if you cannot pay off the bill each month. Always pay close attention to interest rates, fees, and penalties for late payments. If you charge too much, you could end up drowning in the debt.
4. Salary is not the only thing that matters.
As you look for your first post-college job, it is natural to focus on salary. However, you need to consider many more factors when you look at a job offer. Pay attention to medical and retirement benefits, as a job with a lower salary may turn out to be a better choice if it also covers medical insurance and offers a match for retirement savings. In addition, think about the amount of paid vacation being offered and any other extras that a company may use to attract you, such as equity. Only compare job offers once you know all these factors.
Also, it is important to remember that salaries are negotiable. If you love a job but feel like you need higher pay, you can bring that to the table and see if the company will increase the salary.
5. Compound interest is extremely powerful.
An important lesson in personal finance is the power of compound interest. Compound interest can work for you or against you, so it is important to be strategic. If you are paying down student loans, you will see compound interest working against you. However, you can counter this with a solid investment plan. Begin investing early to take full advantage of compound interest even if that means nothing more than contributing to a 401(k) up to the match. If you do not have an employer-sponsored retirement account, you can set up your own. Since you will earn interest on interest over time, even a small amount of savings in your first job can leave you with a lot of money in the bank down the line. This is especially true if you are saving for something that is many decades in the future, such as retirement.