Graduation is a start of a whole new chapter in a young person’s life! It is exciting, a little scary, and monumental in many ways – not the least of which is about money. Many new graduates find themselves making expensive mistakes in the first year or two out of college. Those mistakes are easily avoidable with a little awareness and planning. Here are my top 5 tips for the new graduates in your life!
Have a budget.
Nope, doing it “in your head” won’t cut it. You must actually sit down and write out how you plan to match your cash inflow with your outflows. Don’t get too detailed on expense categories: rent, utilities, transportation, groceries, and student loans should get you started. The goal is to spend less than you make. Use an app like You Need a Budget or Mint to make budget-maintenance as painless as possible.
Build an emergency savings fund.
Murphy’s Law states that if something can go wrong, it eventually will. That’s why everyone needs an emergency savings fund. I cannot predict if it will be used to pay for the new breaks for your car, a medical bill, or a new laptop – but I promise that when an unexpected expense comes up, you will be happy to have that money squirrelled away. Make it a personal goal to accumulate 6 months’ worth of your living expenses. Keep it in a bank savings account or a money market account – separate from the rest of your finances, but easily accessible in the event of a money emergency.
Remember about taxes!
One of the questionable “perks” of adult life is that you are now responsible for your own taxes! Not only will you have to file on time, but you may also have to pay them – especially if your employer makes a mistake on the withholdings (not uncommon for your first year of employment), or if your employment changes during the year. How do you insulate yourself from the financial shock of having to make a tax payment come April 15? You guessed it – save up just in case!
Watch for “lifestyle creep”.
Sometimes, having a low-paying job out of college is a blessing in disguise. It forces the graduate to make a slow adjustment and maintain a modest lifestyle – in contrast with someone who is making what feels like a million dollars for the first time in his or her life. Ask yourself whether renting that loft and buying a new BMW is the best decision in the long run. Don’t fall for the common “I deserve it!” line of thinking, and don’t use credit cards for anything other than emergencies.
Take advantage of your employer’s 401k or similar plan.
No, it is not “Too soon”. In fact, your biggest advantage is that you have many years ahead of you, which gives your retirement savings time to grow. Remember that your employer’s matching is essentially free money to you, so set up your contributions to take maximum advantage of the match (for most employers that means contributing between 4 and 6% of your paycheck).
Finally, don’t dip into the 401k savings unless you truly have no other options. Not only do you have to pay a hefty penalty come tax time, that money is better left to grow untouched over the next 25 years. By raiding that piggy-bank early, you rob yourself of compounded growth.
Bonus point: Remember your health insurance!
Sure, you are young, healthy, and virtually indestructible. That does not mean you are 100% accident-proof. Sudden illnesses and injuries do happen, and health insurance can help you pay the medical bills without taking a devastating financial hit. The Affordable Care Act allows you to remain as a dependent on your parents’ plan until 26 if you cannot get health insurance through your job. If employer-sponsored or parent-backed insurance is not an option, research the plans that you can buy on your own.
Life after college: money advice for the new graduate
Finally, don’t let the complexities of money management discourage you. After all, financial planning is just another way of putting your life’s priorities into action. Whether you want to pay down your student loans, buy a house, travel, start your own company, or get married, getting a good handle on your finances can create opportunities that are simply not available to someone without a budget. Financial freedom does not just happen – but with focus and discipline, you can create your own future. That alone makes the effort well worth it.
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