‘Tis the season for caps and gowns! Congratulations on your graduation and job, as well as your intelligent desire to take smart steps to secure your financial future in the longer term. The unfortunate fact is many college graduates may land great jobs but will end up creating years of debt and poor credit because of bad spending habits.
Below are several tips for college graduates who want to establish and maintain a robust financial future.
Create a budget
Building a budget is relatively simple. Begin with your monthly inflow (net pay after appropriate tax withholding). Next, make a list of monthly cash expenses classified in two columns – needs versus wants. For example, money for rent, food, student loan payments and the like are examples of needs. Your “wants” may include a gym membership or a Netflix subscription. You may need a car to get to and from work. However, based on your salary and other expenses, you should purchase an automobile in a price range that fits into your budget. See how all of these expenses add up against your monthly inflow, and adjust accordingly.
Student loan payments
Since most student loans don’t require payment until graduation, the monthly requirement can cause sticker shock for many graduates. If you are able, consider budgeting for more than the minimum payment required to help pay down those loans faster.
When it comes to creating a healthy financial future, you must apply patience and avoid instant gratification when it comes to your finances. Do you really need a new car or could you find a used car with lower monthly payments? If it is an option, how much could you save if you took advantage of public transportation? To be truly productive in your financial planning, you must understand the relationship of time as it relates to growing your money.
Consider the concept of compounding
The “magic” of compounding is that the return to your account in a single time period becomes the basis for your return in the next. At a modest six percent rate, an investment will double in value every twelve years. One of the biggest financial blunders many young people make is waiting until later in life to start saving for their future. Unfortunately, the longer you wait to begin saving, the more money it will take to reach the same financial goal.
Start your nest egg
Start contributing to your company’s 401(k) plan, if offered, as soon as you are eligible. Many young people begin by contributing a small percentage of salary now and then increase the amount in the future as they get raises. The 401(k) contributions are invested before taxes (or after taxes in the case of a Roth 401(k)) and your account balance has years to grow and compound. In addition, your contributions may be matched by your employer, making your nest egg that much bigger.
Use credit wisely
While many credit cards offer a tempting array of perks or points, don’t fall victim to credit card promotions. Unless you are able to pay your credit cards off each month in full, you shouldn’t use them. By avoiding credit card debt and paying your bills on time each month, you will also build a positive credit rating which will be important the next time you shop for a loan or insurance.
Have a back-up plan
Things happen, so it’s important to be financially prepared when your cell phone breaks or your laptop stops working. You should begin putting money into an emergency fund immediately with a goal of accumulating at least 3 – 6 months’ worth of your expenses. Having an emergency fund will also keep you from racking up credit card debt, when say, your used car requires costly repairs.
As you progress in your career and your life, your responsibilities and financial goals will change. Educate yourself as much as possible about personal finance by reading articles and books, and talking to experts. Wealth is not created by how much you make, but by how much you keep.