You’ve graduated, and all of life is ahead. It’s an exciting, exhilarating time. But once the streamers have settled, the parties have wound down and your tassels and hat is packed away, real life settles in. And that’s a good thing. It’s a great thing. Your future awaits. What you do with it… will be up to you.
Personal finance is something you’ll be dealing with for the rest of your life. Getting started on the right foot will give you the right resources to make the rights decision, which will allow you to live the life you’ve always dreamed.
Money Tip #1: Create a Budget
Once you’ve landed your first job and begin earning an income, it’s awfully tempting to buy that pair of $300 designer jeans, or that $1,000 handbag or … the latest release tech gadget. It’s hard to say “no,” or at least “wait.” Or… “we’ll see.” The good news is, the splurge may be totally fine. You just have to do some legwork first.
You have to make a post-graduation budget. Or at least a practice budget if you’re still living with your parents.
Begin to determine what your living costs would be or will be in the following areas: rent, utilities, food, transportation, student loans, health insurance, savings, charitable giving, and clothing, entertainment, and fun. Add it all up and set some financial boundaries.
Using the “50-30-20” rule, you should allocate 50% toward needs such as rent, utilities, and groceries. Thirty percent goes toward “wants” such as shopping, entertainment, restaurants, and fun. The final 20% goes to your savings and debt repayment. If your student loans are substantial, you may need to allocate 30% toward debt repayment and 20% toward “fun” money.
Getting used to living on a budget and spending less than you earn right out of school creates good financial habits for the future. And will set a tone of financial success that will follow you as you set up a household and eventually raise a family.
Money Tip #2: Set Goals
In addition to creating a budget, it’s equally important to set goals. Put some thought into it. “You have to give your money purpose and direction,” says Farnoosh Torabi, host of the podcast So Money and CNBC’s Follow the Leader. “Think about where you want to be in a year, and what you’re willing to give up to accomplish and afford those things.” If you’re aiming for grad school, think about ways to reduce your expenditures, perhaps moving back in with your parents. In life, there are always choices and sacrifices to make. If you have an end goal in mind, it is easier to make those sacrifices. And the gratification you feel once accomplishing those goals is more satisfying and far outweighs the sacrifices. As you set goals, keep in mind some priorities. Experts say they should be:
Establish an Emergency Fund (Monthly Income x 6 = Minimum Amount to Save)
Save for the Future (Retirement, Real Estate, etc.)
Money Tip #3: Begin Saving Now
It may seem impossible right now, but any money you can put toward savings will be more helpful than you can guess. An emergency fund is essential for life’s surprises, like when the car breaks down, you spill a glass of water on your laptop and it needs to be replaced, you lose your phone (and you didn’t have replacement insurance).
Once that fund is established, it’s important to begin saving toward your future. Most employers offer 401(k) retirement plans and many offer some form of a match. This allows you to begin investing a portion of your paycheck, tax-free, toward retirement. Many employers also offer a match, up to a certain percentage of what you contribute. And if you don’t take full advantage of these programs, you’re walking away from free money. Even if all you can contribute is $25 – $50 a month, it will multiply more than you would imagine.
In addition to contributing to a 401(k) or Roth IRA, begin setting money aside for saving. Automate it. Every time you’re paid, set up an automatic deduction into a savings account. Imagine if you put aside $50 a month, every month, beginning at 18. And you didn’t touch it. And you earned a minimal interest rate. By the time you were 65, you would have earned around $36,000 for a minimal monthly contribution.
Money Tip #4: Protect Your Credit
Protecting your credit score is vital. Bad credit makes it difficult to get a good job, get approval for leases or purchases, or get a favorable interest rate on loans. Employers almost always run credit checks. Paying bills on time is key to protecting your score. “Missing even a single bill payment means you’ll not only get hit with fees, but you’ll see your score plunge,” says Beth Kobliner, author of “Get a Financial Life: Personal Finance in Your Twenties and Thirties.” Automate your payments for regular expenses when you can.
Money Tip #5: Less is More
Get used to living below your means, says Teresa Ghilarducci, a labor economist at The New School and the author of How to Retire with Enough Money. Create a budget that covers your fixed monthly costs and includes regular savings (ideally 10% of your earned income) but also leaves wiggle room to cover the inevitable surprise expenses. Expert advise having 3 months salary in the bank for surprise expenses. Others advise a year. It’s challenging but with determination, you can do it. Just look what you’ve already accomplished. You’ve graduated!