You may have graduated from college recently, or expect to in the coming months. Either way, you’re about to enter an exciting period of your life – perhaps a new career, armed with the education you’ve received over the past few years. You’re ready to go!
But what about your finances? With all that you learned in college, it’s a good bet that personal finance wasn’t part of the agenda. It’s a shame because how you manage your finances – especially in the next few crucial years – may be every bit as important as what you do in your career.
Now is the time to make most of the important money decisions in your life. And most of these are habits that need to be initiated and nurtured now when you’re just starting out. How successful you are in embracing good money habits will go a long way towards determining what kind of future you’ll have.
If you work hard to implement these tips into your financial plans in the next few years, your financial future should see smooth sailing.
1. Don’t Buy a New Car
One of the first “must haves” on any college graduate’s list is a new car, but it can be one of the biggest mistakes if it’s purchased mostly with debt. The problem isn’t the car loan itself, but the fact that so many recent grads come out of school with a substantial amount of student loans and credit card debt. Adding another large monthly payment to an already sizeable debt load can put you on a debt treadmill that may take years or even decades to get off of.
It’s better to buy a decent used car – with a large down payment – and keep the monthly payments as low as possible, at least until your job and income are more stable and the debt hangover from college is well under control.
2. Don’t Buy a House
When I was in the mortgage business, it was common to see people buying homes fresh out of school. In most cases, the homes were purchased with gift money for the down payments and co-signatures from parents in order to qualify for the mortgages. Financial translation: junior really isn’t qualified to buy a house.
Buying a home and investing in real estate will have it’s time in your life, but there’s no need to do it right out of school. For one thing, owning a home generally costs more than renting (i.e. renting vs. buying a home). But perhaps more important is that you’re in a transitional phase coming out of college and owning a home could mean less job mobility. In today’s real estate market it may not be possible to sell a home quickly and follow a job to a new city.
Wait until your life becomes more settled and your future direction is clear. In the meantime, find a cheap apartment for rent and keep your options open.
3. Start Building an Emergency Fund
Saving money is the basic foundation of financial success, but it’s often thought of as something that can be done later in life. The problem with that way of thinking is that saving is a habit, and the earlier it’s developed the better. Start saving when you’re 21 or 22, and you may have a nice bankroll by the time you’re 25 or 30.
But closer to the present, it’s more important than ever to at least have an emergency fund of a few thousand dollars available. Jobs are less stable than they have been in recent memory and the need for savings to supplement an unemployment check has to be prepared for. Additionally, having savings readily available helps to avoid tapping into credit cards any time money is short.
4. Avoid Using Credit Cards
Young adults can be more susceptible to the attractions of credit cards than most. The combination of unbridled optimism with the need for so much stuff can get you buried deep in outsized balances in no time at all. Credit cards are a vicious cycle, because of the revolving term and the fact that it’s so easy to charge when money is tight. And interest charges are added on while the process flows on.
The best way to deal with a credit card problem is to avoid getting into it in the first place. Pay for your purchases out of income or savings, and if there isn’t enough of either, don’t buy at all. Know the difference between needs and wants.
5. Start Funding a Retirement Plan Now
If you’re facing a large number of expenses – as many young people do when they’re starting out in life – this can be a tough one to swing, but one well worth doing. If you have a 401k plan at work that offers a company match, put as much of your paycheck into it as you can afford. If you can’t put in much, don’t sweat it, put in as much as you can. A little is better than nothing at all.
Retirement savings are another one of those good habits, and small contributions made early in life can get you started on the right path. Because of compound earnings, the sooner you start this process, the better off you’ll be in the long run.
6. Pay Off Your Student Loan Debt Now
Yes, the monthly payments on your student loan are small in relation to the loan balance, and yes the interest rates are probably the lowest you’ll ever pay on any debt at any time. But debt is debt, and no matter how attractive the terms, it will have to be repaid. Do you want to be carrying these loans when you’re 35 or 40 and have other obligations?
Obviously you’ll want to pay off any credit card debt before taking this on, but the sooner you can, the better. Debt – even “good debt” – is not a good traveling companion in life.
7. Don’t Stop Learning Because You’re Out of School
Even though this tip has little to do with spending or saving money, it can have a bigger impact on the future of your finances than anything else you might do. No matter how well you’re able to invest your money, you will almost certainly earn more money from your career than you will from any investment or combination of investments.
The job market is more competitive than ever, and promises to be even more so in the future. The best way both to survive and to increase your future income stream is to invest in yourself and commit to continually learning and growing in your abilities. Learn more about your job, your company and your entire industry. The more you know, the more you can do and the more valuable you will be to your employer or to future employers. Develop enough job skills and you may be paving the way to starting your own business.
If you’re a young adult starting fresh in life, you can choose to develop the habits of either a debtor or a saver. Which path you choose may be the most important money decision you’ll make in your life.
Do you have any other tips for new graduates starting out?