When you’ve recently graduated from college, the world can seem like your oyster. After four years of unpaid internships or part-time jobs, you suddenly can see full-time employment with a full-time salary on the horizon.
But sometimes, finding a full-time job can be more difficult than you thought it would be – and you may find yourself still at that part-time job, even though you have a degree in-hand. And even if you do land a full-time job, your post-graduation salary might not be as high as you thought it would be.
Life after college may not be the financial paradise you expected. In fact, you might be wishing someone had told you how complicated it was going to be. While you can’t go back in time, you can do your best to prepare for the future by getting your finances in order, no matter how much or how little you make. Here are several pieces of advice that can help you get on the right track.
1. Figure Out Your Budget
One of the best things you can do when you’ve just finished school is live below your means. Now that you’re making more than $7.50 an hour, you might be tempted to start splashing out on fancy things, such as $250 designer jeans or that $300 duvet you saw at Crate & Barrel. While splurging occasionally to avoid frugal fatigue is totally fine, you do want to give yourself some boundaries. The best way to do that is to create a post-graduation budget.
When you make a personal budget, you tally up your income and expenses, then compare the two. There are a variety of budgeting methods out there, and it can take some trial and error before you find one that really clicks with you.
The Practice Budget
Much of the budgeting advice out there assumes two things: that you have an income, and that you know what your expenses are. If you haven’t found a job yet, you don’t know what you’re going to earn. If you haven’t moved out of your parents’ house yet, you may not have a clear sense of your expenses.
You’re not off the hook when it comes to budgeting though. Now is the time to make a best guess about what your after-college budget can be. Do some research to give yourself a ballpark figure for some common expenses and the average entry-level income in your field.
- Rent. Find out what the average rent is in the area you plan on living in. You can browse current apartment listings on Zillow or Craigslist to see what studios or one-bedrooms go for, or take a look at average rent figures for the area on a site such as Rent Jungle. Although you might be tired of living with others, don’t rule out life with roommates at this point. Take a look at what it costs to share an apartment or house.
- Utilities. Get an idea of what you can expect to pay for utilities when you finally get a place. Ask former classmates who live in the area what they pay. You can also drop by the leasing offices of neighborhood apartment complexes and ask which utilities are included in the rent and which ones aren’t.
- Food. The USDA offers handy reports that tell you the average amount people spend on groceries weekly or monthly based on age and gender. Your dietary habits might differ from others, but you can use the reports to estimate what you’re going to spend on food each month.
- Transportation. Look at the monthly cost of a transit pass in the town you plan on moving to. If you own a car, you probably already know what it costs to own and use it every month. Keep in mind that moving to a new state or city can mean a change in the cost of insurance and gas. If you’re getting your own car insurance policy after being on Mom and Dad’s for years, expect a rate increase.
- Student Loans. Whether or not you are going to wait the full six allotted months after graduation to start repaying your loans, you most likely already know the monthly amount due. If it seems high, and you have federal loans, consider enrolling in a different payment plan, such as the Pay as You Earn Plan or the Income-Based Repayment Plan. Both options reduce your monthly payment based on your income, but extend the repayment term.
- Health Insurance. Here’s some good news about health insurance: You can stay on your parents’ plan until you’re 26, thanks to the Affordable Care Act . That means that this might not be an expense you have to worry about just yet. If you do have to think about health insurance, you can browse plans on the HealthCare.gov marketplace to get a sense of what you need to pay each month.
- Savings. It’s hard to think about savings when you don’t have income yet, but you do want to leave some room in your budget for an emergency fund and retirement savings. Use a placeholder figure here for now, such as 10% of your anticipated income, and adjust it as needed when you start working.
- Clothing, Entertainment, and Life in General. This last category can be the most difficult to budget for, as it can fluctuate the most. For example, you might need to spend more one month on a pricey winter coat or a new suit. Look at your spending in college to get a decent sense of your random expenses in life each month. If necessary, this is the category you cut from first to make ends meet.
Guessing your anticipated income shouldn’t be that difficult. The Bureau of Labor Statistics has details such as median and average salaries for pretty much any occupation in the U.S. When looking at income data, always guess on the low side. If you’re fresh out of college and haven’t worked in your field before, you can expect to be at the bottom of the heap when it comes to earnings.
The Working Budget
Once you have a job and your own place, you can put together a much more concrete budget. Replace the estimated amounts you used in your practice budget with your actual income, rent payment, and other expenses. Now you can see how your income stacks up to your expenses, how much you can afford to set aside for savings, and whether you need to cut things out or not.
Maybe you got lucky and your income is much higher than your expenses. Resist the urge to inflate your “fun” or otherwise nonessential categories, such as dining out, entertainment, and clothing, and instead redirect most (if not all) of your extra income toward savings or debt repayment.
Your working budget isn’t set in stone. It helps to revisit it every few months and make adjustments as needed, as your expenses or income changes.
Getting used to living on a budget and spending less than you earn right out of school creates good financial habits for the future. As your income increases, keep focusing on saving or paying off your loans, rather than increasing your spending in other areas.
Learning to create and stick to a budget is just the first step to take toward financial responsibility after college. You also want to start planning for the future when it comes to savings and debt payments. Be sure the choices you make today don’t cause you financial harm in the long run.
2. Control Your Credit
If you’re like most modern college graduates, you left school with a pretty sizable student loan debt. According to The Institute for College Access & Success, the average college graduate in 2013 owed $28,400 in federal and private loans. You might also have a credit card or two in your name.
It’s fairly easy to let those two sources of debt spiral out of control in your early post-school years, especially if you get a credit card right after graduation or with your first job and don’t pay off your balance each month. If you do have a mix of student loans and credit card debt, it makes financial sense to focus on paying off the credit cards first. The average credit card interest rate is much higher than the rate you pay on your student loans. Your credit card interest rate could be more than 20% and you can’t deduct it from your income on your tax return.
Decisions you make about borrowing, spending, and paying bills when you’re 22 can still haunt you when you’re 32 or even 42. Focus on keeping your credit card debt as low as possible (if not zero), on raising your credit score by paying on time, and thinking carefully before opening any new accounts.
- Always Pay on Time. Late payments, whether on student loans or credit cards, cost you in terms of your credit score and can sting financially. Your score suffers when you pay late on a regular basis. Missing due dates also usually means a late fee of up to $25 the first time you’re late, or up to $35 if you pay late again within six months, plus a jump in your interest rate.
- Don’t Use a Card if You Can’t Pay It. It’s common for college grads to borrow against their future income by charging things. The assumption is that you’ll pay it back when you get a job. That might be true, but by that point, your debt might have climbed considerably, thanks to interest. If you have a balance of $1,000 on a card with an interest rate of 20% and you pay $25 per month on the card, you end up paying an extra $662 in interest over the life of the loan.
- Be Careful About Opening Cards. Getting a new credit card might mean new perks, such as a better rewards program or lower interest rate. However, don’t open cards just because one seems to offer a better deal than the ones you already have. Every time you open a new account, your credit score takes a hit. The more cards you have, the more tempting it can be to use them and drive up your balances.
- Guard Your Credit With Your Life. Monitor your credit reports regularly to make sure no one’s stolen your identity. Shred any paperwork you get to keep thieves from getting your details. And don’t log into your bank or credit card account online when you’re using an unsecured, open network at a coffee shop or elsewhere – identity theft is costly both in terms of time and money.
- Don’t Be Scared of Credit. Used carefully, credit helps you get ahead in life and reach financial goals. For example, you need it to eventually get a home mortgage loan. Don’t avoid borrowing completely, as you need to use credit to build credit history and attain a favorable credit score. Just make sure you only borrow what you can pay back easily, in full, at the end of every billing cycle, on or before the due date.
3. Don’t Ignore Student Loans
Although they have lower interest rates, take your student loans as seriously as you would any other type of debt. Make your payments on time if you can. If you’re struggling with payments, consider switching to a different payment plan for federal loans.
- Repayment Plans for Federal Loans. Options include the Income-Based Repayment Plan, which caps your monthly payment at 15% of your discretionary income, for up to 25 years, or the Pay As You Earn Plan, which caps payments at 10% of discretionary income for up to 20 years. Discretionary income is the difference between your adjusted gross income on your tax return and 150% of the poverty guideline in your state for your family size. Any remaining balance on the loan is forgiven after 20 or 25 years, as long as you remain on the Pay As You Earn or Income Based Repayment Plan.
- Deferment. You might also qualify for deferment of your federal loans, if you go back to school, participate in a service program, such as the Peace Corps, or are unable to find a job. When you defer your loans, you don’t have to make payments on them until the period of deferment ends, or for up to three years if you are out of work. In the case of subsidized loans, the government pays the interest on the loans during the deferment period, but you are responsible for the interest on unsubsidized loans.
- Forbearance. You might qualify for forbearance on your federal loans if you are struggling to find work or don’t earn enough to pay the monthly amount due and don’t qualify for deferment. Forbearance typically lasts for no more than 12 months, and you remain responsible for interest on the loans during it.
Although private lenders typically offer fewer support programs than the federal loan program, your lender might be willing to work with you if you are struggling to pay your loans. Ask the lender if it offers forbearance programs or if it’s able to work with you to create a payment plan you can afford.
4. Prioritize Your Goals
Generally speaking, there are four basic goals most people work toward. They save for retirement, an emergency, a major expense (such as a vacation, home, or new car), and they pay down debt. Which goal matters more to you depends on where you are in life.
Usually, when you’ve just graduated, you want to focus on saving for an emergency, saving for retirement, and repaying debts. Saving for the big things in life, such as a fun vacation or a home, can come later, after you’ve knocked out your debt and have a considerable amount of money tucked away “just in case.”
- Repay Debt. If you’re dealing with debt, focus on the loans with the highest interest rates first, such as credit card debts. Make the minimum payments on any other debts.
- Establish an Emergency Fund. Look at your monthly income and multiply it by six. That’s the minimum amount you want to eventually have in your emergency fund. This fund is meant to cover things such as a high medical bill, car trouble, or to tide you over if you lose your job. You don’t have to build the fund in record time – start by contributing what you can afford after necessary expenses, retirement savings, and debt payments.
- Start Saving for Retirement. Even though retirement is decades away at this point, you want to start saving something now, either in an employer-sponsored plan or an individual retirement account (IRA). Contribute as much as you can every month, even if it’s just $10. It might not seem like much, but thanks to compound interest, $10 a month now can be worth more than $100 a month a decade from now.
No matter what goal you put first, you can shift your priorities with time. For example, you decide to pay down your credit card debt first, and put a certain amount of your income toward that debt each month. Once the cards are paid off, you can focus on a new goal, such as boosting your retirement savings or putting money aside for a down payment on a home.
Speaking with a financial planner is usually the best option if you aren’t sure where to focus when it comes to financial goals. An advisor can show you the ups and downs of focusing on retirement savings versus paying off any debt rapidly.
5. Find Frugal Fun
You worked hard in college to get where you are today. Although you’re starting out financially and you want to lay the groundwork for a solid financial future, things don’t have to be all gloom and doom or all savings and no fun. Give yourself room to have a little fun in your budget each month, even if your funds are limited.
Having a good time doesn’t mean breaking the bank, maxing out your credit cards, or withdrawing from your fledgling emergency fund. Enjoy yourself while saving some money.
- Learn to Cook. Knowing how to cook a few simple meals can help you save money on food, since it’s cheaper to buy food at the grocery store than it is to order takeout or pizza delivery. Cooking is also an essential skill if you want to host a dinner party or impress a date. Your recipes don’t have to be complicated. Combining rice and beans gives you lots of options for little money.
- Hold a Movie Night. Whether you’re a cord-cutter or not, it’s cheaper than ever before to watch a movie with friends. There’s no need to head to the theater and spend more than $10 per person a ticket, plus another $10 on snacks. Pick a film from Netflix, Hulu, or Amazon Prime, grab a few bags of popcorn, and you’re all set.
- Take Advantage of Happy Hour. Plenty of bars and restaurants offer half-priced or otherwise steeply discounted drinks, plus cheap appetizers for a few hours each weekday. If you’re tired of staying in, treat yourself and a date or friend to a drink and snack, then head out before the special ends.
- Find Free Stuff Near You. Free activities are all around, if you know where to look. Check out Meetup to see what groups are near you. Find out when local museums offer free admission, visit a local park and spend a few hours reading in the grass, or go for a hike along a trail. Visit your local library and borrow all the books, movies, and music you want, totally for free.
There might be a steep learning curve when it comes to figuring out your finances after college – so the sooner you master your financial details, the better off you’re going to be. Be cautious with your money, and think of the future whenever you feel like spending more than you can realistically afford.
More importantly, don’t be afraid to make mistakes. You may face some setbacks, such as a job that doesn’t work out or an unexpected expense. However, keep your eyes on your financial goals as you work toward success.
Are you a recent graduate? What financial advice did you find particularly helpful?