Top 5 Personal Finance Tips For Recent College Graduates

Top 5 Personal Finance Tips for Recent College Graduates

Life after college may not be the financial paradise you hoped for. In fact, you may wish someone had told you how complicated this was going to be. While you can’t turn back time, you can do your best to prepare for the future by getting your finances in order, no matter how much or how much you make. Here are several tips that can help you get on the right track.

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Top 5 Personal Finance Tips for Recent College Graduates

1. Calculate your budget

One of the best things you can do when you’re just out of school is live below your means. Now that you’re making more than $7.50 an hour, you might be tempted to start spending on fancy things, like $250 designer jeans or that $300 comforter you saw at Crate & Barrel. While it’s totally okay to splurge from time to time to avoid frugal fatigue, give yourself some limits. The best way to do this is to create a post-graduation budget.

When you do a personal budget, you tally up your income and expenses, then compare them. There are a variety of budgeting methods, and it may take some trial and error before you find one that really clicks with you.

The Practice Budget

Much budget advice 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 picture of your expenses.

However, you are not discouraged when it comes to budgeting. Now is the time to make a better estimate of what your post-college budget may be. Do some research to get a ballpark figure for some common expenses and the average entry-level income in your field.

Rent . Find out what the median rent is in the area where you plan to live. You can browse current apartment listings on Zillow or Craigslist to see which studios or rooms to turn to, or take a look at average rental figures for the area on a site like Rent Jungle. Although you may be tired of living with others, don’t rule out life with roommates right now. Take a look at what it costs to share an apartment or a 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 stop by the leasing offices of the apartment complexes in your neighborhood and ask which services are included in the rent and which are not.
Food The USDA offers helpful reports that tell you the average amount people spend on groceries weekly or monthly based on age and gender. Your dietary habits may differ from others, but you can use the reports to estimate what you’ll spend on food each month.
Transportation . Look at the monthly cost of a transit pass in the city you plan to move to. If you own a car, you probably already know how much it costs you to own and use it every month. Keep in mind that moving to a new state or city may mean a change in the cost of insurance and gas. If you get your own auto insurance policy after being at Mom and Dad’s house for years, expect a rate increase.
Student Loans Whether or not you wait the full six months after graduation to start paying off your loans, chances are you already know the monthly amount you owe. If that seems high, and you have federal loans, consider signing up for a different repayment plan, such as the Pay As You Earn Plan or the Income-Based Repayment Plan. Both options lower 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 parent’s plan until you’re 26, thanks to the Affordable Care Act. That means it may not be an expense you need to worry about yet. If you need to think about health insurance, you can search for plans on the HealthCare.gov Marketplace to get an idea of what you should 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 as needed when you start working.
Clothes, 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 may need to spend more a month on an expensive winter coat or a new suit. Look at your expenses in college to get a decent sense of your random expenses in life each month. If necessary, this is the category that is cut from the beginning to make ends meet.

Guessing your anticipated income shouldn’t be that hard. The Bureau of Labor Statistics has details such as median and median wages for almost any occupation in the United States. When looking at revenue data, always guess the downside. 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 against your expenses, how much you can save to save, and whether or not you need to cut back.

Maybe you are lucky and your income is much higher than your expenses. Resist the urge to inflate your “fun” or non-essential categories, like dining out, entertaining, and dressing up, and instead redirect most (if not all) of your extra income toward saving or paying down debt.

Your job budget is not set in stone. It helps to review it every few months and make adjustments as needed as your expenses or income change.

Getting used to living on a budget and spending less than you earn right after school builds good financial habits for the future. As your income increases, keep focusing on saving or paying down your loans, rather than increasing your spending in other areas.

Learning to create and stick to a budget is just the first step in taking financial responsibility after college. You also want to start planning ahead when it comes to savings and debt payments. Make sure the decisions you make today don’t cause you financial damage in the long run.

2. Control your credit

If you’re like most modern college graduates, you left school with some pretty hefty student loan debt. According to the Institute for College Access and Success, the average college graduate in 2013 owed $28,400 in federal and private loans. You can also have a credit card or two in your name.

It’s easy enough to let those two sources of debt spiral out of control in your first few years out of school, 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 have a mix of student loans and credit card debt, it makes financial sense to focus on paying off 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.

The 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), instead of zero. Increase your credit score by paying on time, and by 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 hurt you financially. Your score suffers when you pay regularly late. Due dates also typically mean a penalty of up to $25 the first time you’re late, or up to $35 if you’re late again within six months, plus an increase in your interest rate.
Don’t use a card if you can’t pay for it . It is common for college graduates to borrow against their future income by cashing things out. The assumption is that you will pay it back when you get a job. That could be true, but at that point, your debt could have increased considerably, thanks to interest. If you carry a $1,000 balance on a card with a 20% interest rate and pay $25 per month on the card, you’ll end up paying an extra $662 in interest over the life of the loan.
Watch out for opening cards . Getting a new credit card can mean new perks, like a better rewards program or a lower interest rate. However, don’t open cards just because they seem 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 is to use them and increase your balances.
Guard your credit with your life . Check your credit reports regularly to make sure no one has stolen your identity. Shred any paperwork you have to prevent thieves from getting your details. And don’t log into your bank or credit card account online when using an open, unsecured network at a coffee shop or elsewhere: Identity theft is costly both in terms of time and money.
Don’t be afraid 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 loan. Don’t avoid loans altogether, as you need to use credit to build a credit history and build a favorable credit score. Just be sure to borrow what you can easily pay back, in full, at the end of each 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 having payment problems, consider switching to a different repayment plan for federal loans.

Payment Plans for Federal Loans . Options include the Income-Based Payment Plan, which limits your monthly payment to 15% of your discretionary income, for up to 25 years, or the Pay As You Earn Plan, which limits payments to 10% of discretionary income for up to 25 years. 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 loan balance will be forgiven after 20 or 25 years, as long as you remain on the Income or Income-Based Repayment Plan.
Deferment You may also qualify for deferment on your federal loans if you go back to school, participate in a service program such as the Peace Corps, or can’t find a job. When you defer your loans, you don’t have to make payments on them until the deferment period ends, or for up to three years if you’re out of work. For 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 may qualify for forbearance on your federal loans if you’re having trouble finding a job or don’t earn enough to pay the monthly amount due and don’t qualify for deferment. The forbearance generally lasts no more than 12 months, and you remain responsible for the interest on the loans during that time.

Although private lenders typically offer fewer support programs than the federal loan program, your lender may be willing to work with you if you’re struggling to repay your loans. Ask the lender if they offer forbearance programs or if they can work with you to create a payment plan that you can afford.

4. Prioritize your goals

In general, there are four basic goals that most people work towards. They save for retirement, an emergency, a major expense (like a vacation, new house or car), and pay off debt. The goal that matters most to you depends on where you are in life.

Typically, when you first graduate, you want to focus on saving for an emergency, saving for retirement, and paying down debt. Saving for the big things in life, like a fun vacation or a home, can come later, after you’ve paid off your debt and have a considerable amount of money stashed away “just in case.”

Pay the debt . If you’re dealing with debt, focus on loans with the highest interest rates first, like credit card debt. Make the minimum payments on any other debt.
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 like a high medical bill, car trouble, or to help you 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 . Although retirement is decades away at this point, you want to start saving something now, whether it’s in an employer-sponsored plan or an individual retirement account (IRA). Contribute as much as you can every month, even if it only costs $10. That may not sound 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 change your priorities over time. For example, you decide to pay off 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, like building your retirement savings or saving money for a down payment on a house.

Talking to a financial planner is often the best option if you’re not 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 quickly.

5. Find frugal fun

You worked hard in college to get to where you are today. Even though you’re just starting out financially and want to lay the foundation for a strong financial future, things don’t have to be all dark and doom or all savings and no fun. Carve out some fun space in your budget each month, even if your funds are limited.

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Having a good time doesn’t mean breaking the bank, maxing out your credit cards, or withdrawing from your nascent emergency fund. Have fun 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 supermarket than to order takeout or pizza. 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. The combination of rice and beans gives you many options for little money.
Hold a movie night . Whether you’re a cord cutter or not, it’s cheaper than ever to catch a movie with friends. No need to go to the theater and spend more than $10 per person per ticket, plus another $10 on snacks. Pick a movie from Netflix, Hulu, or Amazon Prime, grab some bags of popcorn, and go.
Take advantage of Happy Hour . Numerous bars and restaurants offer half-price or otherwise heavily discounted drinks, plus cheap snacks for a few hours each weekday. If you’re tired of staying in, treat yourself and a date or friend for a drink and a snack, then head out before the end is special.
Find free stuff near you . There are free activities everywhere, if you know where to look. Check out Meetup to see which groups are near you. Find out when local museums offer free admission, visit a local park and spend a few hours reading on the grass, or go hiking on a trail. Visit your local library and order all the books, movies and music you want, absolutely free.

final word

There can be a steep learning curve when it comes to calculating your finances after college, so the sooner you master your financial details, the better off you’ll be. Be careful with your money and think ahead when you want to spend more than you can really afford.

More importantly, don’t be afraid to make mistakes. You may face some setbacks, like 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?