Graduating from college can feel like the achievement of a lifetime, but this momentous occasion can easily leave you feeling vulnerable as well. After all, college can feel like a “safe space” where you get to learn and grow without dealing with all the problems traditional adulthood brings. But once you graduate, you must get out there and build a career, pay bills, and deal with a ton of adult tasks you may not have encountered before.
Even worse, you may not be making quite as much money as you hoped in your first job, or even your first few jobs. And at the same time, you encounter a bunch of new living expenses, you’ll also have to begin repaying any student loans you have.
With all of this in mind, it’s important to be proactive about your finances once you graduate from college.
Here are the most important money tips for college graduates.
Start Saving for Retirement Right Away
Thanks to the power of compound interest, you can get a huge leg up for retirement if you start saving for it early on. That’s why, no matter how poor you feel when you land your first job, you should start saving something in your employer-sponsored account right away.
Keep in mind that many employers offer a match on your contributions, which is free money you can take advantage of to grow your account at a faster rate. If you contribute 5% of your wages to a 401(k) account with some employers, for example, they may throw in matching funds up to a certain percentage, maybe 3%. This means that your 5% savings rate would increase to 8% without any extra effort on your part.
Also, keep in mind that you can save for retirement even if your employer doesn’t offer a 401(k) or a similar account. As long as you earn an income, you can get started with a traditional IRA or a Roth IRA, both of which let you contribute up to $6,000 per year in 2020 provided you’re under the age of 50. If you’re ages 50 and older, you can save up to $7,000 per year.
Learn to Save First and Spend What’s Left
Common financial wisdom says you should learn to pay yourself first and live with the money that’s left, and there’s a good reason why. When you learn to pay yourself first, you wind up living a lifestyle that is based on what you can afford after saving for your goals.
Paying yourself first also means you get in the habit of funding your investments and your own savings accounts before you begin planning your spending. If you get a new job and your take-home pay is $4,000 per month, for example, you would automatically invest, save, and pay down debt using the month’s wages, then you would plan for discretionary spending with whatever funds are left. This may mean moving $1,000 to investment accounts and student loan payoff then budgeting for food, fun, and living expenses with the other $3,000 in monthly income you have.
When you learn to live within your means with this strategy, you don’t wind up spending whatever you want and hoping there is something left to save. That’s how most Americans live, and it’s why most people’s savings and retirement accounts are dramatically underfunded.
Start Using a Budget
If you decide to save first and live on what’s left, consider using a monthly budget to help you plan. A budget doesn’t have to be restrictive unless you want it to be, but budgeting does make it considerably easier to reach your goals when you are living on a limited income.
To create a budget that works, sit down with all your monthly bills and your credit card and bank statements from the last few months. From there, you’ll figure out how much you’re spending on categories like utilities, food, transportation, insurance, and more, and you’ll set a limit on spending in categories you have some control over.
With a monthly budget, you’ll need to track your spending each month to figure out how much money you fork over in popular categories like groceries and dining out. Often, the act of tracking your spending can cause you to tighten up and spend less, which comes with the side effect of making it easier to save.
Either way, a budget is nothing more than a written plan you use for the money you work hard to earn. With that in mind, you should get in the habit of using one as soon as you graduate college and start learning how to live within your means.
Build an Emergency Fund
While you’re getting used to saving so much money each month, make sure you’re setting aside some money in an emergency fund you never plan to touch. Most experts recommend setting aside at least 3 to 6 months of expenses in your emergency fund, but even having a few thousand dollars can help until you’re able to save more.
Make sure you put your emergency fund into a high-yield savings account that can help you earn interest on your deposits, and only use the money if you have to. While emergency funds can be used for any real emergency you encounter, these funds are most commonly reserved for periods where you lose a job or face a loss in income, major unplanned medical expenses, surprise home repairs, and other expenses that could easily knock you off track if you didn’t save for them.
Use Credit Wisely and With a Plan
There’s nothing wrong with using credit cards for convenience or rewards, but it’s crucial to remember that the average credit card interest rate is over 16 percent! You need a good credit score to qualify for a mortgage and other loans with the best rates and terms, but you aren’t helping yourself if you use credit to rack up long-term debt.
Here’s my advice: Use credit cards and other types of credit to your advantage, but only do so with a plan. Only borrow money you can afford to pay back, and never use a credit card for purchases you cannot pay off when your bill comes due. If you want to earn rewards, that’s fine, too. However, you shouldn’t pursue rewards if earning cashback or travel rewards tempts you into spending more than you planned.
Also make sure you pay all your bills on time, including student loans, to build your credit score. And if you’re worried, you’ll fall behind or forget to pay any bills on time, consider setting them up on autopay.
At the end of the day, credit cards and loans can be a blessing or a curse for your finances. Which outcome becomes your reality is up to you.
Consider Refinancing Your Student Loans
If you’re leaving college with your share of student loan debt, you should also keep in mind that you’re not stuck with the loans you have forever. It may be possible to refinance your student loans into a new loan with a lower interest rate and better loan terms, and the process of refinancing may be easier than you realize.
With College Ave student loan refinancing, for example, you can choose a new loan term between 5 and 15 years.
Refinancing your student loans with a private lender like College Ave could easily save you thousands of dollars. As an example, imagine you have $38,000 in student loans with an interest rate of 6%. If you just started a 10-year repayment plan, you would have to pay $434.53 for 120 months for a total loan cost of $52,144.11. If you refinanced into a new loan with an interest rate of 4%, on the other hand, you would pay $392.43 per month for 120 months with a total loan cost of $47,109.14. This means you would pay less per month, but you would also save over $5,000 in interest over 10 years.