You graduated from college. Congratulations! That didn’t happen without a lot of hard work on your part.
Now is the perfect time to channel some of that drive into following a few simple financial steps. Do this and you will be way ahead of many people and on your way to financial success.
1. Draw up a budget
Seriously. Once you’ve landed your first post-college job, you’ll probably be making more money than you’ve ever had. Don’t go crazy. By following a plan, you won’t end up wondering where all your money went at the end of the month. Budgets tell you just what you have so you can spend and save with purpose.
Budgets are pretty straightforward. Just list all your monthly income for each month. Then list all your monthly expenses (school loans, rent, utilities, food, cable, car payment, cell phone bill, savings, etc.). If your budget breaks even, well done! If you are in the red, that’s a problem and you’ll need to reevaluate your priorities and decide where to cut back. If you have money left over, fantastic! Throw it at any debt and beyond that into an emergency fund. Note: You can still treat yourself to the occasional Starbucks drink, dinner out or movie — just plan for it in your budget.
A good way to track your money (even if you don’t have much) is by using one of any good online finance trackers. For a list of several popular ones, click here.
Bottom line: Always spend less than you make.
2. Find affordable housing
This can be tricky. Especially, if you are living in a high-cost area. The best way to keep your rent down is to share it. Round up a roomie or two and you’ll reduce your rent by half or more.
Another option may be living rent-free with mom and dad for a bit. (Breathe — this need only be temporary!) While this arrangement most likely was never part of your post-college plan (or your parents’), it actually makes good financial sense. The money you would have spent on rent or food can now be funneled to paying off that school loan, saving for a car — a used car — or even a down payment on a house.
3. Save money automatically
Please don’t skip this. Automatic deduction is a powerful tool. If you have money automatically deducted from your pay into your bank account or retirement account, you will painlessly build your savings without ever having to think about it. Most likely you won’t even miss what was taken out. Even more important, you will be establishing the critical habit of saving money.
4. Build an emergency fund
Life happens. Cars break down. Teeth need crowns. Jobs are lost. Having money set aside for unplanned life events is a needed safeguard against falling into debt and financial trouble. Build your fund up to where you have three to six months of expenses covered. (Another instance where auto deduction is your friend.)
5. Stay out of debt
Debt is deceptive. It promises a quick and easy way to take that trip or buy that iPhone or leather chair from Pottery Barn. No planning or saving required. But unless you have the discipline to pay off your credit cards in full every month, debt can rapidly swell and before you know it, you’re in over your head. Nobody wants to be squeezed by debt or be the sorry owner of a bad credit score (which will make it difficult to lease an apartment or buy a house or car down the road).
Borrowing money isn’t free. A typical credit card charges a whopping 17% interest for the privilege of lending you money. So even if you don’t add to your debt with more charges, your debt will keep growing unless you make payments. If you do use credit cards make sure you pay them off in full every month.
6. Pay off any outstanding debt ASAP
If you have college loans (and about 70% of recent college graduates do), start paying them off immediately. You have a grace period of six months after you graduate before you are required to begin your payments, but as with any debt, the faster you can reduce or eliminate it, the less interest you’ll have to pay. And with the average student loan reaching about $30,000, that’s a lot of interest. Be fierce with this.
7. Invest in a 401(k) plan
It is not too soon! Investing in your early 20’s versus your 30’s could make a difference of hundreds of thousands of dollars in your retirement account. The younger you are when you start contributing to a 401(k), the longer compound interest has time to work its magic, resulting in a sound nest egg waiting for you when you retire.
The time to do this is right after you’ve built up your emergency fund. Once that’s in shape, immediately invest in your company’s 401(k) plan, (hopefully they offer one). Contribute enough money to get the company match. This is free money! Don’t pass it up.
If your company doesn’t have a retirement plan, open a Roth IRA (individual retirement account) or regular IRA and contribute regularly through (that’s right) auto-pay.
And if you change jobs? No problem. Even if you’re not fully vested, all of your contributions are yours to keep and should be able to be rolled over to a new employer’s plan or, if not, into an IRA. DO NOT cash it out and spend it. If you do, you’ll live to regret the lost money and years of growth.
8. Live within your means
Here is where social media can get you in trouble. On Facebook, Twitter, etc… everybody looks like they are living the most amazing lives. Snow skiing at Lake Tahoe, dining on Phat Thai in Bangkok, cruising in a shiny new car. All those photos of so-happy faces. It all looks fantastic — until the bills come. Then (although the photos won’t show this) worry and maybe even a bit of panic set in.
Stop comparing. A quick way to fall into debt is by over-spending on wants. You don’t really need the latest and greatest, do you? That doesn’t mean you can’t enjoy an occasional splurge. Just save up for it first.
Like grandma did.
These tips are neither new nor rocket science, but they do make a difference when followed. With a little self-restraint and planning ahead, you can be on your way to a financially secure future.
Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.