6 money tips for recent grads

6 money tips for recent grads

When you graduate from college, you have an amazing opportunity to set yourself up for financial success.

You’ll hopefully be joining the ranks of the working world for the first time with a job that pays you a reasonable salary and makes full use of the degree you earned. And, while you may have student loans to pay back, options like debt consolidation and income-driven payment plans could give you the freedom and flexibility to pay them back on your own terms.

The money decisions that you make now, when you are first establishing your financial life, are going to shape every aspect of your future going forward, from whether you are able to save for retirement to whether you can live within your means and avoid high-interest loans that leave you in need of debt relief later.

You obviously want to make the right choices to set yourself up for success. These six money tips from Freedom Debt Relief can help you to get on the path toward growing your net worth so you can maximize the chances of building a strong financial future.

Key takeaways:

• Graduating from college is a time of change in your financial life.
• Tips for success include creating a budget, learning to manage debt, and creating a rainy day fund.
• The right money moves now can help set you up for success in life.

1. Create a budget

Establishing and sticking to a budget is essential for long-term financial health and one of the most important money tips for recent grads. If you make a budget, you can ensure that you are using your money as wisely as possible—including doing important things like saving for your retirement and for big purchases you’ll need to make later.

You can also avoid going into debt because you can make certain that you live within your means and don’t overspend.

To make your budget, calculate the amount of income you bring home from your new job so you’ll know how much you can spend each month. Next, add up your necessities like rent, utilities, transportation, groceries, and debts. If there’s nothing left over to save at the end of the month, you’ll need to make a change by living someplace cheaper, getting a roommate, or opting for less-expensive public transportation.

When you make your budget, treat saving as a must-do expense. Ideally, you should budget to save a minimum of 10% to 15% of your income. If you can, try to push this amount closer to 20%. If you start this habit early once you start earning a salary, you can set yourself up for great success in the future. It’s also easier to start saving now before you get used to living on a big paycheck.

After accounting for fixed expenses and saving, you can plan to spend the remaining portion of your income on discretionary expenses for things like clothing and entertainment. Ideally, your budget will end up looking like this:

• 50% to fixed expenses
• 30% to discretionary expenses
• 20% to savings

This is called the 50/30/20 budget and it is a simple, effective approach to distributing your money that ensures you are growing your net worth over time.

2. Limit your fixed expenses

If your income goes up as a new college grad, it’s tempting to expand your spending and live a more lavish lifestyle. Try to avoid this temptation. If you can continue living frugally or living like a college student for a little longer, you can save more at a younger age and take advantage of the power of time to grow your net worth.

Your fixed expenses are the recurring expenses that you must pay each month. They include things like your housing costs and your car payment. It is much easier to keep these expenses low since you only have to make the responsible choice one time.

If you can get an apartment that is $100 cheaper per month, for example, that’s $100 extra to save each month that you don’t have to try to cut from your budget by saying no to your daily latte or skipping a night out.

3. Manage your debt

Another of the most important money tips for recent grads involves managing your debt.

Credit cards in particular can make it tempting to spend money you don’t have. Don’t fall into that debt trap and let it hold you back from achieving financial freedom. If a credit card purchase you’re considering doesn’t fit into your budget, reconsider whether you really need it. If you’ve accumulated credit card debt, create a plan to pay it off as fast as you can.

When you have high-interest debt like credit cards, it’s important to reduce your debt load as quickly as possible. Getting out of debt will help free up your money so you can make more of the investments you’ve been planning for. You need to be honest about what you owe and what it will take to pay off your debts, and dedicate yourself to tackling repayment.

If you have low interest debt like student loans, though, it doesn’t always make sense to pay it off early—particularly because you can deduct student loan interest from your taxes. It may be smart to pay the minimums on this debt if you can earn a higher return by investing.

Be sure to evaluate exactly what you owe, taking a look at the balance due, the interest rate, and the pay-off timeline so you can make an informed plan about which debts to pay extra on and which it makes sense to pay off slowly over time.

4. Protect your credit score

A low credit score can seriously limit your opportunities to make a big purchase, secure an apartment lease, obtain a loan, or even land your dream job. So, understanding what factors affect your credit score and how to earn a great score can have a serious impact on your overall financial picture.

Each person’s credit score is calculated based on five factors: payment history, how much you owe relative to credit available, the length of your credit history, the type of credit you use, and the number of inquiries on your report (inquiries are placed on your credit record when you apply to obtain more credit).

Protect your credit score by:

• Paying your bills on time and in full each month. Missing payments means you’ll not only get hit with fees, but you’ll also see your score drop.
• Paying down your debts as quickly as possible and keeping your credit used to 30% or less of the credit available to you.
• Using each type of credit appropriately. Maxing out a credit card to buy a car could hurt your credit score and cost you a lot of extra interest, while taking out an affordable car loan and paying it back on time can help your credit by showing you have a good mix of debts that you’re managing responsibly.
• Avoiding the temptation to apply for multiple credit cards or lines of credit within a short time.

Ultimately, your credit score will affect almost every major financial decision in your life. The better your credit, the more money you’ll save in the long run.

5. Establish an emergency fund

No matter what stage of life you’re in, it’s crucial to have a stash of money set aside for the surprises life throws your way. This is one of the best money tips for recent grads.

It’s okay to start small, but eventually, you’ll want to give yourself a financial cushion of at least three to six months of living expenses saved in a high-yield savings account.

Your emergency fund will help tide you over if you face a job loss, unexpected medical bills, or run into other financial emergencies. It can also help you to avoid debt if you lose your job or face unexpected surprises.

Emergency funds are so important that you should prioritize saving up for emergencies even when you have credit cards or other high-interest debt you’re trying to pay back. Otherwise, you could get trapped in a debt cycle where you are constantly paying off debt and then borrowing again when you face surprise costs.

Try to save up at least a small emergency fund before paying extra to your creditors to avoid getting trapped in that cycle.

6. Start saving for retirement

Even though retirement may be years away, the earlier you start saving, the better. That’s because compound growth can make it much easier to save since your money will earn money for you. The returns you earn on your investments can be reinvested, making your principal balance larger and ensuring your investments earn even more over time.

There are different kinds of retirement accounts you can invest in, including a traditional and Roth 401(k) or a traditional or Roth IRA. Traditional accounts provide an upfront tax break for retirement savings and are a good choice if you are in a higher tax bracket now than you expect to be as a senior.

Roth accounts allow you to defer your tax breaks until you are a retiree. While you don’t get to deduct contributions when you make them, you can take out money tax-free as a senior. If you don’t have a very high salary right now since you are just starting out, it can be an ideal time to invest in a Roth.

However, the most important account for most people is a 401(k). If your employer offers a match to your 401(k), you should always take advantage of it. Matching contributions means your employer puts money into your account when you do. Not participating enough to get your 401(k) employer match is like leaving money on the table.

Consider opening at least one of these different types of retirement accounts and contribute as much as you can to it each month. It may not seem like much now, but with compound interest, your funds should continue to grow over time. Here’s another helpful money tip for recent grads who want one less thing to remember. Set up automatic transfers from your checking account to your retirement account and emergency savings accounts.

There are plenty of apps out there to help with these efforts, including ones that round up purchases to the nearest dollar, with the extra change going to savings or investment accounts. Soon, you won’t even miss the extra cash, and your money will be there for you when you need it.

Financial management 101 for recent grads

Following these money tips for recent grads can help you maximize your savings over your lifetime. It’s worth the effort to get started on the right foot when it comes to managing money, as the decisions you make as a recent grad are going to shape your finances for years to come.

FAQs

What should you do financially after graduating from college?

After you graduate from college, make smart financial decisions that set you up for future success. Make sure to keep fixed expenses low and start saving for emergencies and retirement. You should also set a budget to ensure you live within your means and try to avoid debt so you can get started on the right financial path.

What is the 50/30/20 rule for college grads?

The 50/30/20 rule is a budgeting guide new graduates can use to determine how to spend their paychecks. When following this rule, you should limit fixed expenses to 50% of your income, save 20% of your income, and spend 30% on discretionary purchases.

What is a good income after college?

A good income after college depends on your degree and where you live. Ideally, you will be working in a field relevant to your degree and will earn enough to cover your costs, make payments on any student loan debt you borrowed, and save for the future.

This story was produced by Freedom Debt Relief and reviewed and distributed by Stacker.