Once you've graduated college and found your first job, you will probably have a more substantial income than you've ever had before. In fact, the average college graduate now takes home more than $50,000 per year from their first job out of school.
Despite the new source of income, you might be one of the more than seventy percent of recent graduates who have student debt. If you are saddled with student debt, you’ll need to come up with a plan to pay those loans off. Even if you’re debt-free, it’s important to build good financial habits early so you can set yourself up for success in the long run.
Here’s some advice for recent college graduates on getting on the path towards financial success.
Find a Long-Term Bank and Open a Checking and Savings Account
While you were in college, you probably kept your old bank account that your parents helped you set up as a kid. Now that you've graduated, it's time to become independent from your parents financially, if you haven't already.
While your old bank accounts may be perfectly serviceable, you should take the time to look at the banks in the area you’ve moved to, especially if you’ve moved far away. You should also look at your old accounts to see if you’d been getting any special treatment due to your status as a college student. Many banks will waive fees or other bonuses for college students, and you don’t want to see fees depleting your savings now that you’ve graduated.
When you’re looking for a bank to use for the long-term, there are a few things to consider.
First decide whether you want to work with a local bank/credit union, or an online bank. Banks and credit unions that have physical locations offer the convenience and peace of mind of having a place to go to ask questions and get help with your money. On the other hand, online banks often have lower fees and pay better interest. If you're good with technology or don't mind having no physical location to go to for banking services, online banks can be a good choice.
Another consideration is what services you expect to need from a bank. At a minimum, you should look for a bank that offers both checking and savings accounts. The checking account will serve as the location for money that you’ll be spending while the savings account will hold your emergency fund.
If you expect to start investing or think you might want to buy a house or car in the near future, look for a bank that offers brokerage or lending services as well. Using one bank for all of these needs can help you save on fees and keep your financial life simple.
Your bank will be the center of your financial life, so take the time to choose the right bank for your needs.
Build an Emergency Fund
More than half of Americans have no emergency savings. That means that the majority of the country is just one $500 expense away from financial ruin.
It’s easy to hope that you’ll never have to deal with an unexpected expense like a car repair, or medical emergency, or losing your job but these costs can't be expected: they're unpredictable.
Your first priority to get on the path to financial success is to reach financial stability. That means building an emergency fund. At a minimum, that means you should have at least one month's worth of expenses in your savings account.
Once you’ve saved that amount, you can focus on paying off high-interest debt, such as credit card debt. Once your high-interest debt is gone, you can work on increasing your emergency fund’s size until it is between four and six times your monthly expenses. That amount will allow you to handle most unexpected financial emergencies that come your way.
Create a Budget and Track It Using Your Preferred Method
One of the biggest pitfalls that college graduates fall into is spending money they don’t have. Whether it is because they want to enjoy their newfound income and go overboard, or feel an urge to keep up with friends and colleagues who may be better off, many recent graduates fall into expensive forms of debt.
There’s no reason not to spend some money to enjoy yourself during a night out or on a vacation, but the important thing is to do these things responsibly. That means creating and sticking to a budget.
When you make your budget, start by writing down your monthly take-home income. Then, subtract the cost of essential expenses, like rent, food, utilities, and the like. Take a portion of the amount remaining, and designate it to be your monthly savings. Then, you can allocate the rest towards things like entertainment, meals at restaurants, and other non-essential expenses.
By making savings a line-item in your budget, you guarantee that you save some money each month. You should use those savings to start building your emergency fund. Saving using this strategy is much more effective than planning to save whatever portion of your budget that you don’t spend each month since you’re likely to spend the full amount more often than not.
Once you’ve created the budget, you’ll have to work to stick to it. Different strategies work for different people.
Some people prefer to use budgeting software like Mint or You Need a Budget. These programs will track and categorize your purchases automatically. You can log in to your account to see your budget, how much you spent, and how much you have left in each spending category.
These programs tend to work best for people who use their credit card or debit card for the majority of their spending. Those transactions are automatically imported by the programs, while cash transactions have to be entered manually.
Another budgeting strategy is the envelope method. Take as many envelopes as your budget has spending categories. Label each envelope with one category. Each month, withdraw cash from your bank account and fill each envelope with the specified amount of cash. When you buy something, take the cash out of the corresponding envelope. When the envelope is empty, you can’t spend any more money in that category until next month.
The envelope method is great for people who make most of their purchases using cash. It’s also good for people who like having a more physical indication of how well they’re following their budget.
Start Building Your Credit Responsibly
Your credit score will have a major impact on your financial life over the long-term. A better score means better interest rates, better terms on loans, and access to better credit cards. If you didn’t get a credit card in college, now is the time to get one and start building your credit.
Your credit score is calculated using five different factors:
- Payment history
- Amount owed
- Length of credit history
- Recent applications/number of new accounts
- Types of credit used
To put it simply, you want to build a long history of making on-time payments, owe as little as possible, and only apply for new loans or credit cards when you need them.
As a recent college graduate, there are two main steps to take to build your credit score. The first is to start paying down your student loans. As you make more on-time payments and reduce the balance of your loan, you’ll see your score improve.
You should also start using a credit card to make everyday purchases, but only if you feel confident in your ability to pay the bill in full each month. You should never pay interest to build credit, so if you’re not confident in your ability to use a credit card responsibly, you should avoid using one altogether.
On top of building your credit, using a credit card for purchases brings a few additional benefits. Most credit cards offer purchase protection or extended warranties on big-ticket items. You can also take advantage of credit card rewards, which put money back in your pocket.
Come Up with a Student Loan Plan
There are a lot of different types of student loans out there: subsidized, unsubsidized, private, public, PLUS loans, and more. One of your priorities after graduating is to come up with a plan for tackling your student loan debt.
If your total loan balance is relatively low, you should focus on getting rid of it as quickly as possible. Carrying debt ties up a portion of your income each month in the form of a minimum payment and slow your progress towards your financial goals.
If you have a larger balance, planning becomes more important. If you are employed by a state, local, or federal government agency or non-profit, you might qualify for public service loan forgiveness. However, only federal student loans are eligible for forgiveness, so you’ll still have to pay your private loans. Loan forgiveness programs can also take years to take effect, so it might be better just to pay the loan off if you can pay it off before it would be forgiven.
If you don’t plan to take advantage of loan forgiveness, or have loans that are ineligible, focus on paying your high-interest loans first. These loans are the most expensive so paying them down will have a big impact on your bottom-line. Any loan above four or five percent interest can be considered high-interest.
For lower-interest loans, you’ll have to decide whether to prioritize saving or making additional payments on your loans. If you invest your extra money in the stock market, your earnings could outpace the interest you are charged, but there’s no guarantee that that will be the case. If you make additional loan payments instead, you’ll get a guaranteed return by reducing how much interest you’ll pay over the life of the loan, but you might be missing out on greater returns in the stock market.
Whichever you decide, coming up with a plan and sticking to it is important as you tackle your student loan debt.
Set Up Auto-Pay for All Your Bills
Bills are an inevitable part of life. Every month you’ll be paying for housing, electricity, water, internet, phone service, your credit cards, and more.
Keeping track of all of your bills can feel like a full-time job. It’s a high-stakes job because missing a payment or sending a payment late can drop your credit score and incur a number of fees.
Most companies these days offer an auto-pay service for the bills they charge. You should sign up for auto-pay whenever possible because it will save you the effort of making payments manually and help you avoid paying fees because you forgot about one of your many bills.
Some companies even offer benefits, like an interest rate reduction, for signing up for auto-pay. There’s no reason not to automate your finances.
Sign Up for Your Employer’s Retirement Plan
Even though it’s probably decades away, it’s never too early to start planning for retirement. Young people have a big advantage when it comes to retirement savings because they have a lot of time to allow their retirement savings to compound and grow.
Consider the following example:
Rebecca starts saving $250 per month, every month, in her work’s 401(k), starting at age 25. Assuming she earns 8% returns each year, she’ll have $777,169.56 by the time she turns 65. Of that amount, only $120,000 is her contributions–the rest is earnings.
On the other hand, John decides to save $500 per month, every month, in his employer’s 401(k), starting at age 35. When he turns 65, he’ll have $679,699.27 in the account. That’s almost $100,000 despite saving twice as much per month. The extra ten years of compounding has a considerable effect on the ending balance.
If John had saved $250 per month like Rebecca, he’d have only $339,849.63 in his account, just about half of Rebecca’s ending balance.
On top of the benefit of giving your money more time to grow, signing up for your work’s 401(k) brings other benefits.
401(k) contributions are made pre-tax, so each dollar saved doesn’t cost you a dollar of take-home pay. Instead, your take-home pay is reduced by less than a dollar thanks to the tax savings.
Many employers also incentivize retirement savings by offering a match on contributions to a 401(k). For example, your employer might match the first 5% of your salary that you contribute. If you make $50,000 per year and contribute $2,500 to your 401(k), your employer will add an extra $2,500 for you. It’s like getting extra money for free.
Americans, as a whole, are are are enormously unprepared for retirement, so getting started on saving while you’re young can give you a leg up.
Take Advantage of Your Job’s Benefits
Many employers offer a variety of valuable benefits that you can take advantage of to stretch your budget a bit further.
Some employers or insurance plans will pay you for doing things that help you stay healthy, like taking part in fitness classes or taking so many steps per day. Other plans will reimburse a portion of gym membership fees or other exercise expenses. See if your employer offers these benefits and if you can make use of them to help subsidize your fitness costs or to make money for living an already healthy lifestyle.
Many employers also offer transportation benefits like subsidized train passes or reduced-price parking for employees. You shouldn't pay full price if you don't have to, so keep an eye out for these deals.
Benefits vary widely from employer-to-employer and even by location so you’ll have to look at your employment agreement to find out what benefits are available to you.
Learn Money Savings Skills Like Cooking or DIY Repairing
Going out for a meal or ordering delivery is easy and tasty, but it isn’t exactly healthy and is far more expensive than cooking your own meals. In fact, food accounts for about an eighth of the average American family’s expenses.
Learning how to cook your own meals can let you experience delicious meals that you can order at a restaurant for a fraction of the price. When you cook your own food, you can control the price, serving size, and healthfulness of your meals much more easily. Cooking in bulk also makes it easy to bring leftovers to work so that you can eat them for lunch, letting you avoid costly lunches at work.
There are many skills, like cooking, that you can learn that will help you save money on a regular basis.
If you drive, learn to do basic maintenance on your car like changing the oil and cleaning your air filters. If you own your home, learn DIY home repairs to avoid hiring a costly contractor.
Learning these skills while you’re young can spell huge savings over the long term as you can put them to use more often and avoid paying people to do the work for you.
Create Long-Term Savings Goals
When you're just out of college, you can't predict where your life will take you. Maybe you'll move across the country for a new job, or perhaps you'll love the town you're in and become a life-long resident. Maybe you’ll discover an enjoyment of art or sports or some other pastime.
Though the future may be uncertain, that doesn’t mean you can’t predict some parts of your life, like whether you’ll want to purchase a house someday or if you want to take an international vacation. Come up with goals and start saving for them. By starting on working towards your goals early, you’ll accomplish them sooner and will get in the habit of working towards things patiently rather than demanding instant gratification by going into debt.
Graduating college is an exciting time and huge parts of your life are sure to change when you do graduate. Taking a few steps to prepare for the future financially will pay huge dividends in the long run.