Graduating college is an exciting time, but it can be scary if you’re new to managing your money. These five money lessons for new college graduates can help you create a solid foundation and put you on the right track for long-term financial success.
- Protect your credit score.
- Make a budget and stick to it.
- Start saving.
- Get insured.
- Manage debt wisely.
1. Protect your credit score
Your credit score is one measure of your financial health. The better your credit score, the better your creditworthiness — and the better your creditworthiness, the easier and cheaper it will be to take out a loan, buy a car and rent an apartment.
If you don’t have a credit score already, one easy way to establish one is to get a credit card and make regular purchases and payments. If you already have a credit score, do everything you can to protect it. Paying your monthly bills in full and on time is the best way to maintain your score and improve it over time. You should also avoid reaching your monthly credit card limit.
You can keep track of your credit health by requesting and reviewing your credit reports, which you can do for free through AnnualCreditReport.com. A credit report is a statement that expresses all of your credit activity and the current status of your credit accounts.
Maria Alcantara, financial advisor and founder of Millennial Money Queens, explains that checking your report is more important than simply staying informed. “[Students] can then see where they stand, take any action potentially needed to improve a score and ensure their report is accurate so it becomes a financial tool not a hurdle.”
2. Make a budget and stick to it
A solid budget is the foundation for maintaining financial health. With an organized budget, you can track every incoming and outgoing expense, optimize the money you do have, manage your debt and save for future expenses, like a car or a house.
When it comes to crafting your budget, first conduct a financial audit to set realistic goals that will hold you accountable. If you have a job lined up after graduation, calculate your monthly income after taxes. Then check your bank and credit card statements to see how much you spend on necessary expenses, like food, gas and rent.
After that, you can see how much you typically spend on nonessential expenses, like restaurant dining and entertainment. Set aside a specific number for those expenses each month and try to stick to it. If you have very little left over to put into savings, challenge yourself to cut back on nonessential expenses — even canceling a subscription service or two can add up over time and will let you more easily pay down debt, invest in retirement or bolster your emergency fund.
One rule of thumb for crafting your budget is the 50/30/20 rule: 50 percent of your budget for needs (housing, groceries, debt minimum payments), 30 percent of your budget for wants (vacations, gym memberships, dining out) and 20 percent for savings and investments. Of course, those ratios will look a little different for everyone. If you need help creating or managing a budget, a budgeting app could help.
3. Start saving
Once you have a realistic budget in place, you can start saving and investing in your future. There are two goals to keep in mind: saving for larger purchases through a savings account and saving for retirement through options like a 401(k).
Alcantara says that the smartest way to bolster your savings is through automating your extra funds and getting a savings account. If you have a hard time saving extra cash, open a savings account separate from your checking that allows you to automatically deposit a certain amount from each paycheck into that account. A high-yield savings account is a great option, since you’ll earn some extra cash from the interest accrual on your funds in the account.
When it comes to saving for retirement, new graduates should start as soon as possible, says Annette Harris, financial coach and owner at Harris Financial Coaching. Many employers offer a 401(k) plan, which is a retirement plan that allows employees to contribute a percentage of their salary into a retirement fund, a percentage that is often matched by the employer. “Starting retirement savings immediately establishes [students’] standard of living and budget at the beginning of their careers,” Harris says.
4. Get insured
As a new graduate, insurance might be the last thing on your mind; however, it should be a major priority. Dental, health and life insurance are often provided by employers, but new graduates should also consider renters insurance and auto insurance to prevent emergencies from becoming financial catastrophes. Renters insurance covers the cost of your belongings if something were to happen to your apartment. Auto insurance, on the other hand, protects you against financial losses in the event of a collision.
Insurance policies do require monthly payments; however, those small payments are negligible compared to the tens of thousands of dollars you could face if you encounter an emergency and you’re uninsured.
5. Manage debt wisely
Many new graduates hold multiple types of debt. From student loans to car loans to credit cards, it’s important to manage your debts wisely to avoid further interest accrual. Here are a few tips when managing your debt:
- Always pay more than the minimum: If you pay only the minimum amount, it will take years to pay off your balances, and you will likely end up paying more in interest than you originally spent. If you can afford it, pay your balances in full every month.
- Consider refinancing: If you have private student loans with different interest rates and have a hard time keeping up with them, refinancing could keep you on track. Refinancing consolidates all of your loans into one loan and could even get you a lower interest rate or a lower monthly payment.
- Look into different repayment options: Two popular debt repayment strategies are the debt avalanche method and the debt snowball method. With the debt avalanche method, you’ll start by paying off the debts with the highest interest rate first and work down from there, while making minimum payments on the rest in the meantime. The debt snowball method, on the other hand, asks you to pay off debt with the lowest balances first and work up, all while making minimum payments on the rest.
The bottom line
Graduating from college is a huge accomplishment and a financial milestone in itself. While the realities of the workforce, car payments, student loan debt and more can be intimidating, you can set yourself up for success by taking steps now to assess your finances and establish a budget that works for you.