5 money lessons for new college graduates

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Many college graduates do not have a clue about how to manage their money.

Instead, it’s more likely they will use credit cards like cash, take on an auto loan they can’t afford or blow their first few paychecks at the mall.

However, that doesn’t have to be the case. Instead, money experts offer five tips to help keep new college graduates out of financial trouble.

Protect your credit score. New graduates need to be aware of the dangers of a poor credit score.

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Bad credit can make it difficult to get a good job or approval for an apartment lease. Employers and leasing offices run credit checks, says Cheryl Costa, a Certified Financial Planner and managing director of the Boston-area offices of AFW Wealth Advisors.

Paying bills on time is one key way to protect a credit score.

“Missing even a single bill payment means you’ll not only get hit with fees, but you’ll see your score plunge,” says Beth Kobliner, author of “Get a Financial Life: Personal Finance in Your Twenties and Thirties.”

For this reason, she suggests setting up automatic payment for regular expenses like the phone and electric bill.

Make a budget and stick to it. Avoid the temptation to ratchet up your lifestyle simply because a new job has boosted cash flow.

“The easiest way to get into the frugal mindset is to just keep living like a student,” Kobliner says.

Kobliner even recommends living at home for a year to save money, although she and Costa agree that parents should charge their children some rent and maybe a fee for the food they eat.

“Just owing a couple hundred bucks a month over time is good discipline,” Costa says.

Costa also urges new graduates to make a list of everything on which they’re currently spending money. If there’s nothing left over to save at the end of the month, go back to the drawing board and cut some expenses.

Jon Yankee, a Certified Financial Planner with Fox, Joss & Yankee, a fee-only financial planning firm in Reston, Va., recommends budgeting in some “fun money” to avoid spending too much when going out. However, it’s important to limit splurges.

“Graduates shouldn’t fool themselves into thinking that they’re entitled to go out two or three times a week,” Costa says.

Start saving. When it comes to retirement saving, the message is simple: Start soon.

“Graduates should certainly contribute to their employer’s 401(k) if there’s a company match and even if there isn’t,” Costa says.

Ideally, graduates should save 10 percent of their income per year, she says.

Besides saving for retirement, grads need to build an emergency fund that’s worth three to six months of living expenses, Costa says.

They need a financial safety net because there are so many financial crises that could arise, she says. It’s not glamorous, but Costa thinks grads should put their cash graduation gifts in the emergency fund.

Get insured. Graduates may be tempted to save a few bucks by skipping health insurance coverage. But that could be a big mistake, Kobliner says.

“The No. 1 cause of bankruptcy is an unexpected medical emergency, and people in their 20s are the least-insured group in the country,” Kobliner says.

The new health care reform law allows children to stay on their parents’ plans until their 26th birthday. Some states let you keep the family plan until you’re 30. But at the very least, graduates should get a catastrophic insurance plan to avoid drowning in medical bills, Kobliner says.

Yankee advises new graduates to get renters, disability and umbrella liability insurance to protect themselves against other financial catastrophes.

Renters insurance covers belongings if something happens inside your apartment. Disability insurance offers financial help if you suddenly become disabled.

Meanwhile, a personal umbrella liability policy will protect you if you are sued and found to be liable for damages. For example, if you get into a car accident and someone is killed, you could be sued for an amount above and beyond your automotive liability coverage. In such cases, your wages could be garnished for the rest of your life.

“Some horrible mistake that was not intended could devastate your future unless you’ve done something as simple as purchase an umbrella liability policy for only about $150 per year,” Yankee says.

Manage debt wisely. Graduates should pay off their highest-rate debt, such as credit cards, first, Kobliner says. Credit cards typically carry 14 percent interest rates while student loans carry interest rates around 7 percent.

“If a graduate ever can’t pay off her credit card bill, she needs to re-evaluate how she’s spending her money and whether she’s living within her means,” Costa says.

Meanwhile, Kobliner thinks that grads with student loan debt should consider income-based repayment, which ties monthly payment to income and not total debt.

Costa and Yankee advise consolidating student loan debt. It can lower the monthly payment and it’s easier to manage just one payment every month.