Congratulations! You graduated from college and landed your first job! It’s an exciting and scary new chapter all rolled into one. You’ll make some serious money for the first time but also be responsible for severe adult bills. Before signing a lease for an apartment or purchasing a new car, avoid the most common money mistakes college graduates make. We have assembled a list of blunders to steer you towards a financially fit future.
1. No Emergency Fund
In this next phase of your life, saving money is essential, specifically for emergencies. When you least expect it, your car may need a repair, expensive dental work, or you may get laid off from your job. These unexpected events happen to all of us, so planning for them is essential.
Commit to building up an emergency fund that can cover your basic living expenses for six months. You can open an interest-bearing savings account like an FDIC-insured money market deposit account (MMDA) just for this purpose. This way, the money is readily accessible and earns little interest. With this safety net, you won't have to reach for your credit card and ramp up debt for emergencies. Instead, you'll have peace of mind that you’ll be ready for these unplanned expenses.
2. No Monthly Budget
Chances are you were living on a meager financial diet at college, where students find frugal ways to get by. Now that you’re living a more independent life, you need to have a budget and keep your spending in control. Don't eliminate all your ramen noodles until you have a fully-funded emergency fund!
Don't rush to sign that apartment lease with a breathtaking view without creating a budget first. Determine your necessary expenses like rent, utilities, food, and commuting expenses. These needs come first before you dive head-on into your wants, like a brand-new car. You may be making more money than ever, but your income has to cover your higher cost of living. The temptation to indulge in wants may run high. It's your money. Yes, but you must be wise to start on a path to wealth.
Review your spending regularly to see how you’re doing and find potential cost reductions. There are free apps like Personal Capital, Mint, and PocketGuard to help you track your daily spending and help you reach your goals.
3. Living Beyond Your Means
Put the brakes on large or repeated impulsive spending. Living beyond your income is a recipe for financial disaster. Your goal is to spend less than you earn so you can save money and invest some of your earnings. While it is easy to justify higher spending, you want some money left in your accounts after your year of hard work. When you strike out alone, you may find your newfound freedom costly.
Resist the urge to buy designer clothing for work, an expensive new car, or go on lavish vacations. Overspending can happen when you feel you deserve a high life and seek instant gratification. Or when your friends are hitting up bars and expensive restaurants every weekend. Don't fund a costly lifestyle on credit cards when you can't afford them.
4. Getting Rid of Your Roommate
After graduating college, the last thing you may be thinking about is living with a roommate again. However, your housing costs will be a significant portion of your budget. Are you ready to hand over most of your hard-earned paycheck to your landlord?
Sharing expenses with a roommate you may not see much may provide you with worthwhile savings. Those savings can give you the financial flexibility you may not otherwise have. A roommate may not have been in your plans, but by absorbing all of the costs of rent, utilities, and renter's insurance, you may be deferring other financial goals that you may have, like paying off your student loans or saving to purchase a place.
5. No Student Loan Repayment Plan
One of your most considerable new responsibilities will be to make regular student loan payments. Don't put off paying these loans or extend the time further into the future. Go for the standard repayment plan with equal monthly payments for up to ten years.
A grace period usually allows you six months to settle down before payments are due financially. If you live at home or have a roommate, why not make payments immediately? It's a good idea to schedule automatic debit payments from your bank account and link your paycheck deposits. By doing so, you may be able to shave a 0.25% interest rate reduction on certain federal loans over your life. That's saving money!
Having several loans can be complicated. Organize your payments from multiple sources into a spreadsheet. If you have varying due dates, contact the loan servicers to see if you can synchronize payments or spread them out across the month to make it easier. Alternatively, you can automate all your expenses, so you don't miss a bill.
6. Ignoring Your Company Freebies
What's in your company goodie bag? Many answers to your financial future are in your benefits package, yet some don't look close enough. Different types of benefits add meaning to your compensation. As a new employee, you may overlook some essential features trying to make sense of everything.
Beyond the paid vacation, holidays, and sick time, look for perks like flexible work options, paid gym memberships, professional development grants, paid smoking cession offers, or student loan repayment programs that will directly benefit you.
Some of the valuable offerings in your package may need your immediate attention, like an employer-sponsored 401K plan that you may need to opt into for participation. Look for insurance plans, such as health insurance, to know the plan's details.
7. Turning Down Free Retirement Money
Why would a 22-year-old be thinking about retirement? After finding out where the restroom is in your new workplace, your employer-sponsored 401K retirement plan is next. Seriously, it’s that important. The best time to start contributing to retirement is now, especially if your company gives you free money for your retirement account. Many employers increase your performance by matching part or all of your contributions.
Automating contributions from every paycheck takes care of it in one step. When you make contributions early, even in small amounts initially, you can fuel your money through compound growth. Compounding is when you earn interest on interest, which magnifies your growth over 40 or more years.
Waiting will cost you tons of money in the long run. If your younger brother starts investing $100 a year at age 25 but waits to support the same amount until age 35, you’ll have less than half in your bank account at age 65. So even though your sibling only contributed $12,000 more over ten years, he’ll have $162,000, and you’ll only have $89,000.
8. Skipping Health Insurance
You're young and healthy and rarely think about prominent doctor’s bills. Should you break your leg skiing or hurt yourself playing basketball and require surgery, you may be looking at a very high statement if you don’t have health insurance.
If you’re under 26 years old, you can stay on your parent's health insurance plan. You could get your own plan depending on your employer and employment type. Ensure you check the monthly premiums and deductibles to understand the cost and your new healthcare coverage details truly.
9. Racking up Credit Card Debt
Credit cards can be beneficial but tempt college students and recent graduates beyond your means. Kings fun. However, they can also be financially toxic if you don't handle their wit. Collecting credit card rewards, airline miles, or cashback is fun. h care.
If you find yourself unable to pay the balance off in full, you should always pay the minimum on time to not dent your credit score with late or missing payments. But if you only pay the minimum amount required, you will build a mountain of high-cost debt you can't quickly shed.
Say you charge a $1,500 vacation on your credit card with a 19% interest rate. If you repay the credit card company only the minimum amount each month, you’ll start with a $60 payment. But to pay the whole amount, plus interest, you’ll have to make 106 payments and pay them $889 in total interest. That’s more than half the amount of your vacation extra!
10. Ignoring Your Credit Score
Building a good credit score may not even be on your radar. It can take years and effort to make credit on your own and earn a good score. But having a good credit score is crucial if you want to rent your apartment, purchase a car, or buy a home in the next few years. Be patient about getting your credit to where you would like to be. Good financial habits matter and can help the process along. Monitor your credit report and track your score periodically.
First, you need to build your credit file. Start opening a couple of accounts that report to the primary credit bureaus. Separately, you can become an authorized user on a parent's credit card so long as they have a solid credit score.
By handling your payments properly, establish your track record as a borrower over time. Your credit will benefit from paying your bills on time. Don't carry a credit card balance which can increase costly debt, become a challenge to manage, and may get you turned down for an apartment lease.
11. Delaying Investing
A regret I share with many people is not investing earlier. The best time to start investing is now, even in small increments. When you are young, you have time, so don't waste it. A long-term investing perspective allows you to ride out the volatility rather than bailing out of the market. Compounding power can fuel our investment returns to higher heights.
Once you have set aside money for emergencies and automated contributions for your retirement account, use some savings to open a brokerage account and buy a low-cost index fund that tracks the market. These funds provide you with essential diversification from the start. With confidence and learning the ropes, you can expand your portfolio as you turn savings into investments. Understand your risks but avoid being reckless.
The cents of money is about financial education, here to teach and inspire you about money, seek new ideas, and to create greater comfort in your world about one of life’s great stresses. Linda wants to use her financial skills honed by her professional experience to help others.