If you’re a new graduate or are approaching graduation, you may already be hearing that drumbeat of financial responsibility building. A new job, student loans, bills, yikes! One of the best things that you can do right away for yourself is putting a financial plan in place. Even if you don’t consider yourself a financial expert, there are still some very simple things that you can do immediately to get you off and running and started on the right foot.
Here is a brief list of some of the best financial planning tips for new college graduates:
Create a budget
You can create a budget on an Excel spreadsheet or even on a plain sheet of paper. Google Docs has several free applications, including an online spreadsheet that you can use as well. Write down all of your anticipated sources of income and expenses. Expense items might include rent, student loans, car payments, food, gas, savings and any other recurring items that will result in outgoing cash. Next, list all of your anticipated sources of monthly income, including salary, wages, and any other source of income that you can reasonably anticipate. Add up your total income and then subtract your total expenses. Track your monthly spending on an ongoing basis so you can identify areas where you are spending too much money.
Look at More Than Salary
The average starting salary for the class of 2022 ranged from about $51,000 for humanities majors to almost $76,000 for computer science majors, according to the National Association of Colleges and Employers (NACE).
You want your job to cover the cost of living in your area. But more money doesn’t always equal greater job satisfaction. Be sure to consider other factors, such as health and retirement benefits, workplace culture, and potential for career growth.
In some cases, a lower-paying entry job in your desired field is likely to be a better deal in the long run than a higher-paying job in a field you don’t want to stay in. Accepting a job in an unrelated field simply because it pays more can either delay your career progress or worse, trap you in a field of work that you dislike.
Consider Moving in With Your Parents
As of October 2020, 43% of young adults (18- through 29-year-olds) lived with one or both of their parents, down from 49% in June of the same year. While the spike was largely a result of the coronavirus pandemic, about half of new grads tend to move back home after graduation, often due to overwhelming student loan debt.
When you’re just starting out and need to build up your savings, moving in with your parents can be a smart money move. It will lower your living expenses while you find your financial feet. It will also help you determine what your actual living expenses will be so you don’t move into a place that’s more than you can afford.
Once you’ve been at your job for a few months, though, look for a place you can live on your own or with roommates. It’s difficult to move back home when you’ve been independent at college, and you’ll grow faster and learn more by being on your own, even though it may be a struggle at first.
Many college graduates return to their parents’ home to save money, but some lack the discipline required to save and end up spending their earnings on wants like entertainment, electronic gadgets, and social life. Moving home will work for you only if you’re sure you won’t fall into that spending trap.
Don’t Buy a New Car
You may be tired of driving a clunker in college or having no car at all, but buying a brand new car is a costly mistake that could keep you on a tight budget for years. Instead, look for a used car that you can afford. If used cars at a dealership are out of your budget, you can ask around to see if a family friend or neighbor is selling a used car, which might be a cheaper route.
You can also consider moving to an area with good public transit options or walkability so that you don’t need to buy a car at all.
Build an Emergency Fund
In addition to maintaining a budget, consider adopting an emergency fund. This stowed-away amount of money will be your safety net in case of unexpected financial trouble, such as a car accident or losing your job.
Ideally, you want to have three to six months’ worth of expenses saved up. But don’t let that number intimidate you. Start small while you build your fund, for example, by setting aside $50 per month. An extra $500 or $1,000 will help out a lot when you have surprise expenses.
Put the money for your emergency fund in a high-yield savings account. It will still be quickly accessible if you need it, and it will earn more interest than it would in a normal checking or savings account.
Get Health Insurance Right Away
While you were in school, you were probably covered by your parents’ health insurance or had a policy through your college. Now that you’re on your own, though, you will need to be responsible for your own coverage.
If you’re young and healthy, health insurance can seem like an unnecessary expense. But medical bills can be financially devastating if you have to pay them out of pocket. In the United States, 50% of adults had medical debt, of whom 23% owed more than $5,000 and 11% owed more than $10,000 as of September 2021.
Your job may come with health benefits. If not, you can purchase it through your state’s health insurance marketplace. If you don’t yet have an income, you may be eligible for Medicaid. No matter what type of coverage you have, use it when you need to, especially preventative care such as annual appointments, screenings, and vaccines. These are available at no extra cost to you.
Start Saving and Investing
Half of Americans have less than $250 left over each month after accounting for their necessary expenses and regular spending, according to a 2021 survey from The Balance, and 12% have nothing at all.
When you’re creating your budget, be sure to incorporate savings into your expenses equation. This means building up your emergency fund, saving up for larger future purchases, and yes, contributing to a retirement account.
If you’re lucky enough to have access to an employer retirement plan like a 401(k), use it. If they offer some sort of contribution match, try to maximize it. If not, open an individual retirement account (IRA) and begin making contributions there. By starting to save for retirement in your 20s, you can greatly impact your future financial security.
Pay Off Debt
If you’re leaving college with debt of some kind, such as student loans or credit card debt, make a plan to pay it off.
For student loans, you can get on an income-based repayment plan so your monthly payment isn’t more than you can afford.5 If you don’t currently have a job, you can request that your loan be put in forbearance, so you don’t have to make payments until you have an income.
If you have credit card debt, you’ll want to focus on paying that off before anything else. Otherwise, the interest you pay on this kind of debt can end up being worth more than the original purchases you made. Consider using the avalanche or snowball methods to pay off one debt at a time until you are debt-free.
Learn About Personal Finance
How do you open a brokerage account? Is it better to pay off a mortgage early or invest the extra money? How do you improve your credit score?
Taking time to learn about personal finance won’t just help you become financially independent. It will help you stay that way by allowing you to avoid costly mistakes. It will also help you build wealth so you can live more comfortably and retire when you want,
The best way to learn about personal finance basics is to find a financial expert whose methods resonate with you and study their advice. You can also talk with a financial advisor (you might be able to find one for free through your work or bank) to create a financial plan specific to your goals. Decide which way you learn the best, and dive into content that can help you build a financially secure future.