- Graduating college or university is a huge accomplishment, but the rest of your financial life starts almost right away.
- Planning for the long-term future can be hard when you’re just starting out, but it will pay off big in the end.
- Making smart money decisions in your 20s will help set you up for the larger expenses in your 30s, 40s, and 50s.
Every spring, a new batch of fresh college grads pick up their diplomas and head out into the “real world.” For many, it can be a bit of a culture shock. There’s a lot to navigate, especially when it comes to finances.
If you’ve been paying your own way through school, you may already be well-equipped to handle these things. If you’ve been relying on student loans (or the Bank of Mom and Dad), though, real life money issues could smack you right in the face — and hard.
So if you’ve recently donned the black gown and flung your cap into the air with your fellow grads, do yourself a favor and check out this article. It will provide a thorough checklist of the financial tasks you should be focusing on (or skipping, in some cases). No matter what happens to your bank account in the coming months (or years), trust that long term planning and solid decision making tend to pay off in the end.
Get That First Job
Polish up that resume and start applying for work! That fancy new degree should turn a few heads, right? Often, college grads will be happy to take whatever jobs they can get. After all, they have little-to-no work experience and are still usually only in their early 20s. So you don’t have a ton of leverage to demand better roles or higher pay.
However, that doesn’t mean you don’t have any leverage. We’re still in the midst of The Great Resignation, which is described as “an ongoing economic trend in which employees have voluntarily resigned from their jobs en masse” for a variety of reasons. Commonly cited justification includes stagnant wages, mistreatment from management or ownership, Covid-19 safety concerns, or a lack of remote-work options.
The result is that good labor is in high demand. Use that to your advantage by researching the positions you interview for, matching your skills against the job requirements, and what the average pay scale looks like. You might be new to the workforce, but don’t get taken advantage of.
Okay, you managed to get hired and have started bringing home a regular paycheck. Great job! Time to start thinking about retirement. No, we’re not joking. Many employers offer a 401(k) account. Here’s a more detailed explanation, but in simple terms it’s an investment account that you make small contributions to every time you get paid. Most people contribute somewhere between 3 and 10 percent. That money gets invested by professionals and grows over time.
The real key, though, is take full advantage of any matching benefits you company offers. A common 401(k) set-up will see your company match 100% of your contributions, up to a certain percentage of your salary. Some will even match another 50% of your contributions, if you put in a couple more percent yourself. The end result is basically a 4%-to-7% raise, every year, which grows until you retire. It’s free money and you’d be foolish not to take advantage of it.
Living with your parents (or grandparents/siblings/uncle/etc) sucks. We know. But housing costs (both owning and renting) have exploded in recent years. Without a sizable down payment (which you likely don’t have), it’s next to impossible to get a mortgage. Renting by yourself is also extremely costly in most major cities. What’s a new grad to do?
If the option is there, consider moving back home — just temporarily. However, don’t use the lack of rent payments to live a lavish lifestyle of parties and travel. Instead, take the estimated monthly rental payment you would be paying and stash it in a savings account. Or use it to drastically reduce your debt. Either way, you’ll improve your financial situation or get closer towards home ownership. It may be embarrassing to constantly tell people you’re living with your parents again. Don’t worry, though. It’s not forever.
Make a Second Retirement Account
Oh you thought one retirement savings account was enough? Guess again! While a 401(k) is funded by pre-tax income, directly from your paycheck, you should also open a Roth IRA. This type of investment savings is funded by after-tax dollars. The trade-off is that you won’t be taxed on it when you make withdrawals after you retire. (You will be taxed on 401(k) retirement income, so it’s best to diversify.)
You can contribute up to $6,000 a year into a Roth IRA. If you are able, max it out. But even if you can’t spare six grand every single year, making any sort of regular contribution will pay off big in the long run. Remember, these investments take advantage of compound interest to continue growing over the decades.
Choose Health Insurance
Let’s start with the most obvious health insurance advice: stay on your parent’s plan as long as you possibly can. Recent changes to the laws means you can use their insurance (under most circumstances) until you’re 26. If that’s an option for you, for whatever reason, you’ll have to seek out your own coverage.
Hopefully, your new employer is offering something decent. Compare their plans to see which one makes the most sense for you. You’ll want to find a balance between adequate coverage and a deductible you can afford. You could also opt for private, third-party health insurance if you want. However, many employers subsidize their offerings, making them the better choice.
Buying a Car?
Owning a vehicle is basically a money pit. You keep making payments, buying gas, and paying for maintenance, while your “asset” drops in value with every mile driven. If you don’t truly need a car, our best advice is to skip buying one completely. Take transit to work, carpool, buy a bike, whatever gets the job done.
If you truly need a car, though, make sure you shop smart. Inflation has his car prices pretty hard lately. Supply chain issues have caused a shortage of new cars, driving up the prices of used models. The best financial advice is still to find a gently used model, to avoid paying the sticker price of a brand new vehicle. Then shop around for the best loan terms you can find. Don’t forget to factor in ongoing costs, like insurance and fuel.
Don’t Forget Your Student Loans
Now that you’re officially done being a student, you’ll have to start repaying those college loans. Most lenders offer a six-month grace period before the payments are required. However, you should check to see if that period is completely interest-free or not. If you’re being charged interest, you might as well start paying them.
Take the time to learn whether you have federal or private loans, and what the differences are. Check your interest rate. If it seems high, you can consider refinancing with a private lender. (But consider the potential downside to switching from federal to private loans, in the event that student debt relief becomes a political reality.)
One thing you can never afford to do, though, is ignore your loan payments. If you’re struggling to make the minimum payments, make sure you contact your lender. They are usually willing to work with you on a payment plan, as long as you promise to keep paying something.
Watch Your Credit Score
Do you even know what your credit score is? Most college kids don’t bother finding out. Now that you’re “adulting” full-time, it’s time to start paying attention to it. You probably don’t a very long credit history at this age, but don’t fret. Building a strong credit score is a slow and steady process.
- Pay all your bills on time.
- Get a no-annual fee credit card, use it sparingly, and pay it off every month.
- Keep your debt-to-income ratio at a reasonable level.
Don’t Forget To Have Fun
Making smart financial decisions is an important part of adult life. There’s no way around it. You’ll have to sacrifice plenty of “wants” in favor of “needs” over the next few decades. However, you’re still human. You’re young and (hopefully) healthy, and the world is still your oyster. Don’t forget to spend a little bit of your money on fun things.
Whether it’s dinners with friends, a night at the movies with your partner, or travelling the world, don’t end up being so frugal that just sit at home every night, in the dark. Life is short, so make sure you use some of newly earned income to enjoy your time on this planet while you still can. Just don’t dig yourself deep into debt to do it.
Make a Budget (Seriously)
Most people think making a budget is boring. And yeah, they’re probably right. Spreadsheets and line items, balancing income and expenses. It’s not the most exciting thing. However, it’s an important part of keeping your adult-life finances in check.
The good news is that there are so many ways to form a budget. You can keep it old school, using a notebook and pencil. Or you can lean on technology, using an app or computer software to help keep track of your revenue and expenditures. No matter how you do it, keeping track of where your dollars go is incredibly important. Unlike the government, you can’t run a continuous deficit. So if you’re spending more than you’re earning, it’s time to make some adjustments.
Right now, you’re probably young, unmarried, and childless. Without a whole lot of real responsibilities yet, it’s easy to be carefree with your money. But life changes. Some day soon, you may decide you want to get married, buy a house, or start a family. If you think any of those big decisions are in your future, it’s worth planning ahead.
The average wedding in the United States costs over $25,000. A 20% down payment on an average home might be close to the same amount. And children? While, children will help you burn through any of your extra money almost instantly.
We’re not saying you have to start a college fund for your potential future child the minute you finish college. But a little bit of forward thinking goes a long way. Your future self will be eternally grateful that you paid attention to your finances after graduation.