By Tracy Scott
As a recent graduate, you’re at a crossroads, both personally and financially. Decisions made today can affect the rest of your life.
Questions such as:
Do I really want or need to go to college or graduate school?
Is it better for me to take a gap year instead of moving across the country right now for college?
I just landed my first full-time job, so why shouldn’t I spend money on whatever I want?
While we can’t tell you whether to continue with post-secondary studies now or wait a year, we want to encourage you to make smart financial decisions today to start on the road to a promising financial future.
Smart money management helps you avoid the stress associated with the regret of spontaneous money choices, i.e., spending half of your paycheck on lottery tickets. Here are five money management tips for recent grads that will help you avoid common money mistakes.
Contribute the Maximum
Sign up for an employer-sponsored retirement plan, e.g., 401(k), 403(b) or 457 (b), and contribute at least up to the matching amount. Employers often set match contributions (up to 6%), meaning your 6% contribution per paycheck means 12% towards your retirement account. Their match translates to free money.
Speak with your human resources department about other employee benefits you may have overlooked during orientation. Retirement plans, flexible spending accounts, complimentary gym memberships, etc. are ways you can reduce your tax liability and keep out-of-pocket expenses low.
Establish an Emergency Fund
Many financial professionals recommend households set aside at least three months of living expenses in an emergency fund account. Financial emergencies will happen. We simply don’t know when. You can be prepared for the unexpected car repair or dental emergency and avoid turning to high-interest credit cards if you have an emergency fund available.
It can take a while to build your fund, so start early and contribute often. Make it easy by opening a designated savings account with an automatic electronic transfer from your checking account each month. Starting with a small amount is fine, as long as you start.
Build Your Credit
You’ll need good credit now and in the future. Landlords, employers, utility services, and cell phone companies check your credit and are known to make decisions based on an applicant’s credit health. If you hope to secure an auto or home loan at a competitive interest rate (and you should), then you’ll need good credit. Bottom line – lousy credit has both financial and opportunity costs.
Keep your credit in great shape by paying all of your bills on time and keeping credit card balances low. If you’re ready to build credit, consider a secured loan. There’s no credit check since the balance in your savings account establishes the credit limit. Your record of repayment is reported to at least one major credit reporting bureau which will help you build a strong credit history.
Set Financial Goals
Dream of driving a new car, furnishing your apartment space, or spending the week at a tropical resort? You can turn these dreams into reality when you set financial goals and work to achieve them. Financial goals move you out of a foggy dream state and force you to identify what you need to do to make your dreams come true.
Your financial goals can be as small or as big as you desire. They can be short term, i.e., saving for a new computer purchase in six months, or long-term, i.e., paying off your student loans in five years. Any goal related to how you earn or spend your money is considered a financial goal. Without setting firm financial goals, it’s easy to spend money impulsively and have little to show for it.
Spend Less Than You Earn
Creating a budget sounds boring, but it’s necessary. It’s one of the surest ways to meet your financial goals. Regardless of how much money you earn, a budget is needed. When comparing your income against your list of expenses, you’ll quickly see if you’re heading towards a financial roadblock. You can course correct, but only if you have the data. A simple way to spend less than you earn while setting financial goals is to pay yourself first. Direct deposit up to 10% of your paycheck to a designated savings account before you pay your bills.
Your financial future begins today. With consistent, good money habits, you can lay the groundwork to meet your financial goals and can be the beginning of a lifetime of financial peace.