As we make it through the Summer of 2015, many new graduates will soon be entering their first real world job. Some may have opted to forgo a Summer break and may have already started. Some have asked for general guidelines as they begin working their career. I’ve compiled a list of financial advice for college graduates. These will help new grads develop and establish good financial habits that will carry on throughout their lifetime.
“Buying something you don’t need for 50% off is a 100% waste.”
Financial Advice #1: Develop a Budget
Once you receive your first paycheck, develop a budget right away. If you are a salaried worker, this becomes easier since you’ll know how much you’ll consistently make, paycheck-to-paycheck. Whether you’re paid weekly, biweekly, or once a month, set up your budget on a monthly basis. Keep in mind that the cash you take home will be significantly less than what was written in your offer because of deductions for taxes, social security, medicare, and medical insurance. Once you receive your paycheck, at least you’ll know what’s been deducted and what’s left after.
You’ll want to list your expected expenses. The easiest ones are the recurring ones every month. This includes rent, insurance, cell phone, internet, and loan payments. We call these fixed expenses. After that, start budgeting out for variable expenses including food, clothing, entertainment, and travel.
Be sure to do the smart thing and start building an emergency fund if you do not already have one! Remember the CashFlowAlpha methodology: aim to save for at least 6 months worth of expenses. This should be roughly equal to 6 x (Your fixed expenses + variable expenses). Think about using a separate savings account so it’s not tempting to withdraw, yet keep it accessible enough in case you need it quick.
“A budget is telling your money where to go instead of wondering where it went”
If you’ve never lived on a budget before, write down everything you spend for a few months. An easy way to do this is to save your receipts after every meal, every purchase, and stick it into a folder on your desk somewhere. At the end of the month, pull them out and categorize it. Then compare it against the budget you set up for that month and see how you did.
Financial Advice #2: Pay Off Your Student Loans
Most college graduates leave school in debt with student loans. Some programs offer a grace period before you have to start making required monthly payments. Use this time to get your budget in order and start thinking about how much you extra you can afford to pay each month. Once you have a budget and an emergency fund set up, start paying off your student loans aggressively! You don’t want to leave extra money on the table in the form of interest payments. The good news is, when it comes to tax time, you can deduct up to $2,500 of your loan interest (as long as you’re making less than $80,000 per year).
“Live like no one else today so you can live like no one else tomorrow.”
Financial Advice #3: Build Your Credit
Now that you have a stable income, it’s time to start building credit if you haven’t done so in college. Many credit card companies offer rewarding credit cards for first timers. Take advantage of some of these offers and start building your credit. Remember, as long as you stick to your budget and are able to pay off your credit card each money, you won’t be throwing away money. Refer to my credit card post for more in-depth detail.
Financial Advice #4: Build Your Retirement Fund
Your new employer will typically offer some type of retirement fund. The most common one is the 401k. If you’re working federal, you may be offered a TSP. Consider maxing out these funds. You’re allowed a certain limit per year ($18,000 for a 401k). Investing early will allow you more time to generate growth by the time you’re ready to retire. More often than not, these retirement funds come with tax advantages. A lot of employers will match what you contribute to your retirement fund. This is FREE MONEY! And last time I checked, free money was a good thing.
After everything is said a done, build up some extra cash reserves. Fund a travel account if you plan to travel, or a savings account towards a down payment of that dream car or new house you’ve always wanted. Establishing good financial habits early in your career will reward you over your lifetime. Discipline can be hard at first but you’ll find it very worthwhile once these become routine. You’ll feel less stress and less burdens as you take control of your finances!
“A short-term sacrifice will equal a long-term reward.”
Take these financial advice for college graduates and remember them forever. These not only serve college students but also adults for the rest of their lives.