Stepping out of college and into the real world can be an exciting time in a new grad’s life. You have your whole life ahead of you to start your professional career and carve your own path. But having a firm grasp on your financial life can be just as important as getting your first job out of school. If you can’t manage the money you have coming in, you might run in to some financial trouble down the line.
If you’re fresh out of school and want to start developing healthy financial habits, here are five money mistakes you’ll want to avoid.
If your finances are important to you and you want to be able to make contributions to your savings, you’re going to need to keep track of your spending.
This starts with creating a budget that’s suited to your financial situation. You may have already been budgeting as a college student, but when you’re out of school and starting your professional career, your priorities may change. Maybe you’re moving out of your parents’ house for the first time and need to start paying rent, or maybe you need to start incorporating student loan payments into your budget. There may be a ton of shifting parts in your budget as you make this transition, and it’s up to you to keep track of your spending in order to re-prioritize your monthly expenses.
If you weren’t budgeting in college, now is the time to start. There’s more than one budgeting technique out there, so you’re going to want to find the one that works best for you. If you’re a visual person, you may want to use a budget calendar to have all of your monthly expenses clearly laid out in front of you. You may also want to break down your budget into budget percentages so you can easily allocate your income to different parts of your budget. However you want to do it, you need to make sure you’re keeping track of your income, how much you need to take care of your bills and rent, and try to make saving a priority.
Just like keeping up good habits in any realm of your life, you’ll need to keep up good financial habits. Saving money is a big part of this. If you’re a new grad, it might be easy to put off saving your money when you feel like you have your whole life ahead of you to start. But this mindset might be a contributing factor as to why nearly 80 percent of Americans are living paycheck to paycheck.
If you want to avoid becoming a part of this statistic, it might be best to start saving now. Even if you’re only saving in small increments, it’s good to get into the habit of contributing to your savings sooner rather than later. One of the best ways of doing this is to set automatic transfers to your savings account on every payday so you don’t have to think twice about it. This may also help to keep your spending in check if you know you already have money automatically leaving your account.
Different rules of personal finance will serve some people better than others depending on their specific financial situation, but there are a few general rules that might be good for most people to follow. One of these rules is that you should try to avoid spending more than 30 percent of your salary on housing.
The problem some new grads run into is that a lot of the appealing jobs they may be after are often in cities that have a high cost of living. After all, there’s a price to pay for living in the big city. This might make it easier for your rent to chew up more than 30 percent of your salary.
If you find a great job in a pricey city where the housing near your workplace is out of your price range, there are a few different ways to help you lower these costs:
One of the easiest solutions – and likely one of the most common for new grads – is to find a roommate to split the cost of your living space. Better yet, find multiple roommates. You may have friends in your graduating class looking for somewhere to live, or you might have friends from home in the same situation. You can even find others looking for roommates on craigslist or local Facebook groups if you don’t mind living with a stranger.
If you’d rather live alone but can’t afford the cost of housing near your work, try looking for somewhere less expensive that’s just outside of town. In this case, you’ll have to factor in the cost of your commute, but you still may be able to find cheaper living options.
This might not be the most appealing option for new grads who are looking to leave the nest and gain some independence, but if you can’t find housing within your price range, it might be best to live at home and save your money until you get a promotion or find a higher paying job. Staying at home with your parents for a couple of years can help you to build the financial foundation you need for when you finally do decide to leave home.
When you’re fresh out school and just on the cusp of starting your professional career, your retirement may not be at the front of your mind. After all, this is a time in your life that likely feels like a new beginning, not an ending. But the truth is, the sooner you start saving for retirement, the better. Let’s look at a simple example.
Imagine that there are two people who are putting $50 away every month for their retirement, but one of them starts at the age of 25 while the other starts at 35. If there’s a 7% average annual rate of return, the person who started saving when they were 25 will have twice the amount put away if they both retire at age 65. This shows that even making small contributions when you’re in your 20s can have big results later on.
Another important thing for new grads to remember when it comes to saving for their retirement is to take advantage of their employer’s matching program. If your employer is offering to match a percentage of your retirement contributions, take advantage!
If you leave school with a boatload of student debt waiting for you, you wouldn’t be the only one. With one in five Americans carrying student loan debt, you may be facing an uphill battle when it comes to paying off your debt within a healthy timeframe.
Student loans will sometimes have a grace period, so some new grads might make the mistake of finding somewhere to live without having a clear idea of when their repayment plan is going to start and the exact amount they’ll be paying every month.
That’s why if you want to lower student loan payments, you’ll need to start working these payments into your budget. Make sure you know how much money you’ll need to contribute to your debt payments before signing a lease.
Finishing school and stepping into the real world can be an exciting time in your life. But landing your dream job shouldn’t be an excuse to let your spending get out of control and shirk your financial responsibilities. It’s important that you start building good financial habits right out of the gate and try to keep this consistent throughout your life. Do your best to avoid these five financial mistakes and start working towards a brighter financial future!
Are there any financial pitfalls for new grads that you don’t see here? Share below!