The thrill of graduating college can be quickly followed by a rude awakening to the realities of adult life. Yes, there are lots of things to be excited about: You’re able to start chasing your dreams, you’re finally making money, and, unless you continue your education, you’ll never have to take another prerequisite course again.
But it’s not all fun and games. Adult life comes with higher living costs, which requires getting into the habit of spending less than you earn and finding ways to start saving for the future. Most starting salaries are far from the six-figure level, which can make financial planning feel overwhelming.
But smart money management doesn’t have to be complicated. Even as a college grad, there are easy steps you can take to establish healthy financial habits that will set you up for success for the rest of your life. Here are four tips to consider.
1. Set a budget that fits your income
When you graduate college, you’re faced with a lot of firsts, which might include setting—and sticking to—a defined budget for the first time. And you won’t have student loan money to bail you out of a financial hole. In fact, if you’re like many grads, you might only have a few months before those loan payments start taking a chunk out of your paychecks.
As soon as you land your first job post-graduation, figure out what kind of take-home (aka after-tax) pay you can expect to see in your bank account each month, and use that amount to set your budget. Start by factoring in needs, such as rent, utilities, and food, as well as new living costs such as student loan payments, professional clothing, transportation costs to get to and from work, and other first-time expenses you may not be used to paying. This excludes “wants” such as travel, monthly subscriptions, or dining out. Remember to build in a little flexibility to absorb unexpected expenses you may incur.
2. Start saving as soon as you get your first paycheck
Once you see your paycheck hit your bank account, it becomes much harder to leave a portion of those funds untouched and start building up your savings.
Because you’re coming out of a period of your life during which you haven’t been making the income of a full-time professional, challenge yourself to keep your cost of living low while dedicating a set percentage of your paycheck to your savings. A good goal to shoot for is to save 20 percent of each paycheck. If that isn’t possible at first, start with 10 percent and aim to increase your savings contribution by 1-2 percent each month.
A couple of great ways to start are to take advantage of employer matching in retirement savings funds and to build up your emergency fund. The sooner you start saving and the more specific you are about your target savings amount, the sooner you’ll achieve your goals. To motivate yourself to save, try labeling different savings accounts for different purposes, whether short-term (“Thailand Trip”) or long-term (“Dream Home”).
3. Don’t move home without a budget
Moving home, at least for a short period of time, can be a helpful way to lower your living costs and build up your savings at the start of your career. However, this strategy can backfire if you don’t have a budget and a savings plan in place. All too often, college grads move home and get used to having extra expendable income. Instead of building up an emergency fund and working toward bigger goals, such as a security deposit and the first few months of rent for an apartment, the money seems to disappear each month.
Before deciding to move in with family or friends to save money, make sure you have a fixed budget in place, a timeline for reaching your initial savings goals, and a clear agreement of how long you’re planning to stay.
4. Pay off high-interest student loans first
Some people advocate for paying off student loans as quick as possible, but the reality is that this strategy doesn’t always save you the most money.
Look into all of your options for reducing your student loan debt and/or offsetting the interest you’re accruing over time. When searching for a job, check to see if the company offers loan forgiveness or repayment programs that could reduce or even pay off your outstanding student loan debt. Meanwhile, consider investments and high interest-earning accounts that can offset the cost of your loans and the interest charged.
Keep in mind that if your student loans have high interest rates—7 percent or higher—it’s smart to pay those loans down as soon as you can. As a rule of thumb, start by paying down the highest interest rates first to reduce the amount of total interest paid.
The first year as a working professional can be a shock to any college grad’s system. Focus on the steps you can take to set a budget, build a savings plan, and make gradual progress toward your bigger financial goals. Remember: Every little bit helps!
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