Graduating from college is an exciting accomplishment that presents both new opportunities and challenges. You may be ready to move out on your own, start your career, and embark on a new chapter of your life. However, this newfound independence can also be daunting as you learn to balance your responsibilities.
One potential challenge you may face is learning how to effectively manage your finances. Poor money management can threaten your long-term financial security. As you learn to navigate the real world, you should create a plan to help direct your money choices.
Here are five steps you can take post-graduation to start your financial future on the right foot:
- Tackle Student Loan Debt
Student loans can be a major source of stress, even if you’ve landed a full-time job right out of school. On average, recent college grads carry $37,693 in 2021, which may be a hefty balance as you prepare to enter the real world. Establishing a debt repayment plan can help ensure that you pay off your loans on time or ahead of schedule to avoid accruing unnecessary interest, which is essentially the cost of borrowing money.
Start by assessing all of the loan balances you’re responsible for paying off and consider their interest rates and minimum monthly payments. Try to prioritize your debts by paying off either the smallest balances (snowball method) or the highest interest rates (avalanche method) first until it’s fully paid off.
Making higher payments early on can help you avoid paying more in interest. Or, you may be able to refinance or consolidate your loans to reduce monthly payments. Meeting your payments on time can greatly improve your chances of securing a low-interest rate should you decide to refinance in the future.
- Create A Budget
Life after college can be expensive, which may come as a surprise if you’re not prepared. To ensure you are able to afford basic necessities and that you live within your means, you need to make sure your income aligns with your spending. For your savings to grow, you’ll need to spend less than what you earn.
As you prepare a budget, start by evaluating any recurring expenses, such as your rent, utilities, student loans, and car payment. Then, factor in any other expenses you may incur like personal spending. Track these expenses and your spending in a spreadsheet or with a budgeting app to gauge how conservative you will need to be with your money and to identify any discretionary purchases you can avoid.
You may find value in using the 50/30/20 rule when creating your budget. With this method, 50% goes toward essentials, 30% goes toward wants, and 20% goes toward savings and paying down debt. You can use this split to determine where you may be overspending versus where you should allocate more money
- Invest Your Money
While some recent graduates will choose to tackle their student debt first, others may explore ways they can invest their money to earn more over time. Depending on your financial situation, there are several ways you can invest your money to reap long-term financial benefits.
For many, homeownership is often their first major investment. Whether you’re ready for this milestone or not, you should take time to understand the basic steps of the process of real estate investing so you know what to expect. At the very least, you should understand how a mortgage works, how much you should plan on saving, and how your personal finances may impact your ability to secure financing.
You should also understand what’s required to qualify for certain types of loans. In particular, many recent grads explore affordable home financing options like FHA loans to help lower their initial costs. These loans are especially popular among first-time buyers as they only require a credit score of at least 580 and 3.5% down. Knowing the process and financial commitment may help guide your saving strategy.
- Start an Emergency Fund
You may think that earning just enough to cover your basic living expenses will suffice, but it’s also important to prepare for unplanned expenses. Your emergency savings will provide you with financial netting should something unexpected happen, such as job loss or an injury.
You should try to save at least 3 to 6 months worth of living expenses. While this may seem like a lot of money, your account will grow with regular contributions. The easiest way to build your emergency fund is by depositing money from each paycheck into a separate account or by setting up automatic savings.
Of course, the best time to start saving is as soon as you graduate. However, even if you don’t currently have money saved, it’s not too late to start. If you recently received a bonus or tax return, consider using it to jumpstart your emergency fund, or use any money from foregone expenses to boost this account.
- Save For Retirement
You may have just graduated, but it’s never too early to think about retirement. Most companies offer a 401(k) retirement plan and may even match a percentage of your contribution. Or, if they don’t, you should open an individual Roth IRA account.
When setting up your retirement account, you should have a number goal in mind. Think about how much you would like to have saved up by the time you retire, and base your contribution on that amount. Keep in mind that your retirement account compounds interest, so the sooner you start saving, the better.
Once you start a 401(k) or Roth IRA, it’s important not to touch that money. If you withdraw before retirement, you’ll incur a 10% penalty and will have to include the withdrawals as income on your tax return, which could push you into a higher tax bracket. Plus, you would be taking money away from your future self.
Getting your finances in order is critical as you begin this new stage in life. Developing good money habits and management skills will help you secure a better financial future.