Financial mistakes recent graduates should avoidFriday 12 June 2020 | Reading Time: 5 minutes
So, you’ve graduated from college and now you’re about to strike out on your own. Entering the real world can be challenging and overwhelming, especially when it comes to navigating your finances. The way you handle your money during the first few years after you graduate can determine your future financial habits. That’s why it’s important to know some of the pitfalls and how to avoid them. Here are some common money mistakes to steer clear of.
Once you start earning money from your first post-college job, you’ll be excited. You’ll also be tempted to spend that hard-earned cash on things you’ve always wanted. But being realistic about the lifestyle you can afford is important if you want to ensure your financial future. Take a look at your first few paychecks to understand how much you’re making after taxes, and benefits like health insurance and retirement savings are subtracted. Next, compare the net pay amount you receive each month to how much you’ve been spending. If you’re spending more than you’re making, you’re staring down a bad road.
Operating without a budget
Most people do not budget and that number is even lower for new college grads. However, a budget is an essential task to help you stay on track financially. Creating a budget acts as a roadmap, revealing where your money is being spent. Working within your budget will help you ensure money is available for essential household expenses first. You can use a budget to identify wasteful spending and then take corrective action. It can also show areas where spending can be reduced or reallocated to pay down debt. Once you get into the regular habit of budgeting, it becomes easier to maintain and you’ll start to see areas where you can do other things like save money and work toward your financial goals.
Failing to make a plan to pay student loans
When you graduate and enter the real world, you typically have a grace period to start paying your student loans. That’s a great time to come up with a strategy for dealing with the debt. Without a solid plan, your financial future could be affected. Here are some planning steps:
Know your loan
Find out the details of your loans, specifically how much you borrowed, what your interest rates are, the first payment date, whether you have a grace period or not, and how many years your loan term runs. Use a student loan calculator to estimate your monthly payments and see how much interest you’ll be charged.
Sign up for automatic payments
Some financial institutions offer a discount on interest when you sign up to pay your loans automatically. Try contacting the student loan issuer and ask about payment options. Along with potentially saving on interest, auto payments will also help you avoid missing a payment.
Look for jobs that lead to loan forgiveness
When considering a new position at a company, review all its available student-loan forgiveness options. The Public Service Loan Forgiveness program can forgive college debt after 10 years of working in a nonprofit, government agency, for example. Other professions may also qualify for loan forgiveness.
Consider refinancing loan
With a decent credit score and income, you might qualify for student loan refinancing, which will let you restructure your debt, the terms of the loan, and you’ll possibly get a lower interest rate. Before applying for refinancing, make sure to research it.
Failing to save money
Once you leave your parents’ home, you’ll be responsible for regular payments like rent, utilities, transportation, groceries, student loans, and more. Even if you have a good job right off the bat, you may feel overwhelmed with these expenses. Chances are you won’t think too much about saving money for the future. But despite all these new financial obligations, you should think about putting money away for larger purchases such as a house or car, or a vacation, you might want to take. Open a savings account and start small. Try putting $20 a month into the account to get in the habit. You can increase that amount over time.
Taking on too much debt
If you don’t get your spending under control, you’ll go into debt quickly and all your finances will suffer. Having debt isn’t necessarily bad, especially when you’re young. You need to build credit and become financially viable to lenders for mortgages, vehicles, and other important purchases. But make sure your debt is manageable and you have a strategy for paying back the money you borrow. Set a schedule for paying down and eliminating debts such as school loans and credit cards. Pay off the smallest dollar debts and debts with the highest interest rates first.
Not starting an emergency fund
The current COVID-19 crisis has certainly taught us that having money for emergencies is essential. But there are many other unforeseen events in life, such as accidents, injuries, and lay-offs that you should be prepared for. Start putting some money away that’s dedicated to emergencies, no matter what the amount. Your ultimate goal should be to save three to six months of living expenses.
Not contributing to a retirement fund
It’s perfectly understandable if retirement is the last thing on your mind. After all, it’s a long way off. But the more you save now, the longer your money will have to grow. If you start now, when you do retire in 40+ years, you’ll have a nice nest egg. If your employer offers a 401(k), be sure to take advantage of it as soon as possible, especially if they match a portion of your retirement contribution.