Grads' Guidebook: 5 Things New Grads Should Do to Get on the Right Money Path
James Villalobos got lucky when it came to paying for college. The 21-year-old senior at the University of Massachusetts Amherst began hustling for scholarships as a high school student and continued to score scholarship awards throughout his time in school. When he graduates in May, he will only have $2,000 in student loans and some credit card debt to tackle.
But the real world is a far cry from college and the financial pressures are starting to build. As an aspiring journalist, Villalobos knew that his chosen career would not be lucrative at the start. After all, the average salary for an entry-level journalist is just about $37,000, according to the U.S. Bureau of Labor Statistics.
With graduation looming, he said he’s so worried about his immediate financial responsibilities that he hasn’t had time to think about planning for the future.
“Right now, honestly, I think I’m just going to wing it,” he said. “I’m not going to be making much out of college and given how expensive it is to just live, I’ll have so many bills that I can’t be thinking about five to ten years from now.”
Living for that day or that month is a strategy that many recent college grads fall into. It is also one of the worst ways to begin your financial history as an independent adult, financial planning experts said.
With 1.9 million students expected to graduate with bachelor’s degrees this year, according to the National Association for Colleges and Employers, here are five things that new graduates entering the workforce can do to ensure that their financial future is bright.
1. Learn to Budget
Simply mentioning the word budget can conjure images of self-deprivation and lonely nights in front of a television with no cable. But it doesn’t have to be so stark, said Lynnette Khalfani-Cox, co-founder of AskTheMoneyCoach.com and author of “Zero Debt: The Ultimate Guide to Financial Freedom.”
“It’s about knowing how to manage your cash flow and being conscientious of the decisions that you make,” she said. “Look at it as a spending plan of action, rather than a form of deprivation. A budget is actually an empowerment tool.”
The first step to budgeting is simply to make a list of all of your expenses. Start with a quick accounting of every bill that you have paid in the past month.
Break out the ones that are essential to living: rent, utilities, food, car payment and any transportation costs incurred during your commute to work. Then look at additional smaller expenses such as movie tickets and entertainment or your morning cup of coffee. Don’t forget to break out any payments that you make on an annual or semi-annual basis, such as car insurance, and include them into your monthly budget as well.
Then subtract your list of expenses from your monthly income. If you’re spending more than you’re bringing in, it’s time for a reboot. Prioritize your expenses and do away with those that you can live without.
And don’t forget to set aside some portion of your budget for savings, charitable donations and investing opportunities. Having an accessible breakdown of where your money goes will make it easier to plan for the future.
2. Be Smart About Housing
One of the most thrilling aspects of life after college is the prospect of getting your first adult home. For many, it is chance to shake off the drama related to roommates and move on from the bedroom they have lived in since childhood. But in the excitement of moving into a new place, many recent college grads wind up living in an apartment or house that they simply can’t afford.
“That is probably one of the biggest mistakes people make when they are starting out,” said Khalfani-Cox. “They want to be in a fabulous place and think they can afford it just because they can afford the monthly payments.”
Without taking into account all of the other expenses, recent grads may find themselves living way beyond their means in a short amount of time.
A good rule of thumb is to keep housing expenses at 35 percent or less of your net monthly income, she said. Then, with a budget in hand, you can formulate a plan to meet all your other living expenses and have some additional savings in the bank.
3. Keep an Eye on Your Credit and Debt
Even before you get your dream apartment, you have to establish a decent credit score and history. This is something that students can start building while still in college. A good credit score can indicate that you are responsible and more likely to pay back a loan on time.
On a scale of 300 to 850 points, the higher your credit score, the more attractive you are to a lender. A good credit score can ultimately save you money with lower interest rates on mortgages and car loans, and even your car insurance payment.
While having a credit card can help you to build your credit history, if you don’t manage your debt or repeatedly make late payments, a credit card can do more damage than good. One simple strategy is to only charge what you can afford to pay off at the end of the month. Or you can set guidelines that credit cards may only be used for emergencies or specific recurring expenses, such as cell phone bills that you can manage.
You may want to opt for cash for other expenses and avoid using credit cards at places like restaurants and bars, where expenses can add up quickly and get out of control.
If you have already managed to accumulate significant debt before leaving college, it’s important to start strategizing immediately on how to pay it down. There are different options, of course, and you have to figure out what works best for you.
For some, paying minimum balances on all cards and then using extra funds towards your smaller balances may provide some motivation as you see your smaller balances diminish first. For others, tackling the highest interest debts first, regardless of the size of the balance, will help you to pay less in overall interest charges and may get you out of debt faster. Or a combination of the first two strategies may prove successful. The best thing to do is find a strategy that suits you and just start chipping away at your balances to improve your overall financial health.
4. Start Planning for The Future
Just because retirement seems like a lifetime away, it doesn’t mean that you should put off planning for it. Major life changes, such as marriage, children, buying a home or unexpected illnesses down the road may shift your priorities from saving for retirement. That could create problems when age catches up with you.
“The retirement income crisis in the U.S. is arguably the biggest financial crisis facing the U.S. today,” said Robert Johnson, president and chief executive of The American College of Financial Service. “Fifty-six percent of Americans have saved less than $1,000 for retirement. In 2013, the median retirement savings for a head of household between 55 and 64—those approaching retirement—was $104,000.”
The first thing to do is sign up for a 401(k) plan if your employer offers one. If your employer offers to match your 401(k) contributions, you should at the very least aim to contribute at least as much as necessary to get that full match. Otherwise, you are essentially leaving free money on the table.
RELATED: The College Grad’s Guide to 401(k)s
There is also a tax benefit in contributing to a 401(k) because the money is taken out of your pay check on a pre-tax basis. That means that every dollar that you squirrel away in your 401(k) brings your taxable income level down, and thus your tax burden.
If your company does not offer a 401(k), don’t worry. You can still save using an individual retirement account (IRA), which allows you to make tax-advantaged contributions to save for retirement. Here’s a good primer on how IRAs work.
5. Be Smart About Investing
We hear the term “saving for retirement” but what you should be thinking about is “investing for retirement,” said Johnson.
It’s important to remember that you are investing for the long-term and to plan accordingly. It’s also important to pay attention to fees, which can erode your returns overtime.
Before choosing any funds, stocks or other securities, any investors should research potential investments thoroughly. The Financial Industry Regulatory Authority’s Fund Analyzer is a great resource for comparing mutual funds and exchange-traded funds, or ETFs, but be sure to check out FINRA’s other tools and resources here.
New grads will find that, much as in school, doing your homework will serve you well.