Congratulations! You made it through college, and maybe even through grad school!
Now, don’t get complacent. What you do — or don’t do — in your first years out of school will influence not just the course of your life, but the comfort and security of your golden years.
It’s tough to think about Future You right now, because New Grad You is itching to start the next chapter in life. Try this, though: Imagine being as broke as you are right now, only some 50 years in the future — in other words, without the ability to pick up an extra shift or run a side hustle to bring in money.
Utilizing the following five steps will get you on track for smart money management. The five steps are doable even if you’ve got student loans and a starter salary.
Best of all, you have a secret weapon. It’s called “time.” You’re actually in a better position than older adults.
1. Create a budget
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Build your spending plan based on the money you currently have, whether you graduated into a dream job (lucky!) or took a temporary gig that pays the bills while you look for something better.
The 50/30/20 budget works for most people:
- No more than 50 percent of after-tax income goes toward “must-haves.”
- 30 percent goes for “wants”
- 20 percent goes for savings (including retirement) and for debt repayment
The categories can be a bit flexible, though. For example, if you’re determined to pay off that Visa card as fast as possible, it’s fine to send some of your “wants” money toward the bill.
Don’t just set and forget your budget, however. Compare your actual spending to the amounts you’ve allowed for each category. If you’re overspending, figure out why. Practice saying “that’s not in the budget right now” both to yourself and to relatives and friends who would encourage you to go off the rails.
Remind yourself that having a money plan is not a punishment — it’s a smart financial habit that’s guaranteed to make life better.
2. Build an emergency fund
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When designing your spending plan, include “cash cushion” as a line item. Even a relatively small emergency such as a blown-out tire can torpedo your finances. Your emergency fund doesn’t need to be huge — aim for $500, congratulate yourself when you get there, and then keep going.
Scheduling small, regular withdrawals for deposit to a dedicated account is the simplest way to build savings. The big hurdle, according to personal finance writer Beth Kobliner, is “convincing yourself there’s any money there to save at all.”
The solution? Follow the money.
“Keep a detailed spending diary for just one month so that you can become conscious of exactly where your cash goes,” Kobliner advises in her newly updated book, “Get a Financial Life: Personal Finance in Your Twenties and Thirties.”
You can do this on paper or with budgeting software like PowerWallet (a MoneyTalksNews partner) or Mint. The results might surprise you: Once you know where money is going, focus on adjusting your spending habits.
Try some of the “stealth savings” tactics found in “39 Painless Ways to Find Fast Cash.”
3. Deal with student loans — and any other debt
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Add up your debt and create a plan to pay it off. That includes any consumer debt you got once you turned 21 and rewarded yourself with a credit card, or one of those “90 days same as cash” purchases.
Student loans can be confusing, especially if you borrowed from more than one source. It can be tempting just to pay the minimum or to ignore them.
Don’t do either one. Instead, make it your business to learn about your options. Maybe you’re a candidate for deferment or forbearance. Consolidation might be a good idea, but not always. And how much do you know about income-based repayment?
This all sounds complicated, and it certainly can be. But these loans are your responsibility, so “adult-up” and make the right choice. Here are two articles to get you started:
4. Build your credit score
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Having low or nonexistent credit means you’ll pay more for loans and car insurance. In addition, potential employers and landlords are likely to peek at your credit report, so you’d better give them something to see.
Maybe you’re one of those folks who takes pride in not using consumer credit, relying instead on your debit card. Big mistake. Whether you like it or not, credit scores make a big difference in how much interest we pay — and, maybe, whether or not we get that apartment or that job.
Start by requesting a free copy of your credit report from AnnualCreditReport.com. Even if you’re sure that you have no credit history, get that report, because:
- Someone else’s (negative) information could have mistakenly been attributed to you.
- Someone else — even a roommate or relative — may have stolen your identity while you were busy in college.
If your report shows low score/no score, set about building up that three-digit number. Start by applying for a card. The Money Talks News card finder will help you pick the perfect plastic.
No luck applying for a standard credit card? Apply for a secured credit card, or ask a parent or close relative to make you an authorized user. Make sure that your use will be reported to the three major bureaus.
For more tips, see “7 Easy Ways to Build Credit When You’re Starting Out or Starting Over.”
Once you’ve obtained a card, never charge anything you can’t pay for in full when the bill arrives. It’s a tool, not a toy.
“Your focus isn’t on how much you can buy. It’s about using it to build your credit score,” says card expert Beverly Harzog, author of “Confessions of a Credit Junkie” and “The Debt Escape Plan.”
No matter how you build a credit history, pay the card before it’s due. On-time payments make up 35 percent of your FICO score. In fact, Harzog recommends paying all your bills on time. Miss a utility or cellular provider payment even once, and it’ll show up on the credit report — and how will that look to a potential boss?
5. Plan for retirement
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Retirement is an important financial goal – arguably the most important one. The best time to plan is right now. Certified financial planner and personal finance author Liz Weston says.
“Every year you wait, you’re passing up company matches – free money! – plus tax breaks and the miracle of compounded returns. Compounding is so important that the longer you wait, the harder it is to catch up.”
Here’s a startling example of compounding in action:
- Kari invests $5,000 per year (about $96 per weekly paycheck) between the ages of 25 and 35.
- Chris invests $5,000 per year between the ages of 35 and 65.
- Kari gets $1,142,811 upon retirement. Chris gets $540,74, even though he invested three times as much.
The moral of the story: At retirement, the early bird will have many more worms. Even if all you can do at first is make the minimum 401(k) match, or set aside $50 a month for an individual retirement account, you’ll be way ahead of the game.
Bonus: Doing this will get you into the habit of paying yourself first and learning to live on what’s left.
Oh, and this isn’t just about setting yourself up for retirement years. Say you want to stay home with kids in your 30s, or switch jobs in your 40s. Getting your retirement fund started early gives you more options overall. Don’t be Chris — be Kari.
Take charge of your life
Remember to celebrate every step that takes you closer to goals. Keep in mind that you’re trying to do a lot with what’s probably the smallest salary you’ll ever earn. You’re just starting out, remember?
Starting small is better than not starting at all, because compounding is your friend — and also because you’ll establish lifelong money habits. As your earning power increases, so can your contributions.
Suppose you currently earn a pittance at a fast-food or retail gig while looking for work in your field. That stinks. Even so, you should apply these five tactics to that teeny-tiny paycheck.
After all, you’ve got to have a budget so you know where your funds are going. You’ll need to get student debt organized, especially if you plan to modify it in any way. It’s possible — although not always easy — to improve a credit score no matter how little you earn.
That emergency fund is even more important if you don’t earn much, so be sure to check out those stealth savings tactics. And as personal finance expert Weston pointed out, saving for retirement is absolutely critical.
You might very well have to sacrifice — for a while, anyway — to do these things. But this is what adults do: They make the smart money moves even if those choices aren’t much fun.
When you were 11 years old you could afford to blow all your lawn-mowing earnings on action figures and Pokemon cards, because the grownups in your life would be there to cover life’s necessities.
Guess what? You’re the grownup now. Take charge of your finances and watch your money (and security) grow. Someday you’ll thank yourself.
What are you facing as a new grad, or what advice do you have to offer new grads? Share with us in comments below or on our Facebook page.