If you’re a new graduate or are approaching graduation, you may already be hearing that drumbeat of financial responsibility building. A new job, student loans, bills, yikes! One of the best things that you can do right away for yourself is put a financial plan in place. Even if you don’t consider yourself a financial expert, there are still some very simple things that you can do immediately to get you off and running and started on the right foot.
Here is a brief list of some of the best financial planning tips for new college graduates:
- Create a budget. You can create a budget on an Excel spreadsheet or even on a plain sheet of paper. Google Docs has several free applications, including an online spreadsheet that you can use as well. Write down all of your anticipated sources of income and expenses. Expense items might include rent, student loans, car payments, food, gas, savings and any other recurring items that will result in outgoing cash. Next, list all of your anticipated sources of monthly income, including salary, wages, and any other source of income that you can reasonably anticipate. Add up your total income and then subtract your total expenses. Track your monthly spending on an ongoing basis so you can identify areas where you are spending too much money.
- Get health care coverage immediately. While in college, you might still be covered by your parents’ health care insurance plan. But after graduation, you’ll have to make plans to secure your own coverage. With the skyrocketing cost of health care, one of the single greatest benefits of working for a corporation is the health and medical benefits. Going without coverage could have a devastating effect on your finances if you have a severe illness or accident. Be sure to secure that health care coverage for yourself as soon as possible.
- Pay off your credit card debt. If you have credit card debt coming right out of college, it should be one of the first things that you deal with financially. When deciding which debts to pay off first, you should prioritize paying down the debt by interest rates. In other words, the debt with the highest interest rate should be the first one that you pay back, paying down each balance in order with the highest interest rates first. If the interest rate on your credit card balance is high (16% or higher), you might consider a 0% balance transfer. Typically, you can get 6 to 12 months interest free to pay down that balance, but once you get that credit card debt paid down, always pay your balance in full each and every month.
- Consider consolidating your student loans. After paying off that high interest credit card debt, you might want to consider consolidating your loans if you have several large balances spread out across a number of different lenders. Consolidation is not a good idea if you can afford to pay off those loans quickly – simply paying them off will be your least expensive option. While requirements for qualification are pretty strict, consolidating can help you lock in a low interest rate with only one lender and one payment to make. Whatever choice you make, start by putting a plan together to pay those loans down right away.
- Build up a “rainy day” fund. Having an emergency savings fund has NEVER been more important than right now. Immediately start socking away a “rain day” emergency fund. The rule of thumb is to have 6 to 9 months of living expenses liquid (in cash) either in a savings or money market account that you can get to should an emergency (like a job loss) arise. Do not wait to build up that “rainy day” fund. With the economic downturn, corporate downsizing has been rampant and new hires are some of the most vulnerable employees when it comes time for layoffs.
- Pay yourself first. One of the oldest financial planning rules in the book is to “pay yourself first.” After you’ve successfully built up your rainy day fund, create some additional savings goals (down payment on a house or a new business start-up, for example) and pay yourself first — before anyone or anything else. Remember, your rainy day fund is separate from these additional savings goals – and untouchable until that rainy day arrives. Socking away an additional 5 to 15% of your paycheck is a good place to start paying yourself first. You can adjust that rate accordingly but you should always be saving an additional portion of your income (over and above your emergency fund) no matter what your financial situation might be.
- Start investing right away. Hopefully, right after graduation you’ll be fortunate enough to find an employment opportunity (sooner rather than later). One of the first things you should do after getting hired is to sign up for one of your company’s investment plan options, if they offer any. Investing early before other financial obligations start to appear (children, mortgage, etc.) is the best course of action as it can become increasingly difficult to invest consistently as those financial obligations start to pile up. A great place to start is by investing in your company’s 401K plan, if it should offer one. Some companies offer so-called matching contributions (up to a certain percentage) on their 401K plans. A company, for example, that matches up to 5% on your $40,000 salary will match your $2,000 with $2,000 for a $4,000 total contribution, amounting to essentially free money for those who participate. Like my grandfather always said, “You should never pass up free money.”
- Consider moving back home. I know it sounds absolutely nuts. But consider this: moving home for a brief stretch will give you an opportunity to adjust and transition your life right out of college. Moving back home provides an opportunity to focus on some of the most critical aspects of a young adult’s life without being hammered right out of the gate with rent and bills. It can provide a transition period to focus on career choices. So if moving back home for a brief stint after college is a possibility, strongly consider it.
- Pursue your passion. Pursuing your passion might be a concept that sounds crazy to some but obvious too others. You should start right away to pursue your passion, whatever it might be, instead of waiting. How could pursuing your passion be considered a financial tip? Many folks pursue career opportunities solely for financial gain and wind up having to start over from the ground up with a new career when they realize years later that they can’t stand their jobs. Pursuing a job purely for financial reasons can actually wind up costing you more personally and financially than pursuing your passion right out of the gate. So, regardless of what it is, pursue your passion early, regardless of financial concerns that you might have. You will save yourself (and those around you) years of misery if you do it now. If you truly love what you do, the money has a way of working itself out somehow.
The real key to success with financial planning is getting started as early as possible. If you wait to put an emergency fund together or to pay off your credit card debt and student loans, it can take years to recover from putting off those financial obligations. If you can setup a budget, pay off that debt and get started saving and investing at a young age and follow the rest of the financial planning tips outlined above, you’ll be light years ahead of your peers financially in a short amount of time.
This is a guest contribution from Steven Sildon, Managing Director for CreditCardAssist.com. Steve writes frequently about credit-related topics for young people, including student credit cards and student loan consolidation.