A Guide To Managing Your Money After Graduation
College sets students up for success in life beyond campus by teaching them how to better understand the world and how to grow in their careers. But as grads step out into the professional realm, degree in hand, they figure out fast that there’s more to learn. This is especially true when it comes to managing their money in a life filled with new debt, expenses and freedoms.
If you’re a recent college graduate or a young adult looking for ways to succeed with money, we’re here to help! Throw your cap in the air and follow our personal finance tips to move forward with your financial goals from the very beginning.
Financial Advice For Recent College Graduates
For success and strong financial health, you’ll need to take control of your money management skills, attack your debt and keep a rainy day fund for any unexpected expenses that come your way. Follow these tips to not only manage your money but also protect and grow it.
Create A Budget
A budget tells your money where to go, helps you prioritize funds and monitors your spending. The best way to set yourself up for financial success is to create a budget. To do so, you’ll need to know how much you make each paycheck and understand how you’re spending that money.
Once you better understand how much you make and how you spend it, you’ll take your monthly income and first subtract your fixed monthly expenses – those must-pay fees that don’t change or vary only slightly. Examples of fixed expenses include rent, utilities, car insurance, student loans and minimum payments for credit cards and other debts.
With the leftover money, you’ll allocate funds for your savings goals, then assign different amounts of spending money to your variable expenses. These are expenses that may change each month and include such categories as groceries, restaurants, health and lifestyle and entertainment.
Remember that as your circumstances change so will your budget. And as you get better at budgeting, you’ll realize the work is never done and that you’ll often need to make tweaks – especially during months that may require more spending in some categories than others.
Open A Savings Account
Budgeting will help you save money, but you need a place for that money to go so you aren’t tempted to use it. By opening a savings account, you can protect your money and allow it to earn interest, though the interest rate for savings accounts is usually low.
Savings accounts provide easy access to your money when you need it, and you can link it to your other bank accounts if necessary. This allows you to easily transfer money into your savings account, too, every time you’re paid. Remember, with each paycheck, you should budget a small amount of money to go into your savings.
Pay yourself first and take the amount out after you pay your required bills but before you allocate the leftover money to your other variable expenses.
Build Your Emergency Fund
Before saving for anything else, you should first save for an emergency fund. Along with budgeting, building an emergency fund is one of the best ways to protect your finances. Why? Because without an emergency fund, any unexpected, emergency expense or unforeseen event – like job loss – can put you further into debt.
Start with a goal of $1,000 – or at least the amount of your insurance deductible. Once that’s saved, financial experts recommend saving 3–6 months of expenses. This can help fund your living expenses for a few months if you lose your job.
Start Saving For Retirement
It might feel weird thinking about retirement when you’re just starting your career, but the earlier you start saving for it, the more you can take advantage of compound interest, which builds on itself year over year.
For example, if you save $1,000 in a retirement account that earns 2% interest every year, after the first year you’ll have $1,020. That 2% interest on $1,000 earned you $20. In the next year, the 2% interest will be on the $1,020 instead of $1,000. So, without adding more money to the account, at the end of the following year, you’ll have $1,040.40 with $20.40 earned in interest. That may seem like a small change, but with interest being charged on the new amount each year, it can snowball pretty quickly.
In 40 years, your account would more than double to $2,208 – and that is without adding any money to the initial $1,000 you saved. Imagine what the amount would be if you contributed money each month. If you contributed $500 each month over 40 years, your account total would be $364,619. Now, if you started saving for retirement 10 years later and only had 30 years to save, your account total would be $245,219 – more than $100,000 less. That’s why it’s important to start contributing to your retirement plan as early as you can.
When it comes to how much you should contribute to your 401(k) or IRA, it depends on how much you can afford. While financial experts recommend saving 10% – 15% of your income, you may have to start smaller, since you’re just starting out, and build up to that amount. Remember, anything is better than nothing. Even a small amount will help.
If you have a job that matches your retirement contribution, try to save at least as much as the match. So, if your company matches contributions up to $2,500 per year, try to contribute at least that much money into your retirement. The company match is free money your employer is giving you for your retirement. Take advantage of it as much as you can.
To see how much compound interest can grow your money and how much time can affect your total amount at retirement, try this compound interest calculator from the U.S. Securities and Exchange Commission.
Create A Plan To Pay Off Your Student Loans
If you’re like most college grads in America, you’re coming out of school with student loan debt. Student loans are some of the biggest obstacles getting in the way of young adults reaching their financial goals. The faster you can pay them off or pay them down, the better position you’ll be in to do other things with your money, including buying a home, investing and saving even more for retirement.
First, consider paying your loans even during your grace period, which is granted to some borrowers right after they graduate college and usually lasts 6 – 9 months, depending on the loan. While it’s given to help young adults settle into their new life and figure out their finances, interest usually still accrues on the loan balance, even though you are not required to make payments during that time. You can opt to make payments on the full loan or just the interest. Both can be beneficial to your repayment.
Once you start making loan payments, pay extra, if you’re able. If you have multiple student loans, consider using a repayment plan like the snowball or avalanche method. With the snowball method, you’ll make the minimum monthly payments on all of your loans, putting extra money to your lowest balance loan.
Then, once your lowest balance loan is paid off, you’ll put all of that money toward paying off your next lowest balance loan and so on. With the avalanche method, you’ll do the same thing, but start with the loan that has the highest interest rate, moving on to the next highest-interest-rate loan after the first one is paid off.
Start Building Your Credit
Your credit score can impact your chances of getting a loan and the kind of interest rate and terms the loan will have. The higher your credit score, the better. That’s because it shows lenders that you’re a responsible borrower, who can make payments on time and handle their debt. To start building credit, you’ll need to have credit. One simple way to get credit is to open a credit card.
Several factors determine a credit score. Having a mix of credit, including credit cards, student loans and other loans, is one way to get a higher score. Getting a debt consolidation loan can help diversify your credit, build your credit and help you pay for a big expense at lower interest rates than some credit cards.
Length of credit also influences your credit score, so starting to build your credit at a young age will help your score increase in the future as your accounts get older. Just make sure you’re in a good financial position to take on debt or handle the responsibility of a credit card. Consider starting with a low credit limit to make sure you’re able to make your payments and avoid maxing out your card.
Once you have a credit card or loan, make sure you make all of your payments on time and keep your balances low. Payment history is the biggest factor in determining your credit score, making up 35% of your score. The second biggest factor is your amounts owed, or credit utilization, which makes up 30% of your score. By keeping the amount you owe low, you’ll keep your utilization low and it won’t affect your score as much.
Learn More About Personal Finance
As a past college student, you’re used to getting information in several different formats. Stay up on your financial literacy in the same way you did your education!
Read financial books, watch videos on finance topics, keep tabs on the economy, follow the stock market, and learn from reliable financial influencer/podcasts to get tips and expert advice on building and improving your credit, paying off debt, investing and saving for a big expense, like a car or a down payment on a home.
Remember: Recent Grads CAN Succeed With Money
Life right after college graduation can be overwhelming for young adults who are getting their first job, moving out of their parents’ homes and experiencing financial independence for the first time. Having a plan in place for your finances and following the tips mentioned above will help you start building a strong foundation for your financial future.
To prepare even more for the big financial decisions in your life, read more advice from the Rocket Loans® Learning Center.
Ready To Improve Your Financial Life?
Apply for a personal loan today to consolidate your debt.Apply For A Loan
How To Pay Off Debt: A Complete Guide
Concerned about debt? There are many ways to pay it off, no matter how much you’re dealing with. Learn how to pay off debt in a way that’s right for you.
Financial Moves You Should Make At Each Age Of Your Life
For whatever stage you are at in your financial journey, here are the best money management moves you can make during each season of your life.