College graduation season is upon us. Students across the country are walking into their next stage of life, full of promise. This is an exciting time for many newly minted graduates, but along with that excitement comes new responsibility — including managing their money.
You may be on your own for the first time. You likely also have your first professional job, along with new expenses and other obligations. This can be scary for those new to money management, but it’s completely possible to manage your money well.
Here are five steps to take to manage your money after graduation that will set you up for success in the next stage in life.
1. Watch the big expenses.
A key part of managing your money for the first time is watching your expenses. An expense is anything you must spend money on each month, such as utilities, groceries and gas for your car. It’s important to be prudent with all your expenses, but it’s the larger ones — your lodging and car — that can easily derail a budget.
It can be easy to justify spending on these items now that you make more money. Following that philosophy, however, will greatly impact what you have left at the end of each month.
“A good strategy is to stick to the ‘college student budget.’ Just because you have more money coming in doesn’t mean it’s a good idea to spend it all. Living on a budget similar to college allows new grads to maintain the standard of living they’re used to and set aside savings,” says Katie Ross, education and development manager with American Consumer Credit Counseling.
A great way to continue living on a college student budget is to get a roommate. The same goes for avoiding a large car loan. Both let you reduce expenses, so you have more money to work with each month. You want to spend no more than 25% to 30% of your gross monthly income on housing and no more than 10% on a car payment to ensure you’re not overextending yourself.
2. Make a plan for your student loans.
Student loans are the elephant in the room for many new graduates. The average student loan borrower graduating in 2017 had close to $40,000 in student loan debt. That amount continues to rise year over year.
In many cases, you have up to six months to start making payments. During that time, it’s important to set up a plan to attack your loans. If you have multiple loans, you might want to consider consolidating them to make repayment easier.
You may also want to automate payments as most lenders offer a .25% reduction in your interest rate. The sooner you pay off the loans you have, the better, as it’ll free up money to put toward other goals.
3. Start an emergency fund.
Life is full of unexpected events. The air conditioner at your house may need repair, or your car needs something replaced. In these instances, you’ll need to rely on savings to pay for the emergency expense.
A credit card may sound like a great way to handle such emergencies. But that typically results in debt that can take months to repay. The best way to plan for the unexpected is to start an emergency fund. This emergency fund is exactly what it sounds like: a fund to help you in the event of an emergency.
Ideally, you want to have three to six months of living expenses in this fund. It takes time to build this, so start out with a goal of saving $500, then $1,000. There are many online banks that let you start with no minimum balance, pay a decent interest rate, and let you automate your saving. Find one you like and start transferring money on a regular basis.
4. Work on your credit.
Using a credit card isn’t all bad, especially when you only use it for things you can afford. One key benefit of using a credit card is that it lets you build your credit, which is important for your long-term financial health.
Ross suggests getting a credit card if you haven’t had one before, using it sparingly for a few purchases, and paying the balance in full to establish positive credit from the start. While it can be tempting to use credit for everything, it’s important to maintain a good credit utilization ratio (the balance between how much credit you have available and how much you use).
The importance of maintaining good credit can’t be overstated. The health of your credit score can impact the rates you pay on the things you finance, so it’s important to protect it.
5. Start saving for retirement.
You just graduated so should you be concerned about saving for retirement?
Retirement may be decades away, but time is the best gift you can give to yourself when it comes to your retirement plans. The easiest way to start saving as a new college graduate is through the 401(k) plan offered by your employer.
“New graduates can start living on a budget when they first graduate by ensuring they set up their retirement account contributions at a minimum up to their employers’ match,” says Levi Sanchez, CFP®, co-founder and financial planner at Millennial Wealth.
In many cases, your employer will offer to match a certain percentage of your retirement savings. This is free money that doubles the work of your money and sets you on a path of effective retirement planning.
Life after college is an exciting and harried time. With some wise planning, you can set yourself up for success now — and for the long run.