Congratulations Graduates! You’ve put in all of the hard work needed to succeed and now it’s time to set yourself up for success down the road. Of course, I’m talking specifically about your finances here, but there’s a lot coming at you. Today’s article from USA Today addresses just that: “Congratulations, graduates! Now get ready to start your real-world financial education.”
Unfortunately, at least in the US, not many receive formal personal finance training during their schooling. Even for those that may have, it’s a different thing to talk about money in theory as opposed to using it in practice.
Even though this may be the first time you’ve had to actually work with a budget, it isn’t the boogey man. You’ve got this. Here are some simple steps to keep everything in check.
Know What You Spend
This may seem obvious to some, but it’s one of the hardest steps for many. The key is to find a method that works for you. If writing our each of your expenses by hand works best for you, do that. If using an app like Mint or Personal Capital works better, then use that. What you really need are those numbers all totaled into their various categories that fit into your life.
Once you know what you spend, then you can react to it. If you notice that your food bill is much higher than you ever expected, you can start expanding your cooking skills. Depending on which line item gives you the most grief, there are countless ideas to help you be more frugal.
The reason you care about your spending habits, is that you want to try and create as big a wedge as you can between your expenses and income to the point where you can balance your lifestyle and happiness. If you’re eating rice and beans in the dark, you’ve gone too far. Turn back and find that balance that puts your money where your values are.
This wedge of savings can be used to anything you want. You can travel the world, start your own business, build your real estate empire, save for retirement, but you need that wedge first. Once you have it, create an emergency fund to give yourself a jumping off point. Then use your money as a tool to build the life you deserve.
Learn About Credit Scores
Credit scores can be frustrating, but if you don’t know how to keep your score up it could cost you BIG time. The best thing in this week’s article is to watch out for debt. Using one card or have a utility bill in your name can help you build credit without going crazy.
A credit score consists of 5 elements and each of them have some pretty simple steps to maintain a good score:
- Payment History: Pay your bills on time! I recommend setting up automatic payments. It will save you time and money.
- Amount Owed: Specifically, they relate this to your income. If you have $300,000 in student loans and only make $30,000 this part of your score will not be good. Just focus on not accruing any more debt over what you may already have.
- Length of Credit History: This is just a function of time. It’ll improve as you age. Just keep on keepin’ on!
- New Credit: This is the number of hard inquiries you have on your credit. Basically, how often are you taking on new debt? Keep the amount of loans/credit cards to a minimum to start our and you’ll be fine.
- Credit Mix: This is far outweighed by the other factors, so I wouldn’t worry too much about it. Just the same advice of not taking on more debt than you really need.
Retirement Planning Starts Now
Front load your retirement. Put into your retirement any amount you can now and future you will be thanking you. I know that you may feel like you can’t afford it now, but even $100/month can make a BIG difference over time. Besides, you want to put that money in now since life gets more expensive over time.
I like that this article mentions work benefits in this section too. So many of my clients just don’t know what their work offers them in terms of health and retirement benefits. If your company has a 401K or 403B plan,I highly recommend taking advantage of that program at least up to the match, if there is one. If none of that made sense to you, it might be best to have a financial coach or fee-only adviser in your corner to start out.
Student Loans Might Be the Boogey Man
The best way to handle student loans is to turn and face them head on. Use the six month grace period to focus on getting a job that will pay the bills and build your skillset.
From there, look at the repayment plans available to you. If you don’t enroll in a plan, then you will automatically be enrolled in the fixed payment plan with repayment over a 10 yr period. This may be fine, but, depending on your situation may not be the best option for you.
One option you can take a look at with your private loans is to refinance and take advantage of low rates right now. Companies like Juno are using the collective bargaining power to get their clients lower rates and better loan terms.
As for federal student loans, you will want to leave those as they are and look for the right forgiveness program that fits your situation.
In this world, nothing is certain except death and taxes.Benjamin Franklin
Paying income taxes is just part of the deal of having a full time job. During this time, you may move from being a “dependent” to sending in your own taxes. That’s a big step that needs to be discussed with your parents to see what is best for everyone.
The stimulus and earned income tax credit enhancements may have added some complexity to this and next year’s taxes for you. I recommend working with a professional to ensure you are not missing anything.
The last piece of advice in here will save you many, many hours of your life come tax time if you get started now. Set up a filing system to keep track of expense receipts and other tax documents. Keep these records for at least 7 years since that’s how far back an audit can go. Future you WILL thank you.
Some Added Advice of My Own
Watch Out for Credit Cards
When trying to use credit cards to build your credit, be sure that you don’t slip into the habit of using credit cards to pay for things when you don’t have the money. Anything bought on credit will just cost you more than the sticker price you paid later. I’d recommend a no or low fee credit card like the Capital One Venture One card. That way you’re still building credit, accruing points and not having to pay for the privilege.
If you are not the kind of person who can be trusted with a credit card, it is better to focus on makign regular payments on a loan with fixed installment payments, like your student loans or a car loan. There is no prize for going into consumer debt to try and prove that you can use credit cards.
Sinking funds are a great way to help you pay for those random expenses, whether they are expected or not. Say, your car needs emergency maintenance and you suddenly have a $200 bill that you didn’t plan on. Having saved some money every month into your car sinking fund will take the brunt of the pain with bills like this.
With bank accounts like Ally and Capitalone that allow for creating “buckets” of money, the use of sinking funds is even easier since it can all be done within one savings account.
Automate Everything You Can
The best way to simplify your finances is to automate all of your savings and bill payments that you can from the start. Your retirement savings can be automated even if you don’t have an employer plan through an investment account like a Roth IRA. From there, automate your sinking fund savings to keep your financial life more balanced, even when emergencies come up. Then all of your bills can be put on autopay.
Even if you’re worried that your credit card bill may be too high to automatically pay off at least automate the minimum payment and then you can always go in and pay more on top of that. Just make sure that you don’t miss the minimum payment as that will negatively affect your credit score and further perpetuate the cycle of debt.
Further Reading for Starting Out
Finally, I’ll finish off with some books that I highly recommend as you start out.
- I Will Teach You to Be Rich by Ramit Sethi
- Your Money or Your Life by Vicki Robbins
- The Latte Factor by David Bach- No, this book will NOT tell you not to buy coffee. I promise.
- The Simple Path to Wealth by J.L. Collins
Best of luck and congratulations graduates!! If you want more personalized advice, please reach out to me and check out my financial coaching services. Let’s use your money as a tool to build the life you deserve!