Congratulations, you’ve graduated! The world is your oyster, filled with opportunities, challenges, and one inevitable constant – money. As a new graduate, managing your finances can feel overwhelming. But, we have compiled a list of practical money tips to help set you on a path toward financial stability and success.
1. Create a budget and make a savings plan
The cornerstone of personal financial management begins with creating a budget and establishing a savings plan. One popular approach to budgeting is the 50/30/20 rule, where you allocate 50% of your income to necessities (like housing and food), 30% to discretionary spending, and 20% to savings and debt repayment. Of course, these percentages are intended as guidelines and can be adjusted to fit your circumstances or goals.
One of your initial savings goals should be an emergency fund to help you navigate unexpected financial emergencies. This cash reserve should cover 3-6 months of living expenses and be kept separate from your everyday spending account. To make saving a seamless part of your budget, consider setting up automatic transfers from your checking to your savings account. This makes saving effortless and ensures the transfers happen regularly.
2. Avoid debt and minimize expenses
One of the most prevalent forms of debt for young graduates is credit card debt. While credit cards can be helpful tools for building a credit history and earning rewards, irresponsible use can lead to overwhelming debt and negatively impact your credit score. Financial experts often recommend keeping your credit utilization rate below 30%. For instance, if you have a credit card with a limit of $10,000, try to maintain a balance of less than $3,000.
Cars are another potential debt trap for new grads. New cars, while tempting, should not be a priority for grads due to their high cost and rapid depreciation, often losing up to 20-30% of their value in the first year. If you need a vehicle, consider purchasing a reliable used vehicle.
Finally, look closely at your regular expenses and see if there is any room for adjustments. Small changes, like reducing the frequency of dining out, can result in considerable savings over time. Looking out for discounts, shopping during sales, and buying frequently used items in bulk can also make a notable difference in your monthly budget.
3. Make wise student loan moves
When it comes to student loans, not all repayment plans are created equal. Depending on the type of loan, repayment options typically include:
Standard repayment: usually fixed monthly payments over a 10-year period.
Graduated repayment: payments start lower and increase over time, typically every two years, over a 10-year period.
Extended repayment: this offers fixed or graduated payments extended over 25 years, reducing your monthly payments but increasing the total interest paid over time.
Income-driven repayment plans: these base your monthly payments on your income and family size, potentially reducing your monthly payments but extending your repayment term.
Each plan carries different implications for your monthly payments and long-term costs. You might find lower monthly payments appealing, but remember that longer repayment terms can result in higher total interest paid over time.
Save for payments during grace periods
Most student loans offer a grace period, typically six months, after graduation before repayment begins. It’s a common misconception that this is a “free” period where you don’t need to think about your loans. Instead, use this time wisely to prepare for future payments. Consider setting money aside equal to your future monthly payments in a savings account during this period. This habit prepares you for future repayments and creates a financial buffer.
Set up automatic payments
Many lenders offer a slight interest rate reduction as an incentive for setting up automatic payments. This strategy ensures you never miss a payment, helping you avoid late fees and potential credit score damage. And it’s one less thing to worry about in managing your monthly finances.
4. Know your worth when job hunting
As you step into the professional world, it’s crucial to understand and advocate for your worth.
The first step in understanding your worth is to research industry standards for your role. Websites such as Glassdoor, Payscale, and LinkedIn provide salary ranges for various positions across different regions. Professional associations related to your field can also provide relevant data. This information will give you a benchmark to gauge the offers you receive.
Evaluate the entire compensation package
Remember, your pay is not just your salary. It includes other components like health insurance, retirement contributions, bonuses, vacation days, and other perks. Some companies may offer a lower base salary but excellent benefits that might make the overall compensation package more appealing. Always evaluate the entire package before making a decision.
Master the art of salary negotiation
Negotiating a fair salary is an often-overlooked skill in your professional journey, and it begins with understanding and articulating your value. As you approach these discussions, highlight your relevant skills, experiences, and achievements. Be prepared to discuss internships you’ve completed, projects you’ve led, and valuable skills you’ve acquired that make you a strong candidate.
As with any skill, effective negotiation improves with practice. Engage in role-play negotiations with a mentor to refine your approach and responses.
In the actual negotiation, maintain a confident and professional demeanor. This discussion doesn’t have to be confrontational; instead, view it as an opportunity for professional growth. Show confidence in your worth, but also listen and demonstrate respect for the employer’s perspective. Keeping the conversation focused on the value you bring to the role rather than your personal wishes will help to keep the discussion objective and productive.
5. Monitor and build your credit score
Credit scores, ranging from 300 to 850, reflect your creditworthiness. They influence your ability to secure loans, credit cards, and the interest rates you’ll receive. Credit rating agencies generally consider the five following variables when calculating your score:
Payment History (35%): this is your track record of making timely payments on loans and credit cards. Late or missed payments can negatively impact your score, so consider setting up automatic payments or using reminders to ensure your credit accounts are always paid on time.
Credit Utilization Ratio (30%): this represents how much of your available credit you’re currently using. Try to use less than 30% of your total credit limit to maintain a lower credit utilization ratio.
Length of Credit History (15%): the longer you’ve responsibly used credit, the better your score. As a result, try to keep and manage older accounts (instead of frequently closing out accounts) to positively contribute to your score.
New Credit (10%): This includes recently opened credit accounts and credit inquiries. Too many in a short span can lower your score, so try to space out any new credit applications.
Credit Mix (10%): A diversity of credit types (e.g., mortgage, auto loans, credit cards) can improve your score – so consider diversifying the types of credit you use over time.
In addition to understanding what contributes to your credit score, you should get into the habit of regularly checking your score. Many credit card issuers provide free access to your credit score, plus there are free credit monitoring services that will allow you to track your credit without impacting your score. This can allow you to see your progress and spot any inaccuracies or fraudulent activities.
6. Start saving for retirement ASAP
While retirement may seem a long way off, the power of compound interest means that even small savings can grow significantly over time.
If your employer offers a retirement plan, be sure to participate. Not only are contributions typically deducted pre-tax from your paycheck (reducing your taxable income), but many employers also offer a matching contribution up to a certain percentage.
If your employer doesn’t offer a retirement plan, consider opening an Individual Retirement Account (IRA). There are two types: a Traditional IRA, where your contributions may be tax-deductible now, but you pay taxes on withdrawals in retirement, and a Roth IRA, where you contribute post-tax dollars now but can withdraw funds tax-free in retirement.
7. Keep learning new skills
In a rapidly evolving professional environment, continuous learning is key. Staying updated with new skills and knowledge can enhance your relevance, increase job security, and open doors for career growth.
In addition to building your job-related skills, consider ways to boost your financial literacy. Websites, blogs, and podcasts dedicated to finance can be helpful resources. Financial education is an ongoing process, but investing time in it will reap dividends throughout your life.
8. Consult financial professionals
As a new graduate, numerous financial intricacies may be challenging to navigate on your own. This is where consulting professionals can be of immense help. Consider meeting with a Certified Public Accountant (CPA) or a Certified Financial Planner (CFP). These experts can provide invaluable guidance tailored to your financial circumstances. They can assist you in making financial decisions, planning for retirement, managing taxes, and more. Your journey toward financial stability and success can be made significantly smoother with their advice and expertise.
With some planning, discipline, and foresight, you can navigate this new phase of life with financial confidence. These practical tips aim to provide a foundation for effective budgeting, savings, debt management, and long-term financial planning. However, remember that everyone’s financial journey is unique, and the strategies that work best for you may evolve over time. Keep learning, stay proactive, and don’t hesitate to seek professional advice when needed. Armed with these tools and insights, you’ll be well on your way to building a bright and financially secure future.