If you recently graduated from college, it’s time to celebrate your hard work and a job well done. It’s also a good time to get off on the right foot financially. The decisions you make now can help you establish healthy long-term habits around saving money, avoiding debt, and achieving your goals.
Today, many college graduates start out with student loan debt and relatively little money saved. What’s more, persistent inflation translates into high costs for rent, food, and other necessities.
Fortunately, by paying close attention to your money, you can form a solid financial foundation. Below, we’ve listed five mistakes recent college graduates should avoid to help ensure long-term financial success, along with tips from financial experts on how to stay on top of your finances.
1. Mishandling your student loan payments
The average student loan debt is $27,400 for borrowers with a bachelor’s degree from a four-year public university, according to the Association of Public and Land-Grant Universities. Attending a private college or earning an advanced degree could lead to higher amounts of debt.
Possible mistakes when arranging student loans can include:
- Missing or late payments: This could negatively affect your credit score, resulting in higher interest rates on future loans.
- Do not pay more than the monthly minimum, when possible: Paying more than the minimum amount each month can help you reduce your overall interest. (Paying more might be ideal only if you already have a solid emergency fund.)
- Don’t refinance when better rates are available: If research shows that better rates are available, refinancing may net you a lower monthly payment. However, before you take action, be sure to weigh the pros and cons of refinancing your student loan.
Those looking for information about federal student loan repayment plans, such as income-driven repayment plans, can find it on the Federal Student Aid website, says Jennifer Finetti, director of student advocacy at ScholarshipOwl. “There are many different plans and which one works best for you will depend on your top priority.”
If your monthly student loan payment is preventing you from making ends meet, one option is to apply for a deferment or forbearance, both of which serve to pause your student loan payments. These processes only stop your payments, so interest continues to accrue, Finetti says. “And you’ll only delay the inevitable: making payments again at a later date.”
2. Not establishing an emergency fund
Of American adults who have or have had student loan debt for themselves, 27 percent have delayed saving for emergencies because of their student debt, according to Bankrate’s financial milestones survey.
While it’s important to pay off your student loans, establishing an emergency fund should also be a top priority. Not having money set aside for a rainy day can mean going into debt to deal with an expensive unplanned expense, like a medical bill or car repair.
The best place for an emergency fund is usually a high-yield savings account at a federally insured bank or credit union. This account can be linked to your primary financial institution’s checking account and can easily transfer money back and forth as needed.
— Greg McBride, CFA, Chief Financial Analyst at Bankrate
For most people, an emergency fund should cover six months of expenses, while the self-employed, sole breadwinners, and those with variable incomes should aim for double that amount, McBride says. She adds that a good starting point is to set up a direct deposit of your paycheck into a high-yield online savings account.
3. Not living within your means
It’s very important to live within your means when juggling paying off debt and saving money. Keeping your spending under control helps you cover all your bills, avoid credit card debt, and set aside money for savings.
One key to living within your means is to follow a budget. This involves tracking your monthly income and expenses using a spreadsheet or budgeting app. Create categories for your monthly income, as well as expenses such as:
- Rent
- Food
- car payments
- Student Loan Payments
- Credit card payments
- Utilities
- Insurance premiums
- Household items
- Entertainment and other discretionary expenses
- Savings
A budget helps you pay more attention to your finances and possibly helps you identify ways to reduce unnecessary expenses. This can free up money to increase savings or pay off debt.
4. Not saving for retirement
Retirement may seem far away, although investing in your 20s for your golden years allows you to reap the benefits of compound interest, which is essentially interest earned on interest. Starting to save for retirement now, rather than waiting a decade or more, can greatly affect the amount you ultimately have in your savings.
One retirement savings vehicle is the 401(k) plan, which many employers offer. You can contribute a portion of your salary each year, and companies typically match employee contributions up to a certain percentage. The money is invested on a pre-tax basis, providing a tax break on current year taxes.
Another way to save is through Individual Retirement Accounts (IRAs), including tax-deferred traditional IRAs and Roth IRAs, to which you contribute after-tax dollars.
In addition to maintaining your retirement savings, a Roth IRA can provide you with some unique benefits. For example, you may be able to withdraw up to $10,000 from your Roth IRA penalty-free to buy your first home, says Melody Evans, wealth management advisor at TIAA. “The only caveat is that you must earn less than $146,000 as a single individual (to make a full contribution). That is a high threshold for a recent college graduate,” adds Evans.
5. Not saving for your goals
In addition to retirement, you probably have other financial goals that you want to achieve much sooner, like buying a house, getting married, or taking that dream vacation.
Your future self will thank you if you start saving for those goals right away. Some savings accounts are designed to set aside money for separate purposes. For example, Ally Bank savings account holders can create custom savings categories, called “buckets,” and dedicate some of their money to each one.
In addition to setting goals to help you save for planned purchases, you may find it helpful to set goals to pay off student loans or credit card debt. Doing so involves deciding how much you can pay each month and then determining the date by which you will have paid off the debt in full.
Bottom line
Making wise financial decisions as a new graduate can help set the stage for a lifetime of healthy money management. Some young adults prefer soft savings, which involves spending money now rather than saving for the future. However, through careful money management you can achieve a healthy balance between enjoying life now and saving for the future.
ScholarshipOwl’s Finetti recommends that recent graduates meet with a financial advisor, who may be a professional, a parent, or another family member who can offer good financial advice. “The goal here would be to have a conversation about your general bills, your student loans, and your savings goals, so you can come up with a plan that works for you.”
By managing student loans properly, living within your means, and saving for emergencies and life goals, you’re setting yourself up for decades of financial success.
