By Stewart Darrell, CFA
You’ve graduated. Now what? The idea of life after college can be daunting, but also exciting! So many possibilities await you. It’s time to take everything you learned and put it to work (literally) and find a place where you can thrive and gain real-world knowledge while bringing home a steady paycheck. Once you have an income stream going, understanding how to manage the ebb and flow of it will be your next big task. The good news is that the rules for managing money are straightforward. Let’s learn to crush your money game.
Meet Your New BFF, Your Budget
Let’s start with the “B” word—budget. It’s not the most popular kid at the personal finance party, but it’ll be your best friend in lean times and when living large. On top of helping you spend and save wisely, a budget can help you create the building blocks for the lifestyle you want in the future. Begin by tracking how much money you’re bringing home each month and the cost of the non-negotiables (rent, utilities, food, transportation, credit card payments and student loans). Then use the “50-30-20 rule” to sketch out your budget’s spending and saving guidelines:
Just like personal health, personal finance must become a habit and a part of your everyday life to succeed at it. Work your “common money sense” muscles and stick with the budget you establish. There are tools that can do a lot of the heavy lifting for you like Mint, or You Need a Budget. See this comparison of personal finance apps from NerdWallet.
As you progress in your career, beware the “lifestyle creep” effect. Many make the mistake of increasing spending as income rises and drift from the 50-30-20 rule. However, you’ll get more bang for your long-term buck if you maintain discipline and revisit your budget regularly, especially with each raise or significant financial event, to ensure you’re on track.
Money Is a Tool, So Is Credit
Credit is a valuable financial tool that you must learn to wield wisely. Doing so can help you expand your borrowing power and creditworthiness over time. This may mean the difference between getting the apartment you want, your ability to take out competitively-rated loans (homes, auto, etc.) and even affect your employment opportunities. Know your credit score, understand how it works and ways to build up your credit history. Always pay your credit card, car, and student loan bills on time and do what you can to reduce your overall debt load. For example, you can diversify your income stream by taking a side gig, transfer high-interest debt into lower- or no-interest accounts or add an extra $50 to your monthly debt repayments.
Free Yourself from Student Loans
If you’re carrying student loans with you into the world, you’re not alone. Over 70% of college students graduate with student loan debt. The average borrower owes over $37,000 with an average monthly payment of $393.1 If you haven’t yet, take the time to review your loans and understand the payment schedule and details, especially the length of the loan and interest rate. Look into income-based repayment plans if you have federal loans (private loans aren’t eligible) and try to pay off the loans with higher interest rates first. Also, it can be tempting only to make the minimum payments, but taking a more aggressive approach can help you save more money in the long run by reducing the amount you pay in interest. Plus, if you pay off your loans ahead of schedule, you can take the money you would have been paying to start a new savings plan (toward a new spending goal) or use it immediately to treat yourself.
Time Is Your Greatest Asset
Once you have the non-negotiables and saving and debt needs covered, consider carving out 10% of your salary to invest in your future and retirement. Sounds crazy, right? But, if you’re under 25, you have the biggest money advantage of all—time. The longer you allow an investment to grow, the bigger it gets due to a beautiful concept called compound interest, a favorite of Albert Einstein’s. Learn about other investing concepts and check out this section of the National Endowment for Financial Education’s website, Smartaboutmoney.org.
Lastly, if your company offers a 401(k) and will match the money that you put in dollar for dollar, take them up on this offer. It’s the investing equivalent of a free lunch. Ensure you know the “vesting” rules. This is how long you need to be at the company to keep the free matching money that your employer contributes.
Knowledge Is Power
We touched on the basics today, but there is much more to learn, and some techniques may work better for you than others. It helps to get the full lay of the land and pick up and test a variety of tips and tricks. Buy a personal finance book and educate yourself on how money works and how you can put it to work for you. While some books in this genre may bore you to tears, others are fun reads with actionable ideas written for college grads and young professionals. We recommend:
This could be the best time and money you ever spend. Take good notes and try the guidelines for at least a six-month period. Building good money habits takes time and practice, but it’ll pay off in the long run.