You just graduated! Congratulations on the hard work, blood, sweat and tears and all the stress you endured for the past few years of your “becoming an adult” life. It truly feels like an accomplishment – I just graduated with my Master’s degree too as of writing this article. But after all the celebrations, we all need to take true control of our lives – one which WE are responsible for. I try to cover some examples I follow, along with pointers that are genuinely reasonable and not far-fetched.
Account for all your personal finance
This is a daunting task: it doesn’t just include the money in your bank account, but also includes assets you own such as: car, valuables, land/house, or in some cases an inheritance.
The first order of business before you start your new job/next big thing in life is to create a sheet which organizes all that is to your name and all that you owe to others. Once you know the real numbers, you can start creating a progress chart which maps out how you go about your daily/weekly/monthly financial decisions.
1. Your Debts.
If you had education loans to your name, you need to know the following:
- How much is left to be repaid?
- What is the interest rate you’re paying on the principle amount?
- How long is the repayment period?
- Where did you finance your education from (bank or credit Union)?
- What is your current credit score?
Once you have these neatly listed out, your goal should be to pay these off AS SOON AS POSSIBLE. When you no longer are financially burdened you really value each dollar that you make that doesn’t leave your account in payments to someone else.
There are a couple of things you can do to facilitate moving in this direction and reduce the burden on yourself. For example: the interest rate on your student loan is currently at 6% (which is pretty high) but now, thanks to building credit either by responsibly managing secured credit cards and paying off all bills on time your credit score has gone from the mid 500’s to high 600’s or even 700+. It is the perfect time to review the terms and seek to refinance your student loan at a significantly lower rate than before. You would have to shop around and I would not recommend just applying for every refinance opportunity you come across but rather discuss potential rates with your local credit unions (rather than banks).
If you get a 2.25% rate on the remaining $10,000 as opposed to the existing 6%, you end up saving $375 (which is significant).
Once you know how much you have to repay, your priority should be to pay off all debts before your next big financial decision (maybe a car or house or that fancy phone you’ve been eyeing for sometime).
I think Dave Ramsey covers how to tackle debt very efficiently and I would recommend heading over to his YouTube page and website to follow stories and advice given to people in similar or worse situations. One of our guest articles does cover this briefly.
While still in debt, personally, I wouldn’t recommend getting yourself into a very expensive car that you genuinely cannot afford. While monthly payments can make it seem you will be able to pay the bills, it’s better to drive around a cheaper used car and move into something nicer once you’ve attained financial stability. Feel free to check out our coverage on financing as well as refinancing car purchases .
2. Live Prudently.
I think we all try to cheap out and just get by as students but what if I told you, work life doesn’t need to be that much more expensive as people make it seem. If you keep shopping at your go-to grocery store, eventually you develop an idea of how much to spend if almost all your meals are had at home. Avoid the expensive things unless you decide to treat yourself or those closest to you and more importantly avoid splurging.
If you lived a $100/month grocery budget as a student and you continue to live in the same area once working full/part-time, you wouldn’t suddenly spend $300/month would you? Maybe $150-200/month because you’ve developed an idea of how much things cost and you’re comfortably getting by. Additionally, all that extra money you end up saving, you can put towards paying off loans or towards that next car you’ve been dreaming about.
Even with this low budget, you can save more using online shopping portals like Ebates where you may shop on Amazon, Macy’s, Walmart, etc… through the portal to get extra cashback. If you sign-up now, you instantly get $10 back on your over $25 purchase using our link. Additionally, use your credit cards that match the categories for example: the Discover IT 5% back card as well as Chase Freedom which have rotating categories to earn points/cashback.
One quarter worth of normal shopping/expenses can earn you a decent cashback or free flights to various cities.
3. Save for a rainy day (and hope it never comes).
Life happens and sometimes it kicks you when you least expect it. Your car may break down or you may need to buy medicines which your insurance doesn’t fully cover. Emergencies come unannounced and it’s good to always have contingencies prepared for the worst – which we cover how to do here.
Additionally, don’t make the mistake of keeping all your savings in a saving’s account that earns you a measly 0.01% APY. Check out our article on High Yield Savings Accounts which can offer high APYs depending on what’s offered and the minimum requirements. I would recommend checking out PNCBank (for out of state offers upto 3.50% to US Citizens), TABbank (2.40%), Marcus by Goldman Sachs (2.25%) amongst others. Choose what fits you best and start saving.
When you deposit your savings in a High Yield Account, you beat inflation currently at 1.9% (as of May 2019) and your money ends up growing (compared to you losing true dollar value with that abysmal 0.01% APY while the Banks still make money).
4. Diversify your savings.
It’s important to create separate savings accounts as you don’t want to tap into your emergency funds for regular purchases which you would otherwise make from savings. You create and manage a checking/saving account for day-to-day expenses, one for your emergencies and you may create separate funds towards a big purchase (and let it grow) maybe for that next car. When you have only one account for everything, the lines get blurred and you really can’t see the growth towards individual goals.
These days, Banks also give out incentives to create an account with them and waive charges on you meeting minimum requirements. I list/cover two such examples where Chase gives you a $200 sign-up bonus and BoA gives a $300 bonus.
It may seem difficult to manage all these accounts, but infact, it takes lesser time to manage these while you watch a YouTube video or listen to a podcast in the background. You can get the mobile apps for these banks and finger-print enable them if your phone supports it for added security.
5. Plan for retirement as early as possible.
Many companies offer 401k packages with their own versions/ iterations of % of income allowed and in some cases – matched. For example, they may match upto 3% or have a policy that states matching 50% upto 4%. For the former if you put 6% of your salary, they will give an additional (maximum) 3% effectively you put aside 9% towards retirement. For the latter, you put 8% of your income and the company gives you 4% (maximum) effectively 12% of your income.
Ideally you want to maximize on the matching so that you effectively save a bigger chunk now which then gets taxed at the income bracket you lie in when you cross 59.5 years. Early withdrawals will have a 10% penalty so beware of accidental cash-outs due to missed roll overs (when changing companies) or not tracking progress and updates.
Additionally, you may also check out Roth IRAs which you set-up (401k is always through the company you work for) if you earn lesser today as it is taxed at your current tax bracket.
Dave Ramsey states it’s better to pay off all debts before you start saving for retirement – but it’s a choice you have to make. But keep in mind the power of compounding can be proved with this example:
If you saved $200 each month, after 35 years, your money would have only grown to $148,680 at a three percent interest rate. At a six percent interest rate, it would have grown to $286,370. If you received a 12 percent interest rate on your savings, your money would have grown to $1.3 million!
The sooner you start to save, the greater the benefit of compound interest.
6. Track your expenses and manage them now before its too late.
The first three months after you get a job and start living that new life, ensure you track all your expenses. Expect to see a radical difference between your days in college and your days in the workforce. Categorize your expenses and try to create an estimate percentage of your paycheck, such as the following:
Emergency fund: 5%
Retirement savings: 10%
General savings: 5%
Rent/mortgage payment: 28%
Utilities (water/gas/electric/garbage): 3%
Automobile (payments/insurance/gasoline): 15%
Student loans: 5%
Credit cards: 3%
Groceries and home supplies: 5%
Entertainment and fitness: 5%
Dining Out: 5%
Miscellaneous (gifts, one-off expenses): 1%Reference from ZipRecruiter
This spread will help you identify areas you should cut down on and highlights how you can plan better to meet your financial goals. It all may seem daunting at first but that first step that you take, makes you accountable and responsible of your financial situation. Numbers can be tricky but once you understand them, it’ll be second nature for you to do what’s best whenever possible initially until you reach a point when your time becomes more valuable than minor savings here and there.
Realize it’s better to spend more time on these things now as you’re young and actually have the time to learn and experiment, but a few years from now when you’re busy and don’t get as much time to research everything, you’ll be proud and feel accomplished because you planned today for a better tomorrow.