Congratulations on graduating college and landing your first job! It’s an exciting and scary new chapter all rolled into one. You’ll make some serious money for the first time in your life, but you’ll also be responsible for some adult-sized bills. Are you ready?
Before signing a lease for an apartment or purchasing a new car, avoid the most common money mistakes college graduates make. We have assembled a list of blunders to steer you towards a financially fit future.
1. No Emergency Fund
In this next phase of your life, saving money is essential, specifically for emergencies and peace of mind. When you least expect it, your car may need a repair, expensive dental work, or you may lose your job. These unexpected events happen to us and can brutalize our finances. You must plan for them and avoid using credit cards that can ramp up debt quickly.
Commit to building an emergency fund to cover your six-month basic living expenses. For this purpose, you can open an interest-bearing savings account like an FDIC-insured money market deposit account (MMDA). This way, the money is readily accessible and earns some interest.
2. Lack of a Budget
Chances are you were living on a meager financial diet at college, where students find frugal ways to get by. Now that you’re living a more independent life, you need to have a budget and keep your spending in control. Don’t eliminate all your ramen noodles until you have a fully-funded emergency fund!
Don’t rush to sign that apartment lease with a breathtaking view without creating a budget first. Determine your necessary expenses like rent, utilities, food, and commuting expenses. These needs come first before you dive head-on into your wants, like a brand-new car.
You may be making more money than ever, but your income has to cover your higher cost of living. The temptation to indulge in wants may run high. It may be your money, but be wise about managing it. Start on a solid path to wealth. Review your spending regularly and find potential cost reductions. Free apps like Empower, Mint, and PocketGuard help track your daily spending and help you reach your goals.
3. Living Beyond Your Means
Living beyond your means is overspending and increasing your debt. You may find your newfound freedom costly when you strike out independently. Put the brakes on large or repeated impulsive spending. Living beyond your income is a recipe for financial disaster.
Your goal is to spend less than you earn so you can save money and invest some of your income. While it is easy to justify higher spending, you want some money left in your accounts after your year of hard work. This is among the most common money mistakes you can make.
Overspending can happen when you feel entitled to the high life and seek instant gratification. Resist the urge to buy designer clothing for work, a new car, spend at expensive bars and restaurants, or go on lavish vacations.
4. Not Having A Roommate
After graduating college, the last thing you may be thinking about is living with a roommate again. However, your housing costs will be a significant portion of your budget. Are you ready to hand over most of your hard-earned earnings to your landlord?
A roommate may not have been in your plans, but by absorbing all of the costs of rent, utilities, and renter’s insurance, you may be deferring other financial goals that you may have, like paying off your student loans or saving to purchase a place. Sharing expenses with a roommate may provide you with worthwhile savings. Those savings can give you the financial flexibility you may not otherwise have.
5. No Student Loan Repayment Plan
One of your most considerable new responsibilities will be to make regular student loan payments. The federal government is restarting the loan repayments, so don’t extend the time further into the future. Go for the standard repayment plan with equal monthly payments for up to ten years.
A grace period usually allows you six months to settle before payments are due financially. Why not make payments immediately if you live at home or have a roommate? It’s a good idea to schedule automatic debit payments from your bank account and link your paycheck deposits, especially if you have loans from multiple sources, so you never miss a bill.
6. Ignoring Company Freebies
What’s in your company goodie bag? Many answers to your financial future are in your benefits package, yet some don’t look closely enough. Different types of company benefits can add to your compensation. As a new employee, you may overlook some essential features while trying to make sense of them.
Beyond the paid vacation, holidays, and sick time, look for perks like flexible work options, paid gym memberships, professional development grants, insurance plans, paid smoking cession offers, or student loan repayment programs that will directly benefit you. Most importantly, your immediate attention should be opting into an employer-sponsored 401K plan.
7. Turning Down Free Retirement Money
Why would a 22-year-old be thinking about retirement? After finding out where the restroom is in your new workplace, contributing to your employer-sponsored 401K retirement plan is essential, especially if your company gives you free money for your retirement account. Many employers increase your retirement account by matching part or all of your contributions.
You can fuel your money through compound growth when you make early contributions, even small amounts. Compounding is when you earn interest on interest, which magnifies your growth over 40 or more years. Automating contributions from every paycheck takes care of it in one step.
8. Skipping Health Insurance
You’re young and healthy and rarely think about expensive doctor’s bills. Should you break your leg skiing or hurt yourself playing basketball and require surgery, you may be looking at a very high expense if you don’t have health insurance.
If you’re under 26 years old, you can stay on your parent’s health insurance plan. You could get your plan depending on your employer and employment type. Check the monthly premiums and deductibles to understand the cost and your new healthcare coverage details.
9. Excessive Credit Card Debt
Credit cards can be beneficial but tempt college students and recent graduates beyond their means. Collecting credit card rewards, airline miles, or cash back is fun. However, they can also be financially toxic if you don’t handle them carefully.
Slow down spending if you can’t pay the balance off in full. Pay the minimum on time so you don’t dent your credit score with late or missing payments. But paying the minimum required will result in a high-cost debt you can’t quickly shed. For example, suppose you charge $1,500 for a vacation on your credit card with a 19% interest rate and only pay the minimum monthly amount of $60. In that case, you’ll need to make 106 payments, including $889 in total interest, for a $1,500 vacation!
10. Prioritizing Wants Over Needs
You should understand the substantial difference between a want from a need. A need is associated with your essential ability to live and survive, like food and housing, while a want is what you desire, shaped by your personality and culture. You may want a convertible BMW, but you may need to get a used car for transportation to your job. Focusing on your needs as priorities will help delay the instant gratification of your wants that may endanger your finances by overspending and having significant debt.
11. Not Building Credit
Building a good credit history will help you get a desirable score, but that may not even be on your radar. A good credit score is crucial to rent your apartment, purchase a car, or buy a home in the next few years. Be patient about getting your credit to where you would like to be. It can take years and effort to build credit on your own and earn a good score.
First, you must establish your credit file, review your credit report, and score for possible errors. Start opening a couple of accounts that report to the primary credit bureaus. You’ll establish your track record as a borrower by making timely payments. Don’t carry a credit card balance which can increase costly debt, become a challenge to manage, and may get you turned down for an apartment lease.
12. Delaying Investing
A regret I share with many people is not investing earlier. The best time to start investing is now, even in small increments. You have time on your side when you are young, so don’t waste it. A long-term investing perspective allows you to ride out the volatility rather than bailing out of the market. Compounding power can fuel our investment returns to higher heights.
Once you have set aside money for emergencies and automated contributions for your retirement account, use some savings to open a brokerage account and buy a low-cost index fund that tracks the market and provides diversification.
13. Not Having A Plan
Not having financial goals or plans may mean you’ll be haphazard about your money. You worked hard in college and got a job, but your life is only starting. Once you begin your career, consider your short-term goals and how they may relate to your long-term wealth-building path. Your goals and plans should be flexible enough to make ongoing changes. It’s a good idea to talk to someone like a financial planner about your goals and strategy and who can work with you as needed.
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This article was produced and syndicated by The Cents of Money.
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.