Congratulations! You graduated from college and took your first job! This is an exciting and frightening new chapter all rolled into one. You will make some serious money for the first time in your life, but you will also be responsible for some serious adult bills. Avoid the most common monetary mistakes made by college graduates before signing a lease or buying a new car. We have compiled a list of blunders to guide you towards a financially prosperous future.
1. No Emergency Fund
In this next phase of your life, saving money is very important, especially for emergencies. When you least expect it, your car may need repairs, expensive dental work, or possibly fired from your job. These unexpected events happen to all of us, so it’s important to plan for them.
Try to create an emergency fund that can cover your basic living expenses in six months. You can open an interest-bearing savings account, such as an FDIC-insured money market escrow account (MMDA), for this purpose only. Thus, money is readily available and brings a small percentage. With this safety net, you will not have to take out a credit card and increase debt in case of emergencies. Instead, you will be confident that you will be prepared for these unplanned expenses.
2. No monthly budget
Chances are, you lived on a lean financial diet in college, where students find frugal ways to survive. Now that you live a more independent life, you need to have a budget and control your expenses. Don’t dump all your ramen noodles until you’ve created a fully funded emergency fund!
Take your time to sign a lease for an apartment with a breathtaking view without first having a budget. Determine your necessary expenses such as rent, utilities, food, and travel expenses. These needs come first before you dive into your desires like a brand new car. You may be earning more than ever, but your income should cover the higher cost of living. The temptation to indulge your desires can be greatly increased. This is your money. Yes, but you need to be wise to begin the journey to wealth.
Check your spending regularly to see how you are doing and to find potential cost savings. There are free apps like Personal Capital, Mint, PocketGuard to help you track your daily expenses and help you achieve your goals.
3. Living beyond your means
When you go it alone, you may find that the freedom you have gained is costly. Slow down large or repetitive impulsive spending. Living outside 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 earnings. While the higher costs are easy to justify, you want to keep money in your accounts after a year of hard work.
Cost overruns can happen when you feel you deserve a high life and are looking for instant gratification. Or when your friends go to bars and fancy restaurants every weekend. Resist the urge to buy designer clothes for work, a new expensive car, or go on a luxury vacation. Don’t finance an expensive lifestyle with credit cards if you can’t afford it.
4. Get rid of your roommate
After graduating from college, the last thing you can think about is living with a roommate again. However, housing costs will make up a large portion of your budget. Are you willing to give most of your hard-earned paycheck to the landlord?
A roommate may not have been part of your plans, but by taking on all the rent, utilities, and tenant insurance costs, you can set aside other financial goals you might have, such as paying off student loans or saving on a purchase. places. … Sharing costs with a roommate you may not see can give you significant savings. These savings can give you financial flexibility that you wouldn’t otherwise have.
5. Lack of a student loan repayment plan
One of your most important new responsibilities will be to make regular student loan payments. Do not delay paying off these loans or extending them in the future. Choose a standard repayment plan with equal monthly installments of up to ten years.
There is usually a grace period that allows you to settle financial affairs six months before maturity. If you live at home or have a roommate, why not start paying now? We recommend that you schedule automatic debit payments from your bank account and link your payroll payments. This way you can reduce the interest rate by 0.25% on certain federal loans during their term. It’s money saving!
Getting multiple loans can be challenging. Organize your payments from multiple sources into a spreadsheet. If you have different payment terms, contact the loan support team to see if you can sync payments or spread them out by month to make things easier. Plus, you can automate all your payments so you don’t miss out on an invoice.
6. Ignoring your company’s free services
What’s in your company’s goodies bag? Your benefit package has many answers to questions about your financial future, but some of them don’t seem close enough. There are various types of benefits that can significantly increase your compensation. As a new employee, you may be missing out on some important details while trying to figure this out.
In addition to paid vacation, vacation, and sick leave, look for perks such as flexible work options, paid gym membership, professional development grants, paid smoking cessation offers, or student loan repayment programs that will directly benefit you.
Some of the value propositions in your package may require your immediate attention, such as the employer-sponsored 401K plan, which you may need to participate. Look for insurance plans, such as health insurance, for plan details.
7. Refusal from free retirement money
Why would a 22-year-old be thinking about retirement? After you figure out where the toilet is in your new workplace, your employer-sponsored 401K retirement plan is next. Seriously, this is so important. The best time to start contributing to your retirement fund is now, especially if your company provides you with money for free into your retirement account. Many employers increase your bill by combining part or all of your contributions.
When you donate early, even if it’s small initially, you can fuel your money with holistic growth. Compounding is when you earn interest on a percentage basis that increases your growth for 40 years or more. Automation of contributions from each salary solves everything in one step.
The wait will end up costing you a ton of money. If your little brother starts investing $ 100 a year at age 25, but you wait to invest the same amount before age 35, you will have less than half in your bank account at age 65. So even if your brother or sister only invested $ 12,000 more, ten years from now he will have $ 162,000 and you only have $ 89,000.
8. Skipping health insurance
You are young and healthy and rarely think about big doctor bills. If you break your leg while skiing or get hurt while playing basketball and need surgery, you may have to pay a very high bill if you don’t have health insurance.
If you are under 26, you can continue to get your parents’ health plan. Depending on your employer and type of employment, you could potentially get your own plan. Make sure you check your monthly premiums and deductions to get an accurate understanding of the cost and details of your new health insurance.
9. Increase in credit card debt.
Credit cards can be helpful, but they can tempt college students and recent graduates that you can’t afford. Collecting credit card rewards, airline miles or cashback is fun. However, they can also be financially dangerous if you don’t handle them carefully.
If you find yourself in a situation where you cannot fully pay off your balance, you should always pay the minimum on time to avoid damaging your credit rating due to late or missed payments. But if you pay only the minimum required amount, you accumulate a mountain of costly debts that are not easy to get rid of.
Let’s say you’re taking a $ 1,500 vacation from your credit card that has an interest rate of 19%. If you only pay the minimum monthly amount to the credit card company, you will start with a $ 60 payment. But to pay the full amount plus interest, you will need to make a total of 106 payments and pay them $ 889 in interest. This is more than half of the amount of your vacation!
10. Ignoring your credit score
Building a good credit score may not even be on your radar. But if you are looking to rent your own apartment, buy a car, or buy a house in the next couple of years, having a good credit rating is critical. Be patient to get recognition where you would like to be. It can take years and efforts to earn a loan on your own and get a good score. Good financial habits are important and can help the process. Monitor your credit report and track your rating periodically.
First, you need to create your loan file. Start by opening a couple of accounts that report to the main credit bureaus. Alternatively, you can become an authorized credit card user of your parents if they have a good credit rating.
Build your track record as a borrower over time by handling payments correctly. Your loan will benefit from paying your bills on time. Do not carry credit card balances with you, which can add to costly debt, become a management problem, and can lead to apartment rent refusals.
11. Deferral of investment
I share the regret with many people that I have not invested before. The best time to start investing is now, even in small portions. When you are young, time is on your side, so don’t waste it. The long-term perspective when investing allows you to withstand volatility rather than fleeing the market. Increasing capacity can improve the return on our investment.
After you’ve set aside some emergency money and automatic contributions to your retirement account, use some of your savings to open a brokerage account and buy a low-cost index fund that monitors the market. These funds will provide you with substantial diversification from the outset. With confidence and learning the basics, you can expand your portfolio by turning savings into investments. Be aware of your risks, but don’t be reckless.
This article originally appeared on Your Money Geek and has been republished with permission.