For my fellow seniors, now is a time of joy and dismay. On one hand, we are enjoying our last year in college and the relaxation that three previous years of hard work have earned us. On the other hand, we are faced with the realization that after graduation we are being thrust into the real world. While many of us are welcoming this change and the independence that comes with it, it is inevitable that some of us will fall victim to one of the biggest problems facing recent college grads: the mismanagement of personal finances.
So maybe you were not a finance major, and the only thing you know about bonds is that he hits home runs. The time between now and graduation is a great opportunity to learn. Being financially savvy means understanding everything from personal banking to insurance. It means knowing how much money you have coming in and going out. It requires setting short and long term fiscal goals and establishing a plan to meet those goals. Every student would benefit from learning the basic principles of personal finance and money management, regardless of whether you are graduating this spring or three years from now. Here are some basic principles that, if used, may help a college grad avoid some of the pitfalls that are associated with the misuse of personal finance.
The most important word to someone coming out of college is "budget." After you land your first job and receive that coveted first paycheck, it is only natural to want to enjoy the buying power of money that you have earned. Budgeting, however, is a great way to track your cash flow and help you set future goals. A budget can help you see where your money is actually going, and by controlling all those little expenses, you may more easily save for something you really want. Adhering to your budget will also give you piece of mind when it comes to your personal finances.
Start by setting short-, medium-, and long-term goals. A short term goal may be a new car, vacation, or television. A medium-term goal could be buying a business or house or paying for a child's education. Long-term goals may include retirement and traveling. As you successfully achieve your short-term goals, the medium- and long-term goals start to seem more and more accessible.
Two choices that almost every college grad has to make are whether to move back home or get their own place and whether to buy or lease a new car. Though the appeal of moving back home may seem enticing, it may not be the best idea. Sure you may live rent-free and get home-cooked meals, but experiencing fewer bills may lead to other expensive purchases. So now the money you would have saved by living at home has just been used to finance your new spending habits. As most people do not plan on living at home forever, getting a place of your own after graduation may be the best way to learn how to be self-sufficient, a significant long-term benefit.
Regardless of whether you buy or lease, acquiring a new car is always a bad investment. A car depreciates more than anything else once it leaves the lot, so if you decide you do not want it after a week, do not expect to receive anything close to what you paid for it. Think about public transportation, especially if you are working in a major city with a subway system. Not only is it cheaper, but you will meet many new people every day. That type of networking is not something to be overlooked. But seriously, if you do decide to buy a car, spend according to your available income. Just because all of your coworkers are driving BMWs does not mean you have to go out and buy one. Most likely they have been saving for a long time.
So you are out on your own, and with all the bills and loans you may have to pay, saving may start to seem like a pipe dream. The importance of saving and investing early, however, cannot be overstressed. Consider this example: a 25-year-old invests $2,000 a year at six percent interest for 15 years and never invests another dollar after that. Now consider a 35-year-old who invests $2,000 a year at six percent interest for 30 years. At the age of 65 the 25-year-old would have earned more than the 35-year-old at the same age, even though the 35-year-old invested for twice as long. Therein lies the importance of investing early.
Start by putting a little away from each paycheck. You'll begin to build an emergency fund that may prove invaluable in case you lose your job, your car breaks down or any other unforeseen problem occurs. Soon you'll have trained yourself to think of saving money as one more monthly bill and you will more easily retain this habit throughout your lifetime. You may also want to consider having a certain amount automatically deducted from your paycheck and put into a savings account.
Once hired to the first job of their professional careers, many grads will take one look at the employee benefit information offered by their employer and convince themselves that they cannot comprehend it and set it aside. Employee benefits are provided in exchange for your work, so not taking advantage of them is equivalent to giving up a portion of your salary. The most important benefit that should be taken advantage of is the 401k. Essentially, a 401k lets you contribute money into an account with every paycheck and often times your employer will match some part of your contribution. These contributions are deducted before taxes are taken out, thereby reducing your tax liability. Your savings will also grow tax free until you withdraw them at retirement.
Another benefit offered by many employers is health insurance, although many entry level jobs will not include this benefit. Put in this situation, many college grads don't foresee any immediate health problems, so they may think paying anywhere from $100 to $400 a month towards health insurance is a waste of their money.
This may be a huge financial mistake since a medical emergency could strike at any time and a one-night stay in the hospital could devastate your financial situation. If your employer does not offer health insurance as a benefit and you cannot afford an individual policy, there are policies available that cover only extreme medical emergencies. You may still be left with a large medical bill, but even limited coverage is better than nothing.
Lastly, the overuse of credit is another problem that affects all age groups, leaving the college graduate as no exception. It may seem like a good idea to "pay with plastic," but you should first know whether or not you can afford every purchase you make. Recent graduates should especially be cautious about acquiring large amounts of credit, since a bad credit rating can interfere with many types of loans and mortgages you may wish to apply for in the future.
The best way to manage your credit is to adhere to these few credit guidelines: First, try keeping only one credit card as multiple cards may leave you lost in a sea of bills. Bills should be paid on time to avoid late fees and the balance should be paid off every month to avoid interest rate charges. If you cannot afford to pay the entire balance, try to at least pay more than the minimum to show you are making an effort to keep up with your debts.
For those who have a hard time resisting the temptation to use your card, try asking yourself if you would take out a loan to make the purchase, because that is what you are essentially doing. If that does not work, you can always just leave the card at home when you go out.
It is no surprise that the transition from college student to young professional can be difficult, and facing the task of learning how to efficiently manage your money may seem overwhelming.
Just remember that, like anything else in life, good fiscal habits are developed one step at a time. It is best to do the research and learn about how to manage your credit, bills, and other expenditures before it is too late. Once you do, you will be well on your way to achieving your lifelong financial goals.
