3 Things Recent College Grads Need to Know about Money

Congratulations to everyone graduating this semester! After years of preparing for a career while likely living off student loans or receiving assistance from your parents, now it’s time to start adulting. Here are 3 things recent college grads need to know about money.

My neighbor’s daughter graduated from college today – my alma mater! Seeing her in her cap and gown I am reminded of how young we are when we graduate college. It seems like just yesterday she was going to her prom.

Even if you received the best education money could afford, chances are you were not taught about personal finance.

Six months after graduation, student loans will be due. So how do you pay off debt while working an entry-level job?

Here are 3 things you need to know about money:

 

1. Avoid lifestyle inflation!

With your new degree, you are expecting to land a higher-paying job or earn a promotion. But don’t go spending that money right away!

The #1 thing college grads can do to set themselves up for financial success is to continue to keep your expenses the same until your student loans are repaid. If you avoid lifestyle inflation, this can be done in record time!

I was able to pay off all my student loans (as the sole earner for my family). It can work for you, too!

I graduated with a PhD in clinical psychology and a newborn baby! During my post-doc year, my husband stayed at home with the baby while I finished my training. Because post-docs are trainees, I did not make much money. Even worse, my student loans were due 6 months into starting my post-doc.

My parents wanted me to rent a house (so we would have more room for the baby). After 10 years of living in apartments, it was very tempting! But I am glad we chose an affordable apartment instead. We reduced as many expenses as we could and I put that money toward paying off my car loans, medical bills, and then started making extra payments toward my student loans.

When I got my first job, I did the same thing. I continued to live in an affordable apartment with older-model paid-off cars, and reduced expenses. Within months of starting my new job, I paid off my students loans! Then I saved for a down payment on a house!

Six years later, and my mortgage is almost paid off! Our lifestyle has increased in recent years, but the percent of my income that I spend in different areas has remained the same.

Avoiding lifestyle inflation after graduation was the best decision I ever made!

2. Focus on One Goal at a Time

Whether you are starting your career or are enjoying a pay increase after receiving a promotion, chances are you have a lot of plans for that money.

You may be wondering about contributing to your retirement account, saving for a home, investing, and repaying your debt. You may be wanting to travel, have a wedding, or grow your family.

The reality is, when you try to do everything, you won’t make substantial progress on anything.

Rather than putting a little bit of money toward each of your goals, consider focusing all of your efforts on one thing at a time. This approach is consistent with Dave Ramsey‘s baby steps. Regardless of what you think about Dave Ramsey, following his baby steps really can help people get out of debt.

List your personal goals and prioritize them. Here’s an example of a goal hierarchy. Yours may be different based on your values. But everyone should consider putting emergency savings and debt repayment at the top of their list.

my Priorities:
  1. Emergency savings account
  2. Debt repayment*
  3. Saving for a down payment on a home
  4. Maxing out retirement
  5. Investing
  6. Traveling
student loans

*If you have student loans, it will be important that you research options to assist with loan repayment. Ask your employer (or potential employer) about any payment plans.

Be proactive with paying off your loans. Contact your loan servicer to make sure your contact information is up-to-date. Know your loan balance, interest rate(s), and payment options.

Read the fine-print of any consolidation programs and repayment plans very carefully before signing up. Did you know that fewer than 1% of applicants for the Public Service Loan Forgiveness program received loan forgiveness? Many applicants thought they were qualified who were not, and others did not complete their paperwork correctly.

Resources for those with Student Loans
  • For information on Loan Forgiveness programs, see StudentAid.gov
  • To learn whether your federal position qualifies for PSLF, see OPM website
  • Student Loan calculators can be found at Student Loan Hero
    • For a general idea on how increasing your payment can save you time and money, see this calculator from the NY Times

 

Finally, make room in your budget for your monthly payments.

3. Create a Budget

If you want to get (and stay) out of debt, you will have to spend less money than you earn, and put the rest toward what you owe.

To help you achieve this, you will need to know how much money you are spending in each area. Track your spending for at least 3 months. Cut any unnecessary expenses. Then, create a realistic budget, putting as much as you can toward your debt repayment.

Example Budget for Getting Out of Debt

This example is based on one person with no dependents.

Income 2,800
Rent -1000
Food/Toiletries/Household Products -180**
Electric -80
Water -30
Internet -0 ( cut)
Cell phone -40 (discount carrier)
Gasoline -35
Car insurance -100
Car payment -300
Gifts/entertainment -15 (you’re in debt!)
Streaming service -0 (cut)
Medical -20
DEBT REPAYMENT -1000 (the more you can put toward this, the FASTER you will be FREE)
Remaining balance =0

**Many people have been asking how to lower their grocery bill. We averaged $400 per month on food for a family of 5!

In Summary

By avoiding lifestyle inflation, prioritizing your goals (including paying off your student loans), and creating a budget, you will be able to pay off your debt. Once your debt is paid off, then you can start to build wealth.

Congratulations on earning your degree. And best wishes for a prosperous career.

 

What advice do you have for college grads?

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