So you’ve just graduated college and accepted a new job position, but what do you do now? Should you be saving, buying the new car you’ve always wanted, paying off your student loans, or moving out of your parent’s house? While we can’t tell you what to do, here are the most common financial mistakes we see new college grads make the most:
1. Over spending their first paycheck
For most college graduates their new job is exciting and the first time they are earning a real salary. This new money can be tempting to spend on a nice car, a large apartment, and fancy clothes. Not focusing on saving and paying off student debt can lead to major financial problems, which is why it is important to refrain from impulse spending.
2. Falling into a lifestyle creep
Along with spending that first paycheck too quickly and carelessly, a lifestyle creep becomes a problem for many who enter into high paying jobs. It’s not uncommon that the more money one makes the more they tend to spend. This sounds fun for a while until you can no longer afford to pay your bills, and your retirement savings get put to the side. Remember to only buy what you need, pay the bills, put money away for savings, and then with whatever money is leftover you can enjoy guilt-free spending.
3. Accumulating credit card debt
Once you get used to a lavish lifestyle, it can become hard to slow down. For many this may mean credit card debt. Credit cards often carry high interest rates, making them even harder to pay off. The failure to pay off your credit card will soon negatively affect your credit score, which in turn can make it harder to purchase a house or take out loans in the future. This is why it is crucial to avoid excessive credit card debt.
4. Failing to successfully pay off student loans
As a college graduate you may likely already be in debt from the get-go because of student loans. If you have student loans, it is all the more important to avoid slipping into even more debt due to lifestyle creep and excessive spending. Like other forms of debt, ignoring your student loans can negatively affect your credit score. If you have multiple student loans, compare the interest rates and devise a strategy for paying them down. You will save on the interest costs if you pay down the loans with higher interest rates first. The debt snowball approach is another option to effectively pay off debt. With this approach you pay off the smallest debt first regardless of interest rate, so you could end up paying more interest here. However, the debt snowball will allow a quicker repayment of the small loan, in turn keeping you motivated to pay the larger loans.
5. Paying themselves last
Rather than creating a budget, which can be time consuming, boring, and hard to keep up with, consider “paying yourself first”. If you select a certain amount from each paycheck to set aside into a savings account (see #s 6 and 7) you will become accustomed to living without that money which therefore makes it harder to overspend. The key is to pay yourself first (hence a separate, dedicated account), then pay your bills, and then whatever is leftover can be used recreationally. You can pay off your debt more effectively, while creating a substantial savings account, and purchasing what you want guilt free. This can also make avoiding mistakes 1 to 4 a lot easier, as well as save your credit score.
6. Not saving for retirement right away
It’s easy for new college graduates to not think about saving for retirement, given how far in the future it is. While this is true, not preparing for retirement early can cause financial stress in the future at the time of retirement. Many companies offer a variety of retirement plans, such as 401(k)s or 403(b)s, or you can easily set up an individual account known as an IRA. It is important to research the variety of options to find which best suits your needs. You will also need to think about your company’s vesting schedule. A vesting schedule is the time your company has set before their contributions in the retirement plan belong to you. Generally speaking, vesting is used as an incentive for employees to stay with the company. Most companies have a gradual vesting schedule, meaning the more years you have spent with them the higher percentage you are vested. Some companies have what is called a cliff vesting schedule, meaning that you are 0% vested until a specific year then you jump to 100% vested. The reason to note this is because your employer’s contributions are free money for your benefit at retirement, so leaving a job before you’re fully vested could cost you thousands of dollars.
7. Feeling an emergency fund is not necessary
Not having an emergency fund coincides with not paying yourself first (#5). While paying yourself is a useful tool for budgeting you should also apply this to an emergency fund as it is crucial to your financial soundness. An emergency fund can be used in many ways, from reducing your reliance on credit cards, or from taking loans out of your retirement accounts. Simply being prepared ahead of time for life’s inevitable uncertainties can relieve a lot of stress. Ideally your emergency fund will hold 3-6 months’ worth of your expenses.
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