Graduating from college is a major milestone for many young people and can be an exciting transition into adulthood.
While you might be fully prepared to start a career in your chosen field, you might not have received much training about the importance of your finances in the future.
Learning about personal finance and managing your expenses, savings, and budget can help establish a sound foundation for building the successful life you envision.
Here are some personal finance tips you should know and incorporate into your life as a new college graduate.
Top Expenses After College and How to Address Them
When you were in college, you may not have had to worry about many of your expenses. A survey conducted by Sallie Mae found that parents pay an average of 54% of their college students' costs, including tuition, room and board, and other expenses.
Like most college students, you might lack a realistic understanding of your expenses and how much they cost.
This makes it essential for you to identify your expenses, understand whether they’re necessary or not, and create a realistic budget to address them with your monthly take-home pay.
The first thing you should do is figure out your monthly take-home pay or net income. You can calculate this by subtracting all your payroll deductions from your monthly salary.
Once you know your monthly net income, you’ll need to create a monthly budget to ensure you can cover your expenses. Otherwise, you may end up taking on more debt.
Some of the most common types of expenses new college graduates have and how to address them are discussed below.
1. Housing/Rent
Housing expenses include more than just your monthly rent. Make sure to add water, utilities, internet, and cable if you pay them separately.
Plan to allocate a maximum of 30% of your monthly net income to your rent and housing costs. However, with the significantly increasing rental prices in cities across the U.S., you might have to allocate a larger percentage or think of ways to decrease how much you must pay.
High rental costs are a good reason to consider having one or more roommates for the first year or two after graduating, so all of you can benefit from sharing expenses.
As much as you may want your own place after college, having roommates may allow you to live in a nicer home with more amenities while starting to fund other financial goals. And don’t exclude moving back home for a while!
2. Student Loans
According to the Education Data Initiative, new college graduates have an average student loan debt balance of $31,000 and monthly student loan payments of $391.
Review your student loan repayment options and choose the one that will fit your needs the best. Strive to keep your student debt payments to 15% or less of your monthly net income and be sure to make payments on time.
If you only have federal student loans, you can review the repayment plan options on the federal government's website here. If you have private student loans with high payments, you might consider refinancing them into a single loan at a lower interest rate than your current rates on loans.
3. Transportation Expenses
Transportation costs are also necessary expenses, including car payments, auto insurance premiums, fuel costs, and parking fees. Calculate your bus or subway fares if you don’t own a car and instead rely on public transportation.
Your transportation costs should range no more than 10 to 15% of your total net income as a rule of thumb.
4. Food
Food costs include what you spend at the grocery store and eating out. If you routinely grab a triple latte at the coffee shop around the corner, add these expenses to your food category. Similarly, if you eat lunch at a restaurant close to your office, include those expenses.
Tracking your food costs might help you identify some relatively simple ways to pare down your spending. For example, you might find that cooking at home is enjoyable, and you can take leftovers for lunch the next day.
There may be things you'd rather save for than waste money by buying expensive coffees each day at a coffee shop or picking up takeout a few times a week.
Altogether, plan to distribute no more than 10% of your monthly net income to food expenses.
5. Leisure Expenses
Leisure expenses or discretionary spending are generally considered unnecessary expenses and include the costs related to travel, going to the gym, nights out on the town with your friends, and shopping trips.
While you don't need to live such a frugal existence that you don't have any recreational expenses, you should try to allocate no more than 10 to 20% of your monthly net income to these types of expenditures.
6. Savings
You should view savings as a necessary expense. This category would include all the money you contribute each month to your retirement account and your emergency savings fund.
Try to set aside between 10 to 20% of your monthly income to savings. Contributions to a 401(k) through your work can occur on a pre-tax basis, so they’ll also reduce your taxable income.
When you plan your budget, think rationally. Include your essential expenses in your budget first before addressing discretionary costs.
Creating a budget can help you understand the difference between what you can and cannot afford and help you keep your spending in check.
7. Giving
You may have spent time and energy supporting worthy causes as a student. There’s also a good chance you gave financially too.
Now that you’ve graduated from college consider including “giving” as a part of your budget. While this line item will likely grow over time, you don’t need to wait to fund your other money goals before committing to this important one.
By adopting a giving mindset now, you’re signifying it as an important value in your life.
Why Tracking Expenses Is Important
One mistake many people make is trying to guesstimate their expenses when creating a budget. You should avoid doing this, as most people underestimate what they spend without careful tracking.
Track your expenses for at least one month (3 is better), and then review what you spent. Categorize the transactions into your various budget categories to create a realistic budget. Tracking can also help you see costs you need to cut and how you might pay down debt or increase your savings contributions.
You can track your expenses by saving every receipt. But there are many expense tracking apps that you can use to simplify the process.
These apps link to your credit card and bank accounts to record and categorize your expenses. Two of the most popular apps are Mint and Every Dollar.
Begin With a Small Emergency Fund
Once you’ve created a realistic budget and have a clearer picture of your spending, focus on building an emergency fund to handle an unexpected expense.
Consider starting with $1,000, and then build up an emergency fund between three and six months of your monthly living expenses. And remember, you should only use this money in an emergency - not for a cost you could have anticipated.
An emergency fund can supply a cushion if something unexpected occurs, including losing your job, unexpected medical bills, or a severe car accident. Keep this fund in a liquid account (savings, money market, etc.) to access the money if you need it.
Start your emergency fund by setting aside a percentage of your monthly income. Automating your deposits into the account can make it easier for you to build it. Note that this fund should be separate from your checking or other savings accounts.
You can also set up sinking funds, which should be separate from your emergency fund. A sinking fund is savings set aside in small amounts over time for expenses you would not want to have to pay all at once.
For example, if you’re planning to take a vacation to Europe next year, you could contribute monthly amounts to your sinking fund to save for the costs of your trip over 12 months instead of putting all the charges on your credit card when your vacation arrives.
Get Adequate Insurance
Insurance should not be something you skip. You need to ensure you’re covered.
If your employer offers employer-provided medical benefits, take advantage of them. If not, you’ll need to find adequate healthcare coverage to protect you.
Adult children may be part of the parent(s) Member Household Medi-Share plan until they reach age 23 if they meet stated guidelines. They can also apply for an individual Medi-Share membership.
Don't make the mistake of assuming you’re young and healthy and don't need to worry about health coverage. You can be injured in an accident or become ill at any age.
In addition to good health coverage, you need adequate auto insurance for your car. If you have an auto loan or lease, your lender will likely require you to buy comprehensive and collision coverage.
Purchasing gap insurance is also a good idea because it will cover the difference between what you owe on your auto loan and the value of your vehicle if it is totaled in an accident.
If you drive an older vehicle and do not have an auto loan, consider whether it might make more financial sense to carry liability coverage instead of comprehensive and collision.
Finally, consider buying uninsured/underinsured motorist (UM/UIM) coverage. This type of coverage protects you if you’re involved in an accident caused by a motorist who’s uninsured or underinsured.
Have a Plan to Monitor Your Credit
Starting to build and maintain your credit is critical when you’re a young adult. A strong credit score will make it easier to qualify for loans to buy significant items like a vehicle or a home.
Make all your monthly payments and other bills on time to build a solid credit history. If you have a credit card, don't spend more on your card than you can pay off each month to avoid accumulating thousands of dollars of credit card debt. And don't close an old credit card because the length of your credit relationship also factors into your credit score.
In addition to building credit, you also need to monitor it. Monitoring your credit can help you notice identity theft and mistakes made by your creditors that could harm your score.
Each year, you can get a free copy of your credit reports fromannualcreditreport.com. This includes information from the three major credit reporting agencies, TransUnion, Experian, and Equifax. (Note: Due to the pandemic, you can access your credit reports weekly through December 2022.)
You can order them all at once or instead choose to request one every four months. For example, you might ask for your report from Transunion on Jan. 1, Experian on May 1, and Equifax on Sept. 1. Doing this helps you check on your credit throughout the year.
There are also credit monitoring services you can use online. While some charge monthly fees for monitoring, there are a few free ones you can use. Credit Karma andCredit Sesame both offer free monthly monitoring services.
Many lenders now offer credit score monitoring free as a credit card perk, and credit bureaus, including Experian, allow you to access your FICO score.
Remember that catching issues early is crucial before you suffer an unexpected drop in your credit score. Regularly reviewing your credit report allows you to act quickly on suspected identity theft or reporting errors.
Start Investing
Retirement might seem far, far away when you've recently attended your college graduation. You might not understand why it's essential to begin investing and saving when you're young. However, if you start investing in your early 20s, your investments will grow much more substantially than if you wait until later to begin because of compounding.
The U.S. Securities and Exchange Commission has a compound interest calculator you can use to see how much more you’ll earn in interest on your money by starting early rather than waiting.
Experts recommend investing around 15% of your income in your retirement account. However, if you can't afford to invest that much, you should still start saving for retirement by investing any amount you can. Increase the percentage of your contributions as you pay down debt, and your income grows.
As a new college graduate, you have a couple of options for investing in your retirement, including through an employer or an individual retirement account.
While employers are not required to offer retirement plans, many do as employee benefits. Employers provide a 401(k) retirement plan, and nonprofit companies offer similar retirement plans called 403(b) plans.
If your employer offers matching contributions, make sure to contribute at least the amount your company will match. Your employer's matching portion is extra free money for your savings.
Traditional 401(k) contributions will reduce your taxable earnings, but you’ll have to pay taxes when you start taking distributions in retirement. You might consider the Roth 401(k) if your employer offers it as a choice. With the Roth, you pay income taxes on your contributions, but you will not face taxes on distributions you take in retirement.
Start Today!
Starting to invest in a retirement account when you’re young also helps you develop good financial habits. Choose to have your contributions automatically deducted from your paychecks to remove any temptation to spend the money.
When your employer doesn't offer a retirement plan or matching contributions, or you’d like to save more, consider opening an individual retirement account (IRA) or Roth IRA. These accounts also allow you to invest in stocks, bonds, and other financial assets.
Investing money in a Roth IRA is a particularly desirable choice for young adults who will likely earn higher salaries in the future because they’re likely in a lower tax bracket now.
With few exceptions, you cannot withdraw money from a traditional IRA or a 401(k) before you reach age 59 1/2 without paying a 10% penalty on top of the income tax.
With Roth accounts, you’ll only pay the penalty if you withdraw your gains early. However, you shouldn't plan to withdraw any money from your retirement account before you retire.
Consider a Side Hustle
When you want to accelerate your savings or pay off debt early, consider a side hustle while you’re still young. A side hustle can provide additional income to save and invest more or pay down your debts faster.
For example, you could drive for Uber or Lyft on the weekends, offer freelance services, teach English to students in other countries online, or shop for people through apps.
While a side gig can be an excellent way to add an extra income, you should not take one on if it will affect your health. Make sure to reserve time each week for the leisure activities you enjoy and adequate rest.
Set Financial Goals to Avoid Lifestyle Creep
As your income increases, it’s easy to find increasing discretionary spending. This lifestyle creep can make it feel like you can never get ahead.
For example, if you develop an ever-expanding taste for the finer things in life each time your income grows, you might find yourself with little savings and increased debt levels.
Lifestyle creep can also get in the way of your financial goals, including contributing to your retirement savings, building an emergency fund, or saving money for a house down payment.
You want to avoid allowing your lifestyle to take priority over setting up your financial future. Set and stick to financial goals to avoid lifestyle creep.
Create a realistic budget and stick with it. Recalibrate your budget whenever your income increases. Try to save half your extra money to pay down debt. View each boost in your income as a step toward reaching your goals.
Be sure to set short- and long-term financial goals with actionable steps. For example, set shorter-term goals you can achieve within one to five years and long-term goals that will take more time to complete. Also, create measurable progress steps, and track your progress along the way as you work to reach each goal.
Additionally, work to keep your debt down. If you find your debt is increasing, it can be a sign you're overextending yourself beyond what you can manage. Don't live beyond your means.
Commit to Learning More About Personal Finance
Learning about personal finance can seem daunting, especially when you're just starting your career and adult life. Still, choosing to invest in yourself includes learning about personal finance.
Boosting your financial literacy can put you in a better position to manage your assets, handle unexpected expenses, and build a solid and prosperous financial life.
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