This year 2.8 million students will complete college; on top of that another 1 million will finish graduate school. That means nearly 4 million people are or will soon be newly on their own and in many cases managing their finances for the first time ever.
“Many undergrads are used to having the basics covered. Your residence hall is your shelter. You have a meal plan you can always fall back on,” points out Karen Carr, a 26 year-old financial planner at the Society of Grownups, a Boston meeting space where young people are encouraged to learn about, talk about and take control of their money. “Their spending revolves around the fun stuff – eating out, going out with friends, shopping. They are used to not having to pay too much attention to what they spend because they aren't running the risk of coming up short on the rent payment. This is a big change in post grad life.”
After the excitement of graduation wears off having bills to pay, a 401(k) to fund and likely a sizable student loan balance to contend with can be daunting. Add everyday spending blunders and soon the paycheck you were so excited to finally claim can feel pathetically small.
If you want lights you need to pay your bills. If you want a future you need to fund your retirement. And if you want to keep debt collectors at bay you need to make student loan payments. Overspending, however, is not required. Like in college, when it comes to your money, knowledge is power and understanding ways new grads tend to go wrong is key to making sure you come out ahead.
Not know what you can afford in rent. I asked a few friends to recall their wasteful post-college spending. One told me, “I do remember thinking, when college graduation was looming, that I had no idea how much rent I could afford on my salary. I had to guess.” Housing is most people’s single largest expense – recent grad or not – but many young people have no clue how much they can responsibly spend. This cluelessness often leads to spending way too much which reduces the amount you have to spend on everything else and makes it hard to stick to a budget.
Many financial planners advocate a guideline called the 50-30-20 rule. This says that 50% of your take home pay should go to needs, 30% to wants and 20% to savings. No more than 60% of your needs budget (or 30% of your take home pay) should go toward housing. This may sound impossible to someone making a relatively small salary in a big city – where rent is typically high and where young professional typically want to live – but the closer you can stay to this guideline the better.
Spending as a ritual. Carr recently met with a young woman who was making good money but never seemed to have anything left at month’s end. Reviewing the woman’s spending Carr noticed a pattern. Monday: Starbucks. Tuesday: Starbucks. Wednesday: Starbucks. She must really like Starbucks. Nope. It turns out she got coffee every morning because it seemed like something people did before work. She didn’t even really like the taste.
“I would never tell anyone, ‘You are never allowed to get Starbucks ever again.’ says Carr. But if it is the routine you are after and not the caffeine consider creating a new habit – go for a walk before starting your day, read the news, make coffee at home.
Not saving. If you are offered a 401(k) plan for retirement savings through work use it and contribute at least enough to get your employer’s match. About half of employers that provide 401(k)s also match some percentage of the money you put in. If your employer gives a 3% match, to use a typical example, you might have to put 3% of your income into a 401(k) or more (some companies don’t match at a 100% rate) to get it. Not taking advantage of a match is like turning down a raise. (For more on how to start saving for retirement see, “Start Now: A Step By Step, Tough Love Guide To Saving For Retirement In Your 20s” and when it comes time to leave your first job see, “Key Question For Millennial Job-Switchers: What To Do With Your Old 401(k)?”)
Mindless buying. “How many times have you walked into CVS or Target – those are usually the big trouble stores for me – for just one thing and left with a receipt for $100? Spending that happens without us realizing it is not adding any value,” says Carr. Go to the grocery or drug store with a shopping list and commit to no deviations. For the things you do need see if you can lower the bill with rewards cards, store apps or coupons. Keep tabs on key items’ lowest price in the 10 to 12 week sale cycle and stock up then.
Ignoring fees. There is no expense sillier than paying to access your own money. Don’t put yourself in the position of having to pay ATM or overdraft fees. Most banks offer free ATM withdrawals if you use their branches. A few banks will not charge you to use an out of network ATM but typically the institution you are withdrawing from will. If the bank you opened an account with in college does not have a presence in your post-grad city change banks. (To learn how see Laura Shin’s, “How To Change Banks In 5 Easy Steps.”) If it is important to you to be able to take out money from any ATM fee-free consider BankMobile. If you deposit more than $1,500 a month this new online bank will reimburse fees charged by out of network ATMs. Online banks are also pushing back on overdraft fees. Simple Bank, for example, does not allow you to spend more than you have, therefore negating the need for overdraft fees. If you are happy with your current bank commit to knowing how much is in your checking account so you don’t over shoot it and get slapped with a $35 fine.
Paying for things you don’t use. Do you pay for cable even though you mostly binge on Netflix or use your parents’ login to watch HBO Go? Is ad free Spotify really worth $9.99 per month? Are you paying for the priciest membership at your gym when you could sweat just as well with a cheaper one? Make value judgments about what services are worth paying for on a monthly basis. Cut the subscriptions you don’t use and scale back anything that you can get just as much value out of at a lower price. Most importantly – know what is being deducted from your account every month so you can manage cash flow.
Being cheap. When money feels tight the urge to go with the least expensive option can be strong. But it doesn’t always make sense. My twenty-something colleague Maggie McGrath calls this the “vacuum corollary.” She explains, “Sometimes cheapo furniture breaks and you spend more money replacing it than you would have if you had gone for the nicer item. I've wasted so much money on cheapo vacuums and would have been much better off if I had just gotten a nice one on day one.” Another young colleague Kathryn Dill had a similar experience with a blender so developed a “second cheapest thing” rule. Meaning she will do some research and, if need be, spend a little bit more on quality at the start to save in the long run.
Deferring loans. After graduation you typically have a six-month “grace period” before you are required to make student loan payments. Use this time to get your finances in order: start an emergency savings fund, contribute to your 401(k) and most of all get accustomed to living on your new income. Avoid spending more than you will have left when your loan payments come due so the new outflows aren't a shock to your budget come November or December (assuming you graduated in May or June).
If you are going to graduate school you'll have the option to defer loans. If you are working through grad school consider making payments anyway – especially if you have unsubsidized loans because they continue to accrue interest (the government typically covers the interest payment of subsidized loans). If you have the means, not making payments just delays the inevitable and is wasting future money.
If you are making payments on a loan – deferred or not – and can pay more than you owe — do it. This will cut down the principle of the loan and ultimately reduce the amount of interest you need to pay. (For more on student loans see Maggie’s, “5 Things You Need To Do With Your Student Loans Right Now”.)
Falling for deals. Deal sites like Groupon, Gilt or LivingSocial are great for saving on things you would buy anyway. Have plans to get dinner with a friend? Using a Gilt coupon for the cute Italian place you've wanted to try is wise. But the fact that they are offering great deal on headphones (that you don’t need) does not justify the purchase. “If you did not see enough value that would be willing to pay full price probably don’t want it,” notes Carr. Similarly be careful with free trials. For trial subscriptions make sure to cancel accounts before your credit card gets charged. In real life don’t let a skilled salesperson guilt you into signing up.
Being Lazy. After a long day at work it is easy to convince yourself that you don’t have the time or energy to cook. So you browse over to GrubHub. About an hour and some $20 later your food arrives. Throwing together a simple salad, pasta or omelet would have been cheaper, faster and healthier. Set rules. Maybe you can only order takeout if you got stuck at work past a certain hour. Maybe you commit to eating home cooked food at least three nights a week. (For more on how to save by eating in see, “My Money Diet: What Happened When A Food-Obsessed 20-Something Gave Up Restaurants.”)
The same logic applies when: using Uber rather than walking or taking the subway, hiring someone to clean your apartment or going to a salon to get your nails polished rather than painting them yourself. Some of these conveniences will be worth the money but if you are on a tight budget you’ll need to decide which matter most to you.
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