If you just graduated, congrats! You’ve officially made it to the “real world” everyone’s always talking about. And that means you suddenly have a lot more responsibility. You may be looking for your first job, moving back in with your parents or starting off in a new place on your own. It’s a lot to take on, but don’t let your finances fall to the bottom of your priority list.
Here are five money mistakes to avoid when you’re first starting out.
Mistake #1: Not having a budget
When you graduate and get your first job, it’s exciting to have a real paycheck coming in. But it’s easy to fall into the trap of mindless spending. Suddenly, those morning lattes add up and you’ve spent more money than you thought. The solution? Create a budget. You’ll start to track your spending habits, and see where you may need to cut back.
Don’t know where to start? Experts recommend the 50-30-20 rule for beginner budgeters. Half your take-home income goes toward essential expenses, like housing, transportation, health insurance, groceries and utilities. Thirty percent of your income should go to things you want: like your cell phone and data plans, meals out, shopping trips and vacations. The last 20% should go toward savings and paying down debts like student loans.
Mistake #2: Living beyond your means
This is a problem that isn’t isolated just to recent grads. According to the Federal Reserve, 1 in 5 Americans are spending more than they’re earning. We may want to live a lavish lifestyle, or even upgrade to a one-bedroom apartment from a studio, but if you’re spending outside of what you can truly afford, it can cause huge financial headaches.
If you’re spending more than you’re making, try using an app like Mint. It will track every penny you spend and break it down into categories so you can see exactly where your money is going. Or try paying for everything in cash. You’ll be surprised at how quickly your wallet empties. Give yourself an allowance for discretionary spending, like shopping and meals. Once the money runs out, you’ll have to brown-bag it instead.
Mistake #3: Not taking financial risks
You may be living paycheck to paycheck or may think about your finances only in the short term. But millennials have the advantage of time, which means you can benefit from investing and compound interest. Starting early and investing in the stock market means you have more time to ride out the ups and downs of the market. And remember, more risk typically equals more reward.
If you don’t know where to start, start small. An app like Acorns will link to your debit and credit cards, and round up your purchases to the nearest dollar. The spare change is then invested. But educate yourself first — check out these four steps to take before you invest.
Mistake #4: Not saving for retirement
Retirement may seem like a lifetime away, but now is the time to start saving. Right now, you have decades to take advantage of retirement savings plans offered through your employer or by building savings of your own.
If you’ve got a job that offers a 401(k) plan with an employer match, sign up and maximize your contributions so you’re not leaving money on the table. For example, if you’re making $50,000 and contribute 6% of your annual salary, or $3,000, your employer might match your contribution and give you $3,000. Contribute less, and you’re leaving free money behind. (Employers typically match a percentage of employee contributions, up to a certain portion of total salary.)
If you don’t have an employer-sponsored retirement plan, you can start your own with a Roth IRA, a tax-free savings account with an annual contribution cap of $5,500. If you start at 25 and contribute every year until you’re 65, you’ll have over $1 million saved for retirement! Wait until you’re 30, and you’ll have around $200,000 less, so start early.
Mistake #5: Not thinking ahead
You can never predict what will happen in life, but it’s still important to be prepared. Try and bank 3 to 6 months of living expenses as an emergency fund. This can cover any unexpected financial surprises, for everything from an expensive car repair to something major, like a medical emergency or a job loss.
It may be hard to think about growing your savings, starting to invest, or even contributing to a retirement plan when you just hung your diploma on the wall, but the earlier you educate yourself about your finances and take control of your money, the better off you’ll be long term.