Last May, I said goodbye to 10-page papers, late-night cram sessions, dorm life and dining halls, trading them in for deadlines, presentations, dress slacks, a cookbook and 6:30 a.m. wake-up calls.
Although I miss the freedom and fun that college offered, life after college presents exciting challenges. During senior year, most students focus on only one goal: Getting hired. Given the recent job market, achieving that goal is a major accomplishment, but it does not mean you are done climbing mountains.
As many recent college grads have discovered, life as a financially independent adult comes a list of questions: Are you going to open a savings account? Do you want to apply for this credit card? Have you started paying off your loans? Do you want life insurance? How will you save for retirement? I remember thinking to myself a few weeks after graduation, “I haven’t even had my first day of work, and you want me to think about retiring?” Six months later, I have formed a game plan. So, grads, here is my guide to kick-starting life after college.
Creating A Budget
After putting in long hours for two weeks, you get your first paycheck. Although it is tempting to spend it all on one big celebration, we know that’s unwise. So how do you determine how much to spend and how much to save? I was taught to set a reasonable dollar value to contribute to my savings account and to take that amount out of my paycheck every time, before I even think about spending anything. Using that method, I never actually miss the money and can easily build up my savings.
Regardless of how you set aside money, it is important to open a savings account and create a safety net of cash for emergencies. Most people should aim to keep three to six months of living expenses available at all times. Of course, every situation is different. You should consider your job security, whether you’re salaried or get irregular paychecks and whether you have some way to cover the bills if you are out of work.
Once you determine how to build your savings account, then you must work out how to spend the money in your checking account appropriately. Make a list of all your monthly expenses, debt payments, potential future expenses and goals for retirement. By laying it all out, you can start developing a budget to keep yourself out of financial trouble. In the beginning, you may need to focus on simply having enough for your rent, utilities, groceries, student loan payments and, of course, weekend spending money. After all, graduating from college does not mean the fun has to stop. The key is to avoid spending beyond your means. With time, you may want to start setting aside money for a wedding or a down payment on a home. Regardless of your financial goals, the most important reason to budget is to maintain control of your spending.
Applying For A Credit Card
Does it seem as though the credit card companies found a list of every recent college grad? Every time I check my mail, I have at least two new credit card offers. Here are three tips for using credit cards: shop around, read the fine print and always pay in full.
Credit card debt is rampant among college students and recent college grads. According to a Sallie Mae study on undergraduate credit card spending, 82 percent of college students in 2008 carried balances and were paying finance charges each month. Eighty-four percent of surveyed students said they needed more education on financial management. This is precisely the problem. Many students don’t understand how carrying a balance each month affects them financially.
Credit card debt is one of the most difficult forms of debt to escape because the interest rates compound so quickly. Many credit cards set annual percentage rates (APRs) between 10 percent and 15 percent. Hence, it is of the utmost importance to pay your bill in full each month. By only making the minimum payment, you are allowing the credit card company to collect much more for your purchases than you probably ever intended. A purchase that initially cost $150 can turn into $225 in no time at these high interest rates, which should make you think twice before swiping your card. Also, be sure to check for membership fees and late fees when reading over the credit card rules. Recently, I scanned some of the offers I received in the mail, and I noticed many are offering zero percent APR ... for the first 12 months. Conveniently, in the fine print, you will see that when the 12 months expire, the APR can skyrocket to 15 percent. Here are a few recent credit card offers: Capital One No Hassle Rewards Card, 14.90 percent APR; Chase Freedom Card, 13.24 percent APR; and Discover More Card, 11.99 percent APR.
No Hassle? Freedom? Discover More? Reading the fine print makes these credit card titles ironic. Remember, credit cards are helpful for emergencies, big purchases or boosting a credit rating. However, shop for the best rate, read the fine print and never charge anything you know you will not be able to afford. The goal is to stay within your budget.
Determining Your Insurance Needs
Just when you make it through your flood of credit card offers, you start receiving insurance quotes and applications. It seems as though are insurance offers for just about any type of emergency imaginable. When determining which forms of insurance are necessary, consider a worst-case scenario. For example, the average college graduate holds more than $20,000 in student loan debt. If you die before you pay off your loans, your co-signers may be stuck with the bill. If the debt is going to be pushed off to your family, it may be worthwhile to buy term life insurance, a form of temporary and affordable insurance that can cover you until you have paid off the debt. Follow this example when determining whether other forms of insurance are necessary. Who will pay the bills if you are disabled or become seriously ill? What if your apartment floods? How will you handle a car accident? When you finally determine the areas of risk that you want coverage for, be sure to shop around, and as always, read the fine print before signing.
Planning For Retirement
According to the U.S. Department of Labor, the average American spends 20 years in retirement. Although retirement may seem a long way off, saving 20 years of living expenses is a lifelong process, and the sooner you start, the quicker your savings will add up. First, explore what your company offers in terms of retirement planning. If your employer offers a defined benefit pension, you may not need to worry about setting aside money from your early paychecks. When you are financially stable enough, you may want to think about opening a second retirement account, such as an IRA, to put aside additional money to live comfortably in your later years. If your company offers a retirement plan such as a 401(k), you should investigate the terms. Many companies let you automatically contribute money to the account from each paycheck. Some companies also match any contributions you make to your 401(k). This is free money for retirement! By not contributing, you are actually missing out on money your company is simply giving away as an incentive for you to save.
You may also have the option of choosing how to invest your retirement savings. For starters, stick to the basics. Invest in three different index funds, such as a large-cap, a small-cap and an international fund. Index funds let you invest in a broad range of companies, while keeping expenses to a minimum. Although you may be nervous about investing, history teaches that over a 30- or 40-year span, you are likely to see much higher growth in your savings if you put your money into equities than if you let it sit in the bank collecting minimal interest.
My most important advice is to do your research. Dive into these topics. After all, you are making decisions that will affect you in the long term. Just as you need to do research and make outlines before writing a college paper, you need to take some time to research before you can make informed decisions for your financial future. When it is all sorted out and you feel confident that you have developed a long-term plan, reward yourself. You just finished your first semester of adulthood.