When you graduate from college, there are plenty of steps you'll take as you enter the real world. Of course, one of the biggest is getting a job so you can earn money to support yourself now that you're on your own.
It's also very important to learn how to manage your money responsibly. Unfortunately, most students aren't taught the basics of money management in college. Seventy-seven percent of students haven't participated in any personal finance classes or workshops in college, according to a study on student financial education by The Ohio State University.
Establishing your finances doesn't have to be overwhelming — you can take it one step at a time. To get your finances ready for the real world, here are 10 money steps you should take after graduating.
In college, you likely reviewed your notes before taking an exam. Now that you've graduated, you need to review your finances before entering the real world.
"This step may seem obvious, but it's the one most graduates skip right over," said Nick True, a 2015 college graduate and creator of the True Tightwad blog. "It's extremely important to get a grip on your entire financial situation. If you don't even know what the situation is, how in the world can you change it?"
You can make a list of all the accounts you have — checking, credit, student loans. Then you can monitor all of those accounts in one place by linking them with a mobile app, such as Mint or Personal Capital. "This will help you see where all of your money is, and then you can make plans for what you want to do," True said.
Only half of college students frequently or always follow a budget, according to the Ohio State University study. So if you're not used to tracking your cash flow and prioritizing your spending, setting up a budget is a crucial step.
In fact, you should project your potential post-college budget before you graduate, said Nate Comerford, a 2013 graduate and creator of personal finance website HackingYourBudget.com. He took this step to make sure he was on the right financial track.
Start by figuring out how much money you'll have coming in each month. You can base that either on the actual salary you'll receive or an estimate for the job you want, using the low end of the salary range listed at a site such as Payscale.com.
Then estimate your costs for housing, transportation, food, utilities, loan payments and savings. Ideally, 50 percent of your income should go to essentials, 20 percent should go toward debt reduction and savings, and the remaining 30 percent can go toward flexible spending — which includes entertainment and, yes, cable TV.
If your expense estimates don't make sense for your income, you need to figure out what you can cut. "Work it out beforehand so you know what you can afford before you figure out you're in over your head," Comerford said.
If you graduate with a job, you might feel flush with cash. But that doesn't mean you should spend all of your paycheck each month.
In fact, if you want to enter the real world on strong financial footing, you should continue living like you're still in college to keep costs low, said money-saving expert Andrea Woroch. Then you can put more of your paycheck toward debt repayment and savings for the future.
The best way to continue living like a college student is to keep housing costs as low as possible, Woroch said. "Understand what you're able to afford, and aim even lower than that so you can enjoy your abode while still meeting your debt-repayment and savings goals," she said. Also, Woroch recommended living with a roommate for as long as possible to split rent and utility costs.
Once you have a budget, it's important to follow it. "Often the biggest hurdle in setting a budget is making yourself stick with it," said Stephen Vogel, president of Corvus Capital Management in Nashville, Tenn. "Setting up an automatic withdrawal from your checking account when your paycheck comes is a powerful way to make sure you stick to your goals."
Even if you can only set aside $20 a month, it's good to get into the habit of paying yourself first. This could help you reach goals, such as having enough for a down payment for a car or a place of your own someday.
Vogel recommended opening an online savings account with a bank other than the one where your checking account is. This makes it more difficult to access the money. And online banks tend to offer higher interest rates, so your money will grow faster.
In a survey of 468 undergraduate and graduate students by LendEDU, a student loan marketplace, just 38 percent had credit cards in their own name. However, getting a credit card when you graduate can be an important financial step.
"Even if a recent grad doesn't like, or is skeptical of, credit cards, it will allow them to establish a credit history that they will need in the future," said Matthew Coan, owner of credit card comparison site Casavvy.com. "A credit card is the easiest way to establish and improve someone's credit when used responsibly."
Getting credit without a credit history can be difficult, though. You might need to start with a secured credit card. To get a secured card, you pay a bank a deposit that becomes your credit limit, said Julie Pukas, head of U.S. bankcard and merchant services at TD Bank. "Once you prove you're responsible, your deposit is refunded and you can upgrade to a regular credit card," she said.
You might also be able to get a credit card from a retailer, such as a department store, because they're more likely to approve people with low credit scores, Pukas said. However, these cards tend to charge high interest rates.
Once you get a credit card, or if you already have one, you need to manage it responsibly so you can build a good credit history and have a higher credit score. Lenders typically use your credit score to determine whether to give you loans and what interest rate you'll be charged.
The most commonly used credit score — the FICO score — ranges from 300 to 850, but the average credit score for 18- to 24-year-olds is 630, according to CreditKarma.com. A FICO score of 630 is considered "fair" and means lenders might consider you more risky. To find out where you stand, you can get a free version of your credit score at sites such as CreditKarma.com and Credit.com.
To build good credit, don't let your balance exceed 30 percent of your credit limit and pay your bills on time, Pukas said. Ideally, you should charge only what you can afford to pay off every month. "Think of it as a loan to yourself, and pay it back as soon as possible to avoid interest charges," she said.
Although most college students graduate with student loans, they don't understand their loan obligations. About 70 percent of students graduate with student loan debt, and the average amount owed is $28,950, according to The Institute for College Access and Success, a resource for higher education costs. However, just 6 percent of college students surveyed by LendEDU said they knew their repayment terms, and only about 8 percent knew the interest rates on their loans.
Typically, students have a six-month grace period before they have to start paying federal student loans. However, you should check with your loan issuer to find out when your first payment is due and how much you'll owe each month.
Before you start repaying your loan, sign up with your lender to have the amount you owe each month automatically deducted from your checking account, said Nate Matherson, founder and CEO of LendEDU. Not only will this help you avoid late payments, but also you'll likely lower your interest rate. "Most federal and private student loans are eligible for a 0.25 percent discount upon signing up for auto-debit ACH payments," Matherson said.
If you have a good job and good credit, you might be able to cut the cost of student-loan repayment by refinancing high-interest student debt, Matherson said. On average, LendEDU users waive about $14,000 by refinancing high-interest student loans into lower-rate loans, he said.
If you can't afford your monthly payment, you should consider one of the Education Department's income-driven repayment plans that are available to all federal student loan borrowers, Matherson said. If you qualify, these plans can make your student loan debt more manageable by reducing your monthly payment to an affordable amount based on your income. Visit Studentaid.ed.gov to explore your options.
Many companies that offer a workplace retirement plan, such as a 401k, will match a percentage of their employees' contributions. So you should contribute enough to at least get the full matching amount your employer offers, said Jay Messing, senior director of wealth planning for Wells Fargo Private Bank. Ideally, though, you should set aside 10 percent or more of your income.
"Retirement may be the last thing on your mind as you start your first job," said Messing. "But if you don't take advantage of your company's savings plan, you may be giving up an opportunity for free money."
Starting to save early can also help you benefit from the power of compounding, where the interest you earn on your investment helps it to grow at an accelerated rate over time, Messing said. Saving through a workplace retirement plan also can lower your tax bill. Because contributions typically come out of wages before taxes, you're lowering your taxable income — and the amount you have to pay to Uncle Sam.
As many as 30 million workers do not have access to an employer-based retirement plan, according to an analysis by The Pew Charitable Trusts. However, if you're self-employed or your employer doesn't offer a retirement plan, you still can save for retirement.
You can open a traditional IRA and contribute up to $5,500 in 2016 — and get a tax deduction for your contribution. Or you can open a Roth IRA, which has the same contribution limit, but doesn't offer a tax deduction. However, you can withdraw earnings from a Roth tax-free in retirement. Withdrawals from traditional IRAs and other accounts, such as 401ks, are taxed at your regular income-tax rate.
If you're hit with an unexpected expense — such as a car repair or emergency appendectomy — you'll need cash to cover the cost so you don't have to rely on credit and rack up debt. That's why it's smart to start an emergency fund.
Financial advisors usually recommend saving enough to cover three to six months' worth of expenses. That might seem like a lot when you're just starting out. So Shay Olivarria, a financial speaker and creator of personal finance blog Bigger Than Your Block, suggests starting with a stash of $500.
If you set aside $25 a week, you'll reach your goal in five months, she said. Olivarria recommended using a money market account, which you can open through a bank or credit union, because the money will be accessible — but not too easy to access, because there are limits on the number of withdrawals you can make each month. The key is to keep the fund growing instead of tapping it for non-emergencies.
Source: 10 Money Steps You Need to Take After Graduating
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