If you’ve recently graduated from college, you’re facing the beginning of a new financial life. The first financial hurdle might be dealing with student loan payments, but all graduates can benefit from basic financial principles. Learning how to establish credit, budgeting and saving for retirement are just a few of the fundamental skills you will need for a successful financial future.
Paying Student Loans
A great first step to financial success will be getting a handle on any student loan payments you may have. Although some student loans carry generous repayment terms, the faster you can pay them off, the better you will be prepared to take on future financial obligations. Paying off a debt not only puts you in a better overall financial position, but it also provides you with confidence to handle future financial responsibilities.
Earning and Budgeting
Creating a budget is a proven way to help make sure your expenses don’t exceed your income. Use a budget tool to see just how much money you can allocate to various expenses after you get your first job. A significant percentage of your costs are likely to be fixed, such as your rent and insurance or car payments. Variable expenses, such as food and entertainment, should still have a budgeted maximum. Don’t overlook savings as a category when you draft your budget.
Establishing a Credit Score
Applying for credit after college should be handled carefully. Many graduates are faced with large costs they’re not prepared for like rent, car payments, or health insurance. It’s easy to rack up debt on a credit card with high interest rates, yet getting a credit card or some other type of loan is the only way you can begin to establish a credit history. You’ll need a good credit score if you want the best interest rates on loans you’re likely to acquire in the near future, like a car loan.
Saving for Emergencies
Financial emergencies are sure to crop up in life, so building up some savings should be an absolute priority after graduation. An adequate emergency fund can help protect you from taking on high-interest debt in the event unexpected expenses arise, the consequences of which can be financially crippling. Shoot for a reserve that can cover one month of your expenses at first, with an eye toward building up a full year’s reserve over time.
Working and Retirement
Retirement might seem like a long way off when you’re 20-something, but time is on the side of a young graduate. The earlier you start putting aside money for long-term savings, the greater the effect of compound interest. Saving just $50 a month a rate of return of 8 percent a year — which is below the long-term average return of the U.S. stock market —could potentially generate a nest egg of about $73,000 after 30 years.
Even if you only achieve an average annual return of half as much, or 4 percent per year, that $50 a month could still reach about $35,000. If you wait 10 years to begin saving that $50 a month, you’ll end up with significantly less. If you’re a salaried employee, take advantage of the HR department and ask them about your 401(k) and other employee savings plan options. Most graduates don’t realize all of the free resources at their fingertips that can help them make better financial decisions.