The day is finally here! You have your cap and gown and a job offer waiting as soon as you cross the stage. All your dreams are finally coming true. Many college students find an uncomfortable reality waiting for them after they leave the “ivory tower”: student loan servicers want to set up a payment plan, handling rent solo can be expensive, and your clunker of a car might not get you through your morning commute.
Financial planning is a must for recent college grads, especially if you have student loan debt. Follow these tips to make the most of those new, fatter paychecks:
1. Plan on Living Off 70% of Your Income
Financial planners recommend recent college grads save 30% of what they make. They suggest taking 30% of each paycheck and depositing it in a 401(k) or IRA, and live off the rest. This allows you to grow wealth slowly and set yourself up for retirement.
If you’re wondering how much to spend on an apartment, plan on dedicating around 25% of your income. This means you might have to forgo that downtown loft for something a little less luxurious, but it will help you budget more efficiently each month.
2. Learn the Difference Between “Want” and “Need”
This seems like an obvious tip, but it’s a notion that takes a little introspection and a lot of practice. Overspending now can lead to years of financial turmoil down the road. If you’re just starting out and don’t have a lot of money to spare, it’s okay to act like it.
How do you know if you’re spending too much on frivolities? We recommend setting up a budget plan that shows your income after taxes, health insurance, and savings requirements, as well as your monthly bills and expenses. This will give you an idea of your discretionary spending. If you’re the type that can’t keep to a strict budget, consider using cash for your discretionary spending – this will help keep you honest.
3. Know How to Handle Your Student Loans
Your federal student loans come with a six-month grace period that allows you to earn some extra money before the payments become due, but many financial experts recommend paying on these loans right away. This puts you in the right mindset and on the road to financial freedom. Talk to your student loan officer about the right repayment plan for you – while you may be able to make payments on a Pay as You Earn or Income-Driven repayment plan, paying on the standard plan can help you pay off your obligations faster.
4. Start Your Own Financial Journey
It’s not uncommon for college students to have authorization on their parent’s credit cards. However, if you want to start the path to true financial independence, it’s time to cut the cord. Starting your own financial journey is symbolically and practically important, as it allows time for you to establish a positive credit history so you can eventually buy a home or finance a new car without a cosigner.
Financial planning after college doesn’t have to be difficult. By following these actionable tips, you can pay off your student loans, arrange for retirement, and begin your journey to financial independence.
Additional Resources:
https://www.forbes.com/sites/lawrencelight/2017/05/16/the-complete-guide-to-finances-after-college-graduation/#4db991a1253d
https://www.usatoday.com/story/money/2017/05/15/money-101-financial-advice-college-grads/101243818/
https://www.investopedia.com/articles/younginvestors/08/financial-mistakes-new-graduates.asp
https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/05/28/10-financial-tips-for-college-grads
http://time.com/money/3892561/new-college-graduates-money-student-loan-410k-emergency-fund/
